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Negotiation and Deal Closing

NEGOTIATION AND DEAL CLOSING

Understanding the aspects of an affordable SMMF preservation deal presents an opportunity to strengthen your negotiation and closing with your project partners. For instance, a financial partner may have fewer projects or deal structures to reference when doing an affordable SMMF preservation deal, and it can be helpful to demonstrate how you see the deal coming together.

A practical financial modeling tool can help established nonprofit and for-profit developers become more active players in the unsubsidized affordable SMMF market. It can demonstrate the key aspects of your preservation deal to lenders or local decisionmakers to help build support for your project and long-term capacity to assist with a smoother closing. And it can quickly assess ways to fill any financing gaps that may arise during this stage of preservation.

The financial modeling tool developed as part of this toolkit, provides information tailored to the scale, financial resources and associated requirements and market realities of unsubsidized affordable SMMF preservation projects.

COMMON PITFALLS THAT CAN DISRUPT THE CLOSING PROCESS FOR AFFORDABLE SMMF PRESERVATION

In addition to the common financial hurdles that can disrupt closing (e.g., obtaining consent of subordinate lenders in refinancing; conditions of the construction lender relative to the permanent lender; disagreement about different debt sources’ positions in the capital stack), there are a variety of property-related hurdles to be aware of during the closing process for affordable SMMF preservation projects:

ISSUES FOUND DURING A TITLE SEARCH THAT MAY PREVENT A TITLE COMMITMENT

This may be especially relevant for SMMF properties that have unreleased liens or have been informally sold or transferred in the past (including heirs’ properties). Research by the Center for Community Progress has shown these murky title situations are more likely to occur in low-income communities and neighborhoods with many senior households, which are also areas where preservation efforts can be particularly impactful (e.g., addressing blight or preventing displacement).

EVIDENCE OF CONTAMINATION OR HAZARDOUS MATERIALS

This pitfall is most relevant to properties that have been vacant and/ or are located in older, predominantly low-income communities.xxvii Contamination can result from things like leaking pipes running under the property, neighboring industrial buildings, leaching from a nearby waterway and illegal dumping. These issues can present even if there is a previous environmental study on the property, reinforcing the need for updated environmental studies at the outset of your preservation project.

Ha, H. et al. (2016). “Analysis of Pollution Hazard Intensity: A Spatial Epidemiology Case Study of Soil Pb Contamination.” International Journal of Environmental Research and Public Health, 13(9). Available at www.ncbi.nlm.nih.gov/pmc/articles/PMC5036748/.

APPRAISAL GAPS

Appraisal gaps can occur due to inadequate market analysis, poorly estimated cash flow projection or simply a very strong real estate market. This can be a particular risk with unsubsidized affordable SMMF preservation, since it may be hard to find appropriate comparables, especially in strong markets, where a property’s selling price may be determined by rents in newly constructed buildings or a different use. If the appraisal comes back less than anticipated, you may need to find additional equity or financing to cover the gap. One potential solution would be to seek a guarantee from a philanthropic funder, which may enable a Community Development Financial Institution or bank to offer a higher loan-to-value ratio.

TIPS FOR NAVIGATING NEGOTIATION AND DEAL CLOSING

Team capacity – To close a preservation deal for unsubsidized affordable SMMF properties, the following capacities are needed:

  • Knowledge of:

    • Local land-use and permitting processes

    • Financial resources and hw t structure deals

    • Comparable projects and their terms and conditions

  • Expertise:

    • Technical expertise – Surveying, environmental assessment (if needed), architecture and/r engineering (if needed), construction, property management
    • Financial expertise – Accounting; private sector lending; public sector financing
    • Legal expertise – Land-use, affordable housing, real estate/tax lawxxviii
    • It is important to have your own attorney (separate from that of the seller or lender) when title issues are identified.
    • Regulatory compliance expertise related t using specific financing resources

RELATIONSHIPS WITH FINANCIAL PARTNERS

It also helps to have good relationships with and knowledge of your financial partners. Even if you don’t have an existing relationship with your financial partner, understanding their interests in your deal (e.g., exit terms, sponsor guarantees, investor’s expected return) will support a stronger negotiation.

NEGOTIATE DEAL POINTS EARLY

Ideally, all major deal points should be negotiated as early as possible. Major deal points include (but are not limited to): guarantees; credit delivery; pay-ins and conversion requirements; permit status; dates for final investment approval; lien position; and discrepancies in lease- ups and legal leases compared with current cash flow statements.

With fewer precedents for unsubsidized affordable SMMF projects, financial partners may need to negotiate waivers or alternative terms on a case-by-case basis, adding time and uncertainty to the closing process. For instance, during the underwriting process, identify any deviations from a lender’s programmatic requirements and understand options for waivers as soon as possible. Proactively identify issues that could derail the deal and propose solutions that will help compensate the lender for added risk (e.g., adjustments to term and interest rates or extra reserves).