PRESENTER: Presenter
Jeff Jewell, Economic and Community Development Director
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SUBJECT: Title
Discuss and consider approval of a Resolution recommending the New Braunfels Utilities (NBU) Board of Directors exempt capital impact and recovery fees - per the NBU Impact Fee Waiver Policy - in an amount up to $500,000, for the Park at Dogwood, a qualified affordable housing project in the City of New Braunfels.
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DEPARTMENT: Economic and Community Development
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COUNCIL DISTRICTS IMPACTED: 6
BACKGROUND INFORMATION:
The project - Park at Dogwood - is a proposed 76-unit new-construction Low Income Housing Tax Credit (LIHTC) development at 1869 McQueeney Road in New Braunfels. In 2024, the City Council approved a resolution in support of the tax credit application delivered to the State of Texas. In July 2024, the state notified the developer the project had been selected to receive tax credits and they began the site development process. The project is nearing completion of the design and permitting process and the project has a funding shortfall. The developer has requested that NBU and the City participate in closing the funding shortfall through a combination of fee and impact fee waivers. The zoning is appropriate for the proposed use.
All of the project’s units are reserved for households earning 30%-60% of the Area Median Income (AMI). AMI is the midpoint of a region’s income distribution, and the figure is used to determine eligibility and rent caps for affordable housing programs. The project’s affordability structure includes 8 units at 30% of Area Median Income (AMI), 31 units at 50% AMI, and 37 units at 60% AMI. Program rents by unit and income level for the project’s first year are detailed below:
The property will employ two full-time property management staff members and will coordinate with service providers to offer recurring services to residents.
These units must be rented at affordable rates to low or moderate-income tenants for an affordability period, usually 30 years, during which the property must be maintained as affordable housing and meet other program requirements. If a developer fails to meet these requirements during the project’s first 15 years, there can be a recapture of the tax credits, meaning the tax benefits must be repaid. Because of these recapture provisions and program monitoring, LIHTC properties historically have very low delinquency and default rates and New Braunfels has at least five of them that have been in the program for 20 years and less. The last tax credit project placed into service in New Braunfels was the rehabilitation of Eden Heights on Lakeview Blvd. The last LIHTC development that produced new units for the New Braunfels community was the Reserve at Engel that opened in 2017.
The Low-Income Housing Tax Credit (LIHTC) program is the federal government’s primary vehicle for providing affordable housing nationwide. The program allocates federal tax credits to state housing agencies based on population. These agencies then distribute the credits to housing developers according to the state’s own specific criteria and competitive processes. Developers of affordable housing projects apply to their state's housing agency for these tax credits. The application includes details about the project, such as location, size, cost, and the intended population to be served. State agencies review applications and award tax credits to selected projects. The criteria for selection often include factors like project feasibility, location, and the level of impact on the target population. If awarded the credits, developers typically sell these credits to investors to raise capital for their projects. Investors in these projects get a dollar-for-dollar reduction in their federal tax liability over a 10-year period in exchange for providing equity funding into these affordable housing projects. The project developer uses the funds received from the investors to build or rehabilitate housing that is required to be affordable to the target populations.
The tax credit received will typically generate around 60%-70% of the construction funds needed for a project. The rest of the project funding sources come from a permanent loan, soft funds from a public entity and/or a deferral of a portion of the developer fee (project cost) that is repaid from cash flow remaining after all other project obligations are met (property management and upkeep expenses and permanent loan debt service). Project owners have obligations that must be upheld in exchange for participation in the program.
Funding Request
Staff evaluated the applicant’s request utilizing construction bids, term sheets from lenders and tax credit investors and other sources of information relevant to the analysis. The state’s agency that awarded the tax credits - Texas Department of Housing and Community Affairs (TDHCA) - also undertakes an independent underwriting process that helps inform staff’s analysis of the request. The project lacks sufficient equity and permanent debt to pay all development costs without a substantial developer-fee deferral or another subordinate funding source.
