Housing Services:
Housing Development Subordinate Loan

Purpose

The Housing Development Subordinate Loan (HDSL) is a subordinate loan that provides public financing to fund development costs for new or existing rental and Mixed-Use Projects that provide public benefits. The HDSL is intended to fund the difference between the projected project costs and available sources of construction or permanent financing to the extent the loan is supportable from operating revenues.

Product Description

The HDSL provides construction and/or bridge financing, that either partially or fully converts to term financing. This loan has lower interest rates and generous terms in order to make projects that provide public benefits feasible and developable. The HDSL is designed to work in conjunction with other public and private financing sources, when projects will predictably generate sufficient cash flow (after payment of operating expenses, required reserve contributions and required senior debt service) to allow regular periodic payments on the HDSL.

The following summary outlines the general product characteristics available to Project Sponsors within the construction, bridge and permanent loan period. A more detailed description of loan terms, specific to the HDSL, is outlined in the Product Specific Guidelines section below. In addition, all HDSL loans are subject to the General Guidelines for Direct Financial Assistance Products.

Construction/Bridge Period:

Interest Rate: Minimum 3%, simple interest

Term: Maximum of 18 months

Repayment: Deferred payment until end of construction period, interest accrues

Other Terms: See Permanent Loan Period <

Permanent Loan Period:

Interest Rate: Minimum 3%, simple interest

Loan Amounts Per Unit: No set maximums, but total direct financial assistance funding must compare favorably with PDC Published Averages (based on income level served)

Term: Up to 30 years

Repayment: Amortization period is 30 years, with some flexible options available, subject to PDC approval

Debt Coverage Ratio (DCR): While a 1.1 DCR is a project minimum, PDC’s underwriting will adjust DCRs on a project by project basis according to the project’s risk factors and it’s ability to maintain sufficient cash flow. DCRs will be increased on properties with lower income targeting and higher risks. Underwriting will focus on maintaining minimum DCRs during the term of the loan and the amount of Borrower cash flow from the property.

Loan to Value (LTV): Total secured debt may not exceed 100% LTV

Other Repayment Terms: Project Sponsor pays PDC 50% of Excess Cash Flow (see below)

Minimum Qualifications

Project Sponsors who meet the following criteria may be eligible to receive an HDSL:

1. The Project Sponsor must own the subject property or have site control, and
2. Other financing sources for the project, including primary debt, must be maximized, and
3. The Minimum Investment Requirement must be, and
4. Designated Affordable Units must be affordable for 60 years.

PDC funds are limited. The PDC may not be able to provide loans to all eligible projects.

Product Specific Guidelines

Eligible Project Sponsors: An individual, corporation, partnership, sponsor or a joint venture that has ownership or site control of a rental property may apply for an HDSL.

Eligible Projects: A project providing rental housing that furthers the goals and objectives in Portland's Comprehensive Housing Plan, Consolidated Plan, Urban Renewal Area plans or other applicable policy directives is eligible for an HDSL.

Interest Rates: Interest rates during the construction and permanent loan periods are a minimum of 3%. In cases where the PDC is providing a portion of the loan funds through a credit facility with a private lender, the Project Sponsor may receive an interest rate based on PDC's cost of funds and/or the ability of the project to repay debt.

Loan Term:

1. Construction Loans carry a maximum 18-month term or until the permanent loan funds are available, whichever period is shorter. Construction interest may be paid monthly or at the end of the construction loan period, subject to underwriting.
2. Permanent Loans carry a maximum 30-year term or the length of the amortization period, whichever period is shorter.

Repayment Terms: HDSL repayment terms are structured to balance the goals of (1) maximizing participating financing; (2) assuring that the project is feasible over the Term of Affordability; and (3) providing for timely repayment of public funds.

HDSL loans are structured as fully amortized 30-year loans unless the PDC determines (and the Project Sponsor accepts) that the following alternative repayment schedules will better achieve the goals outlined above.

Alternative Repayment Schedules:

1. Fully amortized over a shorter loan term based upon available debt service at 1:10 to 1; or
   
2. Amortized up to 50 years with a principal balloon payment at the end of the loan term;
   
3. Interest only payments with a principal balloon payment at the end of the loan term; or
   
4. Deferred payments and a balloon of principal and accrued interest at the end of the loan term.

If additional replacement or operating reserves are required or additional leverage can be achieved, schedules 1, 2 and 3 may be adjusted to allow the deferral of principal and interest payments for an initial period of up to five years. After the end of the deferral period, any accrued interest will be added to the principal balance and the new principal balance will be amortized over the remaining term of the loan, which generally does not exceed 30 years.

Participating Financing: Project Sponsors must seek maximum participating financing on the best terms available. Interest rates for superior loans should be at the current market rate or better for the financing type. Generally, the combined debt coverage ratio for all participating financing (other than PDC financing) should be no greater than 1.15-1.20 to 1:00 for superior loans, and/or the combined loan to value ratio (LTV) for all senior financing should be no less than 80% LTV. The PDC evaluates bond-financed projects against current bond underwriting requirements.

Security/Collateral: An HDSL is secured by the subject property. Security may take the form of a mortgage, a deed of trust or a participation agreement with another public or private lender.

Cash Flow Payment Requirement: PDC may require Cash Flow Payments in addition to scheduled debt service payments. These payments will be made from cash flow splits of Excess Cash Flow. Excess Cash Flow is determined when a priority cushion* for identifiable project risks that can be mitigated by available cash is deducted from Net Cash Flow. Net Cash Flow is Gross Revenue less Allowed Expenses, Permitted Loan Payments, and Required Reserve Contributions. The remaining Excess Cash Flow, if any, shall be split between the Borrower and the PDC.

The priority cushion may be shared among pools of assets prior to determination of Excess Cash Flow, if the Borrower has sufficient asset management capacity and is able to provide specific details of project needs, funding levels and an acceptable maintenance/replacement program.

See definitions of Gross Revenues, Allowed Expenses, Permitted Loan Payments, Required Reserve Contributions, Net Cash Flow and Excess Cash Flow under the definitions chapter.

In summary, Cash Flow Payments are determined as follows:

Gross Revenues	Less	(Allowed Expenses +Required Reserve Contributions)	=	Net Operating Income
Net Operating Income	Less	Permitted Loan Payments	=	Net Cash Flow
Net Cash Flow	Less	The greater of 15% of Permitted Loan Payments or $600 per unit*	=	Excess Cash Flow
Excess Cash Flow	Times	50% (**)	=	Cash Flow Payment

* Currently the cushion is the greater of $600 per unit or 15% of Permitted Loan Payments and may be adjusted depending on project size and project risks identified during underwriting.

** See note regarding sizing of cash flow payment.

As part of PDC's underwriting to determine the financial need for public financing, the PDC evaluates the project's internal rate of return over a 10-year period.
(See Rate of Return Guidelines). If a project's projected return exceeds the maximum allowable, the PDC may require either a) an increased percentage of Excess Cash Flow from the project or b) an increase in the Minimum Investment Requirement for the project.

for Housing Services' News & Information E-Mail List

We value your input: Let us know what you think about our new website design.

---

for PDC's News & Information E-Mail Lists
Archive of sent E-Mails
Unsubscribe from our E-Mail Lists