The rejuvenation of Ginger Ridge (the “Property”), located in Calumet City, Illinois, is a prime example of how a community wide effort, under the overall direction of an experienced development entity, can successfully turn around a distressed mixed-income residential rental housing resource. The Property was foreclosed on by the United States Department of Housing and Urban Development (“HUD”) in May, 1991. Between the foreclosure and the date the Property was transferred to a resident-based ownership entity on October 7, 1996, HUD had operated Ginger Ridge at a deficiency averaging $3 million annually. The Property, historically suffering from a high vacancy rate, had 435 vacant units out of 934 as of the transfer date. Vacancies, among other problems, caused the Property to become a blight on a neighborhood and community in transition. The complex was known to be a destabilizing force -- with high turnover and crime rates. The Mayor of Calumet City, Jerome P. Genova, made a campaign promise in 1993 that by the end of his first term, April, 1997, he would find a way to “clean up” Ginger Ridge. In February 1994, as a part of that commitment, the City of Calumet City retained The Finch Group (“TFG”), a then Boston-based (and now Boca Raton, Florida based) real estate development and management company whose principals had, at that time, over 25 years of hands on experience in rehabilitating, revitalizing, financing and operating distressed subsidized housing. The 1993 mayoral campaign’s debate on Ginger Ridge also awakened the tenancy of the Property, and caused some leaders to emerge, most notably Ms. Marshall McCray, a 15-year resident. Through her and other residents’ efforts, the Ginger Ridge Tenant Council was born, which in turn retained the services of New Cities Community Development Corporation (“New Cities”), a south Chicago suburb church sponsored not-for-profit with a substantial track record in acquiring, rehabilitating, and selling single family housing to first time home buyers. By the end of 1994, New Cities had brokered the creation of the Ginger Ridge Mutual Housing Association (“GRMHA”) which brought together New Cities, the Ginger Ridge Tenant Council, local churches, local business and residential leaders, the City of Calumet City and TFG into a well-organized and experienced advocate for the rebirth of Ginger Ridge. Led by TFG, this advocacy group solicited, and received, the bipartisan backing of then Senator Carol Mosely-Braun and Representative Jerry Weller. Because of their advocacy, HUD commissioned a feasibility/market study that was completed in August 1996. The study determined that a redesign, reconfiguration and renovation of the Property was the most viable policy alternative for the United States Government in its desire to preserve a significant housing resource. As a result of working together for two years, on September 27, 1996 a Contract For Sale was executed between HUD and GRMHA. Title to the Property was transferred October 7, 1996 for $1, at which time HUD provided: (1) 276 Section 8 Vouchers to “protect” all then current residents earning under 50% of the area median income, and (2) one of HUD’s first UpFront Grants in the amount of $17,658,750. Under the terms of the HUD UpFront Grant to New Cities, the funds were to be applied as follows: • $10,338,030 for hard and soft construction costs & environmental abatement; • $ 4,100,000 for operating deficits during construction; • $ 3,220,720 for relocation; $17,658,750 Total UpFront Grant Original Property The Property is located on 26.5 acres of land, and, as originally constructed circa 1968, had 31 two-story, garden style buildings (the “Buildings”) with exterior balcony access to the units. The original design of Ginger Ridge was “California barracks” which was poorly regarded in the community. Ginger Ridge’s density, site plan, unit sizes, and unit layouts were not well suited to the needs of the current and future household pool in the area, or to the typical competition in the market. The Property was comprised of 934 units, with an original unit mix as follows: Unit Size No. Of Units Rent Sq. Footage Studio 174 $280 320 1 Bedroom 440 $360 510 2 Bedroom 248 $450 698 2 Bedroom Deluxe 72 $500 909 Rehabilitation and Reconfiguration New Cities and TFG (together the "Developers"), represented the GRMHA and acted as co- developers of the Property. Two main goals of the physical rehabilitation were to reduce the density of Ginger Ridge and to enlarge its units. To achieve this, five buildings (three of which had been vacant) were demolished to open up green space, 26 buildings were reconfigured, and a new building was constructed to house a community center. Efficiency units were combined to form larger units, including two- and three-bedroom townhouse units. In the new Property there are a total of 469 renovated units, with square footages ranging from 647 to 1,558 square feet. After significant pre-development design, value engineering and contractor input, it was determined that it would be more practical to create townhouse style homes, by combining smaller units within existing buildings. By designing units that went “up” rather than “sideways”, the Developers: • Saved existing fire walls • Used existing plumbing stacks, providing multi-bath apartments (attractive for marketing) • Properly placed HVAC units, thus saving money for tenants’ future utility bills • Turned second floor exterior walkway/entrances into private balconies for bedrooms (saving almost $1,000,000 in demolition/reconfiguration costs while creating a marketing amenity) • Instead of re-bricking the original second floor entrance doors, kept them as “private balcony entrances” • Eliminated the possibility of walking past other tenants’ bedroom windows • Eliminated exterior stairways, saving significant maintenance dollars (consider snow removal alone) • Dramatically reduced exterior building walkways A newly constructed building houses a community center called the McKinney Center (the "Center"), named to honor the Reverend Princeton McKinney, a long time advocate for multi-racial harmony and education programs. The Center offers a wide variety of traditional and non-traditional amenities and activities for all age ranges that are specifically designed to be age specific. Generally, the intent of the Center is to offer educational, job training and placement opportunities, along with appropriate childcare, for individuals and/or families at various stages in their life cycles. A Head Start and after-school “Center of Excellence” program are combined with field trips and organized activities for children. Adult workshops on topical areas of interest such as high school equivalency, resume writing, pre-natal care, childcare, alcohol and drug awareness and senior fitness classes are also offered at the Center. New Cities, as opposed to the new Property owner, was responsible for the hard construction cost of the Center. While the funding for the construction of the Center came from the Upfront Grant, the financial structuring aspect was a significant detail that allowed Ginger Ridge to most efficiently use the Upfront Grant through maximizing private sector equity. As previously noted, HUD funded 276 two-year Section 8 vouchers, with subsequent one- year renewal periods, subject to federal appropriations. The vouchers are being administered by the Cook County Housing Authority (“CCHA”). The combination of resident initiatives offered at the Center, and Section 8 vouchers offered to existing tenants who qualified, created an educational and economical environment in accordance with the written “principles of redevelopment” formulated by GRMHA. The vision of a mixed income (60% affordable/40% market rate), stabilized community has been achieved. Ginger Ridge has created an infrastructure that will foster an environment to encourage and assist all residents in finding gainful employment. Construction commenced in September, 1997 and was estimated by the general contractor to take 20 months to complete. The swift and efficient relocation of all current residents within the complex was crucial to keeping on the 20-month schedule. A detailed relocation plan was formulated by the MHA’s managing agent, Signature Housing Solutions (“Signature”), a company associated with TFG. Initially it was thought that the HUD Section 104(d) displacement regulations applied, generating a $3.2 million relocation budget. It was subsequently determined that the appropriate temporary displacement regulations applicable to Ginger Ridge were those of the Uniform Relocation Act (“URA”). The plan implemented offered permanent relocation benefits to any person not offered a unit after rehabilitation, economic displacement benefits to people earning between 50% and 60% of median income, and temporary relocation benefits to those residents who were required to move once or twice on site. Because of this thoughtfully structured relocation plan, the actual relocation expense was reduced to approximately $1.9 million. The portions of the $3.2 million budget not spent on relocation were retained by HUD. Occupancy: Rents, Maximum Tax Credit Rents and Incomes It was the MHA’s intent to create a market-driven, mixed-income complex that would become an active and responsible member of the community. TFG and New Cities were therefore, challenged to design a rehabilitated property that could compete (and win) in the market place, yet remain affordable and competitive in the long run. The new unit configurations not only had to be attractive and cost effective to construct, they also had to be cost efficient to operate. Because of the sophisticated transaction structuring, rents at the Property have remained affordable, with units renting at levels that make them attractive to individuals and families earning 60% of the area's median income (table below was based upon 1999 median incomes for comparison purposes and to reflect increases in rents immediately after construction completion): Unit Old Unit Final Old Final Old New Rent 30% of 30% of Size Mix Unit Mix Sq. Ft. Sq. Ft. Rent at 50% 60% completion Studio 174 - 320 - $280 - $534 $646 1 BR 440 200 510 647 $360 $540 $568 $688 2 BR 248 72 698 852 $450 $612 72 74 909 910 $500 $633 $682 $825 75 929 $648 30 1242 $705 3 BR 3 - 1295 - $757 $787 $953 15 1558 $787 The units have been rented to a mixed income population, approximately 65% of which are reserved for Tax Credit eligible residents. Under the Tax Credit law, the maximum gross monthly rent which was allowed to be charged in 1999 for studio, one, two and three bedroom units in the Chicago metropolitan area were $670, $717, $861 and $995, respectively. Tenants' costs for separately metered utilities (electricity for appliances, not heating or cooking) were estimated, using the utility allowance figures from Cook County’s Class 9 program, at $24, $30, $36, and $42, to arrive at the maximum net monthly rents for 1999 as shown in the last column of the table above. Maximum household incomes for 1999 at 60% of Chicago’s median income ($63,800 in 1999) were as follows: 1 person - $26,800 3 person - $34,400 5 person - $41,350 7 person - $47,450 2 person - $30,600 4 person - $38,300 6 person - $44,400 8 person - $50,550 Ownership Structure and Authority The Ginger Ridge Mutual Housing Association incorporated Ginger Ridge MHA, Inc. as an Illinois not-for-profit corporation in March, 1996. It was this entity to which HUD transferred title to the Property effective October 7, 1996. Ginger Ridge MHA, Inc. then formed, and is the sole shareholder of, GR-MHA Corp., a for-profit entity, which in turn became the general partner of Ginger Ridge Limited Partnership (the “Partnership”). Subsequent to the formation of the Partnership, title to Ginger Ridge was transferred to Partnership. There are two partners in that Partnership, a 0.1% general partner and a 99.9% limited partner. The general partner is GR-MHA Corp, whose sole shareholder is Ginger Ridge MHA, Inc (together referred to as the “MHA Board”), and the investor limited partner is Chevron TCI, Inc. This partnership will exist for 15 years following completion of construction (the Tax Credit Compliance Period). At the end of the Tax Credit Compliance Period, the limited partner has agreed to transfer its interest to the general partner pursuant to the right of first refusal provisions in Section 42(I)(7)(A) & (B) of the Internal Revenue Code. Board members of Ginger Ridge MHA include representatives from New Cities, residents of Ginger Ridge and the surrounding community, the local government (a representative of the Mayor of Calumet City) and The Finch Group. After an appropriate training period, 51% of the MHA board will be controlled by Ginger Ridge resident leaders. The $32 million redevelopment was overseen by the MHA Board. While New Cities and TFG act as development consultants with expanded powers, the revitalization was also used as a training ground for the members of the Mutual Housing Association. While this has many benefits, there had been a few drawbacks; primary among those was that not everyone has the experience and expertise required to understand the process of completing a $32 million rehabilitation and operating the resulting new property. Under partnership law, the general partner, and therefore the MHA Board, has control over the operation of the Property. However, during the transition, an interim so-called “stop-gap” entity, AMEN Development Corporation (“AMEN”), was created to oversee (and if necessary, veto) actions taken by the MHA Board. The decisions of the MHA Board are divided into two tiers. As a controlling member of the MHA Board, AMEN has the authority to make Class One decisions such as: the acquisition, encumbrance, or disposition of assets; the final approval of annual capital and operating budgets; the approval of leases and contracts; the amendment or repeal of any of the articles and by-laws of the MHA; the dissolution of the MHA; or any other decision that could have a material financial impact on the association or harm the character or reputation of the MHA or Ginger Ridge. Essentially, AMEN will have control over the MHA Board until that board has been properly trained and is prepared to make its own decisions regarding the welfare of Ginger Ridge. The MHA Board entered into certain contracts with the Developers (joint venture between TFG and New Cities) and a management team associated with TFG (Signature). The Board made the decision to solicit the expertise of these entities so that the redevelopment of Ginger Ridge might move forward. As part of the condition of receiving the $1.67 million HOME Loan from Cook County to help fund the reconstruction, Mr. Wesley E. Finch had signed a personal guarantee to ensure completion of construction for an equal amount. Because of the guarantee, Mr. Finch was granted authority of control over the course of construction. Sources of Funds Funding for the rehabilitation of the Property was structured to come from five sources: (1) the HUD UpFront Grant sums funded to New Cities and then loaned to GRMHA; (2) two tranches of tax exempt bonds; (3) a HOME loan from Cook County, IL; (4) AHP funding from the Federal Home Loan Bank; and (5) proceeds from the sale of Tax Credits. Two tranches of tax exempt bonds were issued so that the amount of tax exempt bond proceeds used to finance the rehabilitation in each building would always be more than 50% of the total renovation cost for that building (see discussion on Bond Financing in this section). Therefore, the loan from New Cities (and HOME funds, as necessary) were drawn down on a pari passu basis with the tax exempt bonds. • Up Front Grant The HUD granted $17,658,750 to New Cities for application toward the development of Ginger Ridge. In addition to paying for $10.2 million in hard and soft rehabilitation costs, HUD included $4.1 million in the UpFront Grant to fund losses from property operations during the Repair Period (the "Operating Loss Reserve"). HUD funded 100% of the projected losses up through the end of the Repair Period (originally defined to be 28 months after closing in October, 1996 and subsequently extended to a 30 month period commencing September 1, 1997), with the Developers taking the risk of funding any additional losses. One of the reasons for establishing the Operating Loss Reserve was a change in the sale/transfer date from HUD to Ginger Ridge MHA, Inc.. Under the original structuring alternative, HUD was to keep title to the Property during the first $10.2 million of renovations, all the while funding operating losses. Because of H.R. 2880 (the Continuing Resolution) enacted by Congress in 1996, HUD was able to change its plans, and committed the UpFront Grant at the September 27, 1996 execution of the Contract For Sale. Title was transferred on October 7, 1996. The budget for the Operating Loss Reserve was prepared by Signature and annually averages $1,416,738 less in operating deficits than HUD operations over the 3 years prior to a transfer in title. HUD Operations Signature Operations HUD FY 93/94 ($3,468,408) HUD FY 94/95 ($2,957,305) HUD FY 95/96 ($3,095,930) Signature 28 months: ($4,063,202) HUD Average: ($3,173,881) Signature 12 mo. avg: ($1,741,372) The actual operating expense loss reimbursement requests to HUD totaled $4,063,202, or an average annual expense of $1,741,372. Therefore, the actual annual operating savings during the repair period was $1,432,509. The HUD UpFront Grant designated $3,220,720 as funding for relocation. Because it was decided that the URA regulations should be used for relocation, a lower number of units than originally projected during negotiations remained occupied after transfer of title, and because the developers were able to minimize relocation to one move per unit for the majority of residents, the developers incurred only roughly $1.86 million in relocation costs. The results of a Phase I environmental study showed that the only environmental hazard found at the property, asbestos, was contained in some of the older floor tile. Therefore, the only necessary environmental abatement consisted of the removal and disposal of asbestos floor tile and mastic. This abatement cost $138,030 and was also included in the total $17.66 million UpFront Grant to New Cities. • New Cities Loan New Cities loaned $11.4 million (the “New Cities Loan”) of the UpFront Grant to the Ginger Ridge Limited Partnership in the form of a subordinate mortgage. New Cities used other UpFront Grant funds to directly pay for the construction of the McKinney Center ($928,000), and to purchase a junior tranche of bonds in the amount of $3 million. The New Cities Loan is payable from the cash flow of the Property, and is subordinate to the repayment of the tax-exempt bonds and the HOME loan proceeds. • Bond Financing Tax exempt bonds (the "Bonds") totaling $12.6 million were issued by the Illinois Housing Development Authority ("IHDA"). The so-called “first tranche”, in the amount of $9,600,000, are rated bonds which were credit enhanced by FannieMae, and were underwritten by The Patrician Financial Company, a Fannie Mae DUS servicer. The $3,000,000 “second tranche” are non-rated bonds purchased by New Cities using a portion of the UpFront Grant. Repayment of the first tranche is supported by the operations of the Property. The second tranche is repayable out of available cash flow at a 1% interest rate over a 30 year term. By issuing the additional junior $3 million tranche, the total of both tranches of the tax exempt bonds financed over 54% of the aggregate basis of the project. Aggregate basis is not clearly defined in the Internal Revenue Code, but it is thought to be the capitalizable basis of a project. The importance is that if aggregate basis does not exceed twice the tax exempt bonds then all of the eligible basis (a defined term in the Code --generally aggregate basis less non depreciable items – on which Low Income Housing Tax Credits are based) can earn Low Income Housing Tax Credits. The combination of the two bond tranches totaling $12.6 million exceeds half of the $23+ million aggregate basis. (Here is where the page 3 discussion of New Cities paying for the Center becomes very relevant.) The project thus obtained an “automatic” allocation of Tax Credits under Section 42(h)(4)(B) of the Internal Revenue Code. This code section describes that if more than 50% of the aggregate basis of any building and the land on which it is located is financed with tax exempt bonds subject to volume cap, then that building will automatically qualify for an allocation of “4% Tax Credits”. This eliminates the need to go through a competitive process in seeking a Tax Credit allocation from the state’s housing credit ceiling allocated according to population size. Proceeds from tax exempt bonds may only be used for Section 265 capitalizable costs. The New Cities Loan has been used for all non-Section 265 capitalizable costs. The Bonds were issued in September, 1997 and during the construction period were enhanced with a letter of credit issued by LaSalle National Bank. FannieMae’s credit enhancement took out LaSalle in September of 2000 when the Ginger Ridge actual income and expenses met the original projections for 3 consecutive months. When bonds are issued, the full amount is drawn down and interest is payable on that full amount. Unused bond proceeds may be invested in certain high quality interest bearing instruments, generally defined as Guaranteed Investment Contracts (“GIC”). The difference between the interest being paid on the issuance and the interest earned from the GIC is known as negative arbitrage. The interest earned from the GIC for the Ginger Ridge redevelopment was taken into income for the time it is earned (5.7% per annum over 20 months). The construction period interest paid out at 6.43% was calculated over 24 months (includes a 3 month breakeven period before the permanent credit enhancement takes out the letter of credit) on the draws as scheduled by the general contractor. A portion of the construction period interest expense was capitalized in accordance with the appropriate accounting procedures. • HOME Funds An additional source of funds was structured as a loan from the Cook County HOME Program. Approximately $1.67 million of HOME funds was used as a hard cost contingency reserve. This funding allowed the Developers to move the previous 10% contingency into hard construction costs and improve the scope of work. The HOME Loan funds were escrowed with a title company and used as a contingency reserve. The repayment of any HOME funds used to finance the construction of the project are subordinated to the payment of debt service on both tranches of tax exempt bonds. • Equity Placement TFG Equities, Inc., a company associated with TFG, has syndicated the Tax Credits allocated to Ginger Ridge through a private placement with Chevron, TCI, Inc. Because of tax exempt bond financing, Tax Credits were automatically allocated without a charge against Illinois’ per capita limit on Tax Credits. On a technical basis, TFG filed both a bond application and Tax Credit application in August, 1996 to obtain an inducement resolution from IHDA so that any development costs incurred would be eligible to be paid from the proceeds of the bonds. According to Section 42(h)(4)(B), this automatic allocation occurs only if over 50% of the project’s aggregate basis is financed with tax-exempt bonds subject to a state’s volume cap. The project will receive $536,070 in an annual tax credit allocation, or $5,360,700 over ten years. This credit amount was based upon 65.25% of the units qualifying (keep in mind that one principle of redevelopment was a mixed income complex) for a “4% Tax Credit” and an eligible basis of approximately $23 million. Chevron, TCI, the investor limited partner, will receive 99.9% of the Tax Credits and passive losses accumulated over the length of the compliance period (15 years from the first year the Tax Credit is claimed). The Tax Credit proceeds have been used to fund certain escrows, operating reserves, developers’ fees, equity placement and asset management fees and once certain benchmarks have been achieved, funding the MHA capitalization. Fees to TFG Entities Besides a standard property management fee, total fees for equity placement and development consultant services of $2,228,000, or 7% of the total development costs were earned. These fees were paid out over time as certain milestones were achieved and investor capital contributions made, with the last payment made in 2001. The total fees are payment for services rendered from 1994 through 2001.
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