WINTER 2008 | VOLUME 13, NUMBER 1
THE NEWSLETTER OF MERRITT COMMUNITY CAPITAL CORPORATION
INSIDE THIS ISSUE: Kent Gardens
BIRUTE SKURDENIS ON
Nonprofits and For-Profits Working Together
IRS 8823 GUIDE
“Kent Gardens was the first project in California to close under the new Section
THE MORTGAGE MELTDOWN – 202 mixed financing guidelines,” said Jennifer Dolin, the project manager for this
OR JUST ANOTHER WALL Mercy Housing property. The HUD 202 program has been available to nonprofit
STREET LESSON? housing developers and owners for the past 40 years. However, the program has
BOARD CHAIR REPORT recently been modified under “mixed financing” guidelines to allow participation
by for-profit limited partner owners with nonprofit general partners. Mercy Housing
California serves as the nonprofit in this partnership. Merritt Community Capital
Fund X is the for-profit Limited Partner.
Eighty-three newly constructed units of affordable housing will be available to seniors this spring
in the Ashland neighborhood of Alameda County when the construction of Kent Gardens Senior
Housing wraps up. Mercy Housing California is the developer and guarantor for the property
and will also be the property manager.
Development of Kent Gardens began in 2002, when Alameda County Redevelopment Agency
purchased the land in order to build affordable senior housing. They put out a request for bids
in 2003 and Mercy Housing California was selected to move forward with the project.
For more than 70 years the site where Kent Gardens is being built was a nursery. Environmental
investigations detected pesticides and metals in the soil. Dieldrin was the only material that
needed remediation. Six inches of soil from the site was removed, tested and dumped.
This investigation and remediation process increased costs and caused delays in the start
K ENT G ARDENS will be of construction.
equipped with safety
amenities that serve the The construction bid for Kent Gardens was originally developed in 2003. Then Hurricane
needs of senior residents. Katrina hit the New Orleans area in 2005. Increased demand for construction materials
resulted in a dramatic rise in estimated construction costs. Consequently, staff at Mercy
realized that they needed more funding to complete the project. “We went back to HUD
> Continued on page 6
BERNARD T. DEASY BILL LOFTON
The Mortgage Meltdown – or Just Another A New Year and a New Chairman – R E P O RT F R O M
THE PRESIDENT Wall Street Lesson? The Outlook for Merritt Capital THE BOARD CHAIR
We all watched in horror as the Dow Jones headed south last August and As I begin my term as Chairman of the Merritt Community Capital Board of
has continued its decline into the first quarter of 2008. It seems that Wall Directors, I want to express the appreciation of my fellow Board Members
Street is about to learn yet another lesson on the tricky subjects of risk and Staff to John Sheldon, the immediate past Chairman, and thank him for
and leverage. guiding Merritt over the past two years.
Hardly the first time, but some of our concern for those of us in the affordable We moved through a very difficult market start 2008, the slate is clean. We are
financial types are really slow learners. housing sector? First, it should be clear phase and, with the closing of Fund XI, evaluating several project investments
This time the event was triggered by that homeownership is not always the we are in very good condition as we face a and are reviewing plans to raise adequate
overcapacity in the mortgage business best answer. Those at the entry home set of new challenges. Merritt Community capital at a reasonable return for our
following years of low rates and a record purchase level were often the most Capital has raised over $300,000,000 investors while maintaining the viability
volume of refinancing. This coincided with adversely impacted by the introduction in equity capital and invested in over 55 of our lower tier investments. Such a
vast sums of capital seeking above market of many of the new adjustable mortgage affordable housing developments since its scenario requires caution. There is risk
MERRITT STAFF returns, mostly in the form of hedge funds products. Loan features such as adjustable founding in 1989 and we are very proud of in any investment and we must not BOARD OF DIRECTORS
and private equity funds. This “Perfect rates, negative amortization, teaser rates, this achievement. Needless to say, our first lose sight of that underlying principle.
Bernard T. Deasy Storm” converged on unsuspecting annual resets, interest only loans and the priority is to continue as a leading source Sometimes, it appears that tax credit William M. Lofton, Esq.,
borrowers to produce a huge backlog of like presented what looked like a real of tax credit equity for nonprofit housing pricing bears no imprint of the analysis Partner, Lofton & Jennings, LLP
Karen Smyda non performing mortgages and an ensuing opportunity for homeownership, but in developers in California. However, during of risk and that may be a problem.