Total development costs are approximately $22.30 million, while LIHTC equity and permanent debt provide approximately $20.40 million. This produces a financing shortfall of $1.91 million, or approximately $25,081 per unit.
|
Project Item |
Underwritten amount |
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Total units |
76 |
|
One-bedroom units |
16 |
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Two-bedroom units |
60 |
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Total development cost |
$22,304,585 |
|
Development cost per unit |
$293,481 |
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LIHTC-eligible basis |
$19,466,462 |
|
Annual federal LIHTC allocation |
$2,000,000 |
|
LIHTC equity price |
$0.785 |
|
Sources of Funds |
Underwritten amount |
|
Federal LIHTC equity |
$15,698,430 |
|
Permanent loan |
$4,700,000 |
|
Permanent interest rate |
6.10% |
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Construction loan |
$12,500,000 |
|
Financing shortfall |
$1,906,155 |
Development Budget
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Major Uses |
Amount |
Percent of TDC |
|
Land |
1,500,000 |
6.7% |
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Base construction |
12,997,428 |
58.3% |
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Contingency and builder’s risk |
729,871 |
3.3% |
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Impact fees and other city fees |
1,637,539 |
7.3% |
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Professional and other soft costs |
1,152,310 |
5.2% |
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Financing costs |
1,284,172 |
5.8% |
|
Operating and lease-up reserves |
464,161 |
2.1% |
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Developer fee |
2,539,104 |
11.4% |
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Total uses |
$22,304,585 |
100.0% |
Financing Shortfall
The project lacks sufficient equity and permanent debt to pay all development costs without a substantial developer-fee deferral or another subordinate funding source. There are two primary causes of the funding shortfall: When making an initial application to TDHCA in 2024, tax credit pricing was estimated at a rate of $0.88 per dollar. Credit pricing will instead be at $0.785 per dollar, which decreased the amount of equity anticipated from around $17.6M to $15.7M ($1.9M).
The shortfall results from the difference between the project’s cost and the two principal sources available to a LIHTC development:
1. Tax credit equity is limited by the credit award and equity pricing. The $2 million annual credit reservation, monetized at $0.785 per credit dollar, produces approximately $15.70 million of equity.
2. Permanent debt is limited by restricted rents and resulting NOI. Because rents are restricted at 30%, 50% and 60% AMI, the project cannot simply increase rents to support more debt. The proposed permanent loan is already maximized given convention limits on debt coverage ratio. Consequently, the shortfall cannot reasonably be filled with additional conventional amortizing debt. The project has maximized debt capacity while maintaining operating feasibility: The projected income supports the proposed permanent debt with a Year 1 debt-service coverage ratio of 1.24.
3. Development costs exceed the combined proceeds. At approximately $293,481 per unit, total costs exceed identified permanent funding by $25,081 per unit.
If the gap is not reduced or eliminated, the project generally cannot close, start construction or convert to the permanent loan phase. At closing, the tax credit investor, construction and permanent lenders and housing finance agency seek a balanced sources and uses statement with legally committed funds.
The project currently addresses the shortfall by deferring 75% of the developer fee. Deferred developer fees are one way to close funding gaps in these projects but typically with conditions that are specific to the tax credit equity investors and/or the project’s lender. Deferred fees that are repaid within a window of about 10 years are common in LIHTC projects. There are certain concerns with this much in fee being deferred:
1. Developer fee repayment risk: deferring 75.1% of the fee is substantial. The developer’s return depends heavily on future cash flow, refinancing or sale proceeds rather than the conversion to permanent financing or repayment during construction. This exceeds the underwriting requirement that the fee be repaid within the initial 15-year compliance period.
2. Equity timing risk: Nearly half of the LIHTC equity is scheduled at conversion. Delays in completion, stabilization, cost certification or permanent conversion could increase construction interest or require additional bridge capital.
3. Cost and contingency risk: The model includes a 5% construction contingency. Any costs exceeding contingency would increase the shortfall unless offset by additional equity, sponsor funds or cost reductions.
Fee Waiver Request
Both NBU and the City have assessed fees on the project like in other projects. NBU has assessed $1.22M in capital recovery (impact) fees and the City has assessed $170,696 in park development fees and $304,130 in roadway impact fees. By ordinance, the development is already entitled to a waiver of roadway impact fees assessed by the City.
