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					                                                                                  WINTER 2008 | VOLUME 13, NUMBER 1

                                              MERRITT MESSENGER
                                              THE NEWSLETTER OF MERRITT COMMUNITY CAPITAL CORPORATION

INSIDE THIS ISSUE:           Kent Gardens
                             Nonprofits and For-Profits Working Together

                             “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.,
President                                                                                                                                                                                                                    Chairperson
                               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.

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                              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

          [4]                                                                                                                                                                                     > Continued on back page                [5]
                                                                                                                       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).

          [6]                                                                                                                                                                                                                      [7]
                                   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.
Capital Corporation
Bernard T. Deasy
Julie Newquist
Lisa Edson Design
Contributing Writers
Bernard T. Deasy, Bill Lofton,
Julie Newquist, Birute Skurdenis
Bob Hsiang, Alain McLaughlin,
Julie Newquist, Low Income
Investment Fund

1970 Broadway, Suite 250
Oakland, CA 94612
Tel: 510. 444. 7870
Fax: 510. 444. 7874
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