Director of Acquisitions John Chan, Vice Chairperson
credit crunch in the mortgage markets. fact were really a basket of slick financial my term as Chairman of the Board of Vice President, US Bank
Daniel Kiernan Those in the business of making fee traps that may leave many of these Directors, I plan to take a close look at our Low Income Housing Tax Credit
Chief Financial Officer
income have made huge short term gains families in a much worse financial role as a successful nonprofit organization investments are based on a partnership Margaret Yung, Treasurer
between the sponsor/developer and the First Vice President & Manager
Maria Duarte at the expense of homeowners who found predicament once the dust settles. within our immediate community and of Tax Credit Investments
Director of Asset Management
out the hard way that “if it’s too good to explore new and nontraditional ways for investor entity, and partnerships need to Washington Mutual Bank
Julie Newquist be true, it probably is.” If we are to promote a Homeownership us to make even greater contributions. operate to the benefit of both partners if
Roy Schweyer, Secretary
Director of Operations Tax Credit and homeownership in general they are to succeed over the long term.
Former Director of Housing
Kristy Ball While the Bear Stearns High Grade for families in the lower Area Median As we start 2008, we in the Low Income We plan to work closely with our project & Community Development
Asset Manager Structured Credit Strategies Enhanced Income groups, it is essential to create a Housing Tax Credit investing business are partners and potential investors to make City of Oakland
Birute Skurdenis Leverage Fund (that is some handle!) had comprehensive financial counseling and facing a new and very uncertain outlook. sure we are on the market, while ensuring Jeff Bennett
Asset Manager a debt to equity ratio of about 17:1, some document review assistance program. The recent crisis in the subprime mortgage the viability of our prospective project Vice President
Denise Taplin would be homeowners found themselves Families need to understand the risks as sector has spread like a Southern California investments. This will not be an easy task Community Lending Division
Administrative Assistant in a similar predicament. In a recent well as the rewards of homeownership; wildfire throughout the financial markets, and will require a great deal of flexibility Wells Fargo Bank
San Francisco Chronicle article, there were that the value of residential property does with huge losses being reported by such from all parties to any transaction. We need Jon Gresley
examples of Bay Area homeowners facing not always grow at double digit rates and financial giants as CitiBank, Merrill Lynch to place increased emphasis on the analysis Executive Director
Oakland Housing Authority
adjusted mortgage rates in excess of 10.5% that debt is an obligation that must be and Morgan Stanley. It is also being of risk in our pricing models. This will
with more adjusters kicking in over the met over the long term. Sure, there will be reported that Fannie Mae and Freddie Mac require careful analysis of underlying real Sean Heron
Affordable Housing Consultant
next few years. Coupled with the fact that periods of lower interest rates in the future may sharply reduce or entirely eliminate estate valuations, the asset management
the market value of their homes was either and a potential refinancing in the out their participation in tax credit investments challenges over the 15-year project Chris Long
flat or sinking, they found themselves in a years, but those are not sure things that in 2008. Record losses on the part of partnership and, finally, the exit strategy. Senior Vice President
Bank of America
genuine financial bind. If the property is can be relied upon. They may or may not major banks and the possible withdrawal All of these factors will be reflected in our
worth less than the outstanding debt and happen. Making judgments now about the of Fannie Mae and Freddie Mac from the pricing decisions. While we may need to Stephanie McFadden
Director, Pacific Housing Advisors
the monthly payments are difficult if not level and the structure of debt that one can tax credit market does not bode well for move cautiously in the near term, we do
impossible to make, then walking away reasonably handle over many years in the the affordable housing industry. While my anticipate moving forward with sound John Sheldon
Executive Director, Morgan Stanley
may be the only viable response. If that future is not an easy task for anyone, but crystal ball remains foggy as I write these investments, just as we have done in past
happens on a large scale, then we may information and the participation of notes, we at Merritt Capital are positioning periods of volatility in the tax credit Rick Yee
Vice President & Manager of
be in for some serious financial weather. knowledgeable housing finance counselors the organization to weather the marketplace. Community Development Lending
can be of great assistance to the first time approaching storm. Bank of the West
There are lessons to be learned from homebuyer. I also want to welcome our readers to a
situations such as these, but what In 2007, Merritt closed our Fund XI at new format for the Merritt Messenger and
specifically are the relevant issues of $42,000,000 and placed the entire fund in I hope you will enjoy keeping in touch with
four outstanding properties. So, as we Merritt via our newsletter.
I N D U S T RY U P D AT E S
The California Tax Credit Allocation Committee TCAC mentioned some of the standards
that indicate adequate due diligence.
TCAC’s new database now allows them
to highlight data relating to the Next
AND RESOURCES Looks at the IRS 8823 Guide These include: updating information on
applications more than a year old,
Available Unit Rule. Properties that are less
than 100% Tax Credit should be prepared
requiring a two year housing history, to document how they track compliance
securing verification of discontinued with the Rule. The IRS has relaxed its rule
employment and questioning creative concerning transfers between buildings
financing for home purchases or other at a tax credit property. A household
intra-family loans that raise questions on transferring between buildings with
Early in 2007, the IRS published its long promised Guide for Completing home ownership and sources of money different Building Identification Numbers
Form 8823. The Guide provides standardized definitions of the options on IRS in bank accounts. (BINs) can now earn up to 140% of the
Form 8823, the form used by state agencies to report noncompliance with current income limit for the unit and
Low Income Housing Tax Credit requirements to the IRS. Managers were advised to complete still transfer. In the past, households
annual recertifications on time. TCAC transferring between buildings were
will report patterns of repeated, late, treated as new move-ins.
The IRS developed the Guide to encourage The most welcome rule change for property
retroactive recertifications to the IRS.
consistency among states in applying managers is the extended effectiveness of
The IRS made several clarifications on the
regulations. After attending an excellent income verification material. The material Training participants were informed that Student Rules. The 8823 Guide confirmed
training given by the California Tax Credit can now be used for up to 120 days prior TCAC inspection policy is to not leave the that the IRS definition of a full-time student
Allocation Committee’s monitoring staff to the Effective Date of the Tenant Income property until serious health and safety should be used. Someone who has been
and hearing from folks who attended the Certification (TIC). Property managers no concerns are addressed. Maintenance staff a full-time student for 5 months during
2007 National Council of State Housing longer have to re-verify stale material after should be available and ready to handle the calendar year is considered a full-time
B IRUTE S KIRDENIS is an Agencies’ (NCSHA) Housing Credit 90 days. However, as in the past, third the most common health and safety student, even if they are not currently a
Asset Manager and Trainer Conference in San Francisco, it looks like party verifications cannot be used if they issues. TCAC staff does not handle keys, full-time student, or they have graduated.
for Merritt Community the IRS may only partially reach its goal. were received more than 120 days prior open doors and will not be in a unit alone Also in the Guide, the IRS confirmed that
Capital Corporation. While the 8823 Guide is a useful tool, to the effective date of the income or perform an inspection when there are all members of the household are included
states will still forge their own way through certification. only minors in the unit.
the compliance minefield, aided by
national training organizations which can TCAC stressed management’s responsibility
never satisfactorily cover the nuances of to compare initial certifications to the first
local compliance situations. recertification to uncover potential fraud.
TCAC expects management to take steps
The most welcome rule change for property managers is the extended
First, let’s take a look at TCAC’s Training. to remove fraudulent households from effectiveness of income verification material. The material can now be
In Spring 2007, Rose Guerrero and her properties, including establishing policies used for up to 120 days prior to the Effective Date of the TIC.
staff presented their latest training in five on when new members can be added to
different cities. Using the 8823 Guide as the household. For those who are desperate
their template, TCAC staff provided their for affordable housing, it can be tempting
interpretation of the IRS’s guidance. They to manipulate household membership to TCAC clarified that management should in determining whether a household is
also took the opportunity to introduce the qualify for tax credit housing. Sometimes not charge rent for managers units, unless comprised completely of full-time students.
new Child/Spousal Support Affidavit that it takes the form of adding higher the manager is fully qualified as a tax However, an IRS opinion issued over
replaces California’s required Child earning family members after move in or credit household, meaning a full TIC with the 2007 year end holidays appears to
Support Affidavit. “borrowing” children, or other relatives verifications. Resident Managers should contradict this. TCAC continues to follow
to increase household size and the not be housed at a tax credit property an NCSHA recommendation that minors
One surprise from the IRS is that a state applicable household income limit. New required to be in school are not treated
other than their own.
does not need to report noncompliance additions to a household must now be as full-time students. So, a family that
issues that are corrected before owners income certified and have their income One noncompliance option on the 8823 included parent(s) who were full-time
receive notice of a state agency inspection. added to the existing household’s. If the presents a problem for Californians who students would meet the Student Status
Only noncompliance found uncorrected household is now “over income,” the have been innovatively using the Low exemption because their school-age
at the time of the TCAC inspection, or Next Available Unit Rule applies. If the Income Housing Tax Credit program for children were not considered full-time
corrected after a TCAC notification of household becomes “over income” all types of supportive housing. The IRS students. However, TCAC is waiting for The California TCAC
inspection should be reported. This puts with the additional resident(s), the new requires that properties be available further clarification from the IRS and if addressed policies that
greater responsibility on owners and residents are limited in their ability to to the General Public. Rose Guerrero there are changes to TCAC’s current qualify household members
property management compliance staff remain at the property should the original acknowledged that California has one of stance on the Student Status Rule they for affordable housing.
to carefully review all initial move-in household members move out. TCAC the most creative collections of supportive will issue a directive to tax credit housing
files. While most property management wants all property managers to develop housing, from survivors of domestic managers. When a household claims a
companies say that they do this, without adequate policies on adding household violence to young adults moving out of the Student Status exemption, TCAC’s
proper oversight, procedures can often members, and documenting identity, foster care system. TCAC relies on attorney guidance is that the file should include
devolve into approval signatures without especially where there is a question of opinions on whether a property meets the proof of that status (e.g. copies of tax
a real review. adult responsibility for minors. IRS’ guidelines for General Public use. returns showing dependents, proving that
 > Continued on back page 
11th Annual Partnership Luncheon EVENTS
On November 7, 2007, over 100 partners, investors and colleagues joined
Merritt Community Capital’s Board of Directors and Staff at the Lake Merritt
Hotel to enjoy lunch, good conversation, a beautiful view of the lake, and a
short program honoring this year’s Partnership Luncheon Awardees.
For its leadership in providing both was honored as 2007 Sponsor of the Year.
debt and equity resources in support of Val Agostino accepted the award on behalf
affordable housing developments, Silicon of Mercy Housing California.
Valley Bank was honored as 2007 Investor
of the Year. Christine Carr accepted the For its pioneering role as an outstanding
award on behalf of Silicon Valley Bank. affordable housing development in the
Mission Bay-SOMA area of San Francisco,
Kent Gardens For its comprehensive leadership in Rich Sorro Commons was honored as 2007
Continued from page 1
the development and management Project of the Year. Myrlem Balladares
to ask for amendment money [to cover with offices in San Francisco, Sacramento, of outstanding affordable housing accepted the award on behalf of Rich Sorro
these costs],” said Dolin. “But since it Orange and Santa Cruz. Mercy Housing communities, Mercy Housing California Commons.
was part of the mixed finance program we California has about 100 properties in
couldn’t get more money, so we had to California serving more than 10,000 2
find other money.” people including families, seniors and
people with special needs.
Mercy staff decided the Low Income
Housing Tax Credit program was the To round out the financing on Kent
answer and Merritt bid on the deal. Gardens, tax exempt bonds were issued
A FFORDABLE S ENIOR “We got the deal,” said Karen Smyda, by Alameda County and privately placed
H OUSING O PPORTUNITIES Acquisitions Director at Merritt Capital, with Silicon Valley Bank. The financing
at Kent Gardens will “Because we understand HUD, we’re structure includes significant soft debt
include good proximity to flexible and we could provide good provided by Alameda County and by
transportation, shopping pricing.” This is Merritt and Mercy’s fifth the Redevelopment Agency. Permanent
and hospitals. partnership together. “We’re thrilled to financing will be a Capital Advance under
be doing another deal with Mercy,” the HUD Section 202 Program. In addition,
said Smyda. “The development team is 82 units will receive operating subsidies 1 Zachary Lopez and Johnnie
knowledgeable, responsive, and they under a HUD Project Rental Assistance Norway from TNDC discuss
know how to move things along.” Contract. Merritt Community Capital Asset Management with
Fund X Partnership will provide an equity Merritt’s Birute Skurdenis.
Kent Gardens Senior Housing will be a investment of $8,678,000. Fund X investors 2 Merritt’s Maria Duarte
single 3-story wood frame structure with are Bank of America, Bank of the West, and Karen Smyda discuss
a manager’s unit. Apartments will be Fannie Mae, Freddie Mac, Washington fees with Merritt’s counsel,
equipped with emergency cords in each Mutual and Wells Fargo Bank. Richard Power.
bedroom and bathroom with a direct
connection to a staff office. There will be Building on its experience with Kent 3 Merritt’s Kristy Ball (center)
community space, a resident services Gardens, in 2007 Merritt closed into a talks with Paul Taylor and
coordinator and a social service office. second partnership utilizing HUD 202 Sandra Reeder, from Eden
The property is centrally located near mixed financing. Casa Grande Senior Housing, about the "miracles"
freeways, bus lines, and several BART Apartments in Petaluma is a 52 unit new they’ve worked at Merritt’s
stations with good proximity to shopping construction project to be developed by Union Court property.
and hospitals. Petaluma Ecumenical Properties. Merritt
is pleased to build on its experience in H ONOREES G ATHER A BOVE TO S HOW O FF T HEIR AWARDS : (From L to R)
Mercy Housing California (MHC) is the fostering nonprofit and for-profit
largest regional development corporation Christine Carr from Silicon Valley Bank (Investor of the Year); Justin Solomon from Mission
partnerships. Housing Development Corporation, Myrlem Baladares from Rich Sorro Commons and
in the Mercy Housing System. MHC
Monique Holsome from Caritas Management (Project of the Year); Val Agostino from Mercy
develops housing throughout California
Housing California (Sponsor of the Year).
Continued from page 5
neither the parent nor any of the children At the 2007 NCSHA Tax Credit Conference,
are dependents of another, marriage one presenter from a training organization
certificates for married couples). TCAC will stated that a student was not required to
hold owners and managers harmless of be a dependent in order to qualify for
past actions but expect compliance with HUD’s full-time student income disregard.
new move-ins after July 1, 2007. The student only needed to be the child of
the Head(s) of Household, regardless of
The IRS Guidelines allow states to accept age. This appears to contradict the IRS
utility allowances established by owners guide which uses different wording from
using sound methods to calculate the real the HUD 4350.3 and specifically refers to
utility expenses of tenants. TCAC made “dependent, full-time student.” TCAC
clear that they do not have the staff to clarified that a full-time student claiming
monitor an owner-established utility HUD’s income disregard, had to be a
allowance and, at present, will only accept dependent of the Household.
allowances set by HUD, PHAs or RD.
TCAC clarified that
full-time students claiming Owners and property managers that operate in several states should
HUD’s income disregard be happy with this new guidance but differences will still exist between
must be a dependent of the
Household. the states.
Owners and property managers that Stay tuned for more clarifications as
operate in several states should be happy Spectrum Enterprises has won the TCAC
with this new guidance but differences will contract to monitor Southern California
still exist between the states. Whether it’s LIHTC properties. Spectrum has several
different required forms or lease addenda state contracts to act as the state
(California is one of only a handful of monitoring agent and is known for its
states requiring the Good Cause Lease tough standards. Unlike TCAC, which is
Addendum), multi-state operators will the State Agency, Spectrum will have
still need to be attuned to individual state an agent’s responsibility to report all
requirements. In addition, supplementary conditions of noncompliance, even if State
guidelines for due diligence are staff later decide that the noncompliance
PRODUCTION CREDITS promulgated by large national training is not reportable to the IRS.
President, Merritt Community organizations like NCHM and Quadel.
Bernard T. Deasy
Lisa Edson Design
Bernard T. Deasy, Bill Lofton,
Julie Newquist, Birute Skurdenis
Bob Hsiang, Alain McLaughlin,
Julie Newquist, Low Income
1970 Broadway, Suite 250
Oakland, CA 94612
Tel: 510. 444. 7870
Fax: 510. 444. 7874
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