The NBU Board of Trustees established a policy for relief from capital recovery fees pursuant to Section 130-408 of the New Braunfels Code of Ordinances. The policy outlines a process and the types of projects where relief from capital recovery fees may be sought. Projects that qualify as affordable housing may receive a waiver of impact fees after making an application for water and/or sewer service and electric service from NBU, the City adopting a Resolution finding the project meets the affordable housing criteria and requests the NBU Board of trustees to approve the waiver and the project receives a recommendation from NBU staff.
The New Braunfels Housing Authority (NBHA) has entered a partnership with the developer where an affiliated housing authority will own the land and the project becomes exempt from property taxes. The partnership also entitles the NBHA to 25% of the development fee (approximately ) and 25% of project cash flows. This tax exemption allows the size of the loan to increase by approximately $850,000 to close the financing gap. The NBHA is also scheduled to receive 25% of the development fee ($635,000).
Underwriting Conclusions
The Park at Dogwood project demonstrates adequate projected operating performance to support the proposed $4.7 million permanent loan. However, the project has an approximate $1.91 million capital funding gap before consideration of additional local fee relief. This gap results principally form the inherent constraints of affordable housing financing: restricted rental revenue limits debt capacity, LIHTC equity is limited by tax credit allocation and pricing, and the developer has already committed a substantial portion of its compensation to the project through deferred developer fee.
In the absence of another funding source, the $1.91 million shortfall must be financed through a deferred developer fee. At approximately 75% of the total developer fee, this represents a significant reliance on future project cash flow to complete the initial capital structure rather than a conventional cash source available at closing. Texas Department of Housing and Community Affairs (TDHCA) requires deferred developer fee to be supportable from projected cash flow within the initial 15-year underwriting period. Typical affordable housing underwriting guidance identifies deferred developer fees exceeding 50% of the total developer fee as warranting additional review of project contingencies and the sufficiency of future surplus cash flow for repayment. The proposed capital structure places a substantial portion of development financing risk on future operating performance.
The proposed utility and roadway impact fee waivers directly address this issue. Unlike additional permanent debt, the waivers do not impose additional debt service on a rent-restricted property. Instead, each dollar of waived development costs reduces the amount of deferred developer fee required as a source at closing. Combined fee relief of approximately $772,000 would reduce the capital gap to approximately $1.13 million, materially decreasing reliance on deferred fee and enhancing the project’s ability to absorb unforeseen operating or capital pressures.
The total combined fee waivers of utility and roadway impact fees - totaling approximately $500,000 and $272,000, respectively - reduces the total amount of deferred fee from 75% to around 45%. This shows the developer fee being repaid in full around year 13 of the project, which is within TDHCA’s initial compliance period underwriting requirements of being repaid within 15 years and therefore helps address an identifiable financing weakness.
ISSUE:
The item considers adoption of a resolution recommending NBU waive a portion of capital recovery fees for a qualified affordable housing project in the City of New Braunfels. Park at Dogwood is a proposed 76-unit new-construction Low Income Housing Tax Credit (LIHTC) development at 1869 McQueeney Road in New Braunfels. The project is zoned appropriately for the proposed use, but the project has identified a funding shortfall as the permitting process nears its completion. The developer has requested that NBU and the City participate in closing the funding shortfall through a combination of fee and impact fee waivers. Staff analyzed the request for public participation and recommends the City and NBU provide the proposed waiver of up to $500,000 in water and wastewater impact fees per the NBU policy.
STRATEGIC PLAN REFERENCE:
YES Economic Mobility N/A Enhanced Connectivity N/A Community Identity
N/A Organizational Excellence YES Community Well-Being
Economic Mobility: Objective 5 - Establish programs and opportunities that leverage private and public sector dollars for use as gap financing in the production and preservation of affordable workforce housing units.
FISCAL IMPACT:
The proposed NBU fees could be up to $500,000. These foregone project costs reduce the deferred developer fee from 75% of the funding shortfall to a more reasonable 45% of the project shortfall. These waivers result in the developer being repaid by the project around year 13 of operation. The project, if it proceeds, will have a positive fiscal impact on the New Braunfels Housing Authority. The NBHA is entitled to twenty-five percent (25%) of the development fee (approximately $634,000) and twenty-five percent (25%) of cash flows after the developer has been repaid in full.
Recommendation
RECOMMENDATION:
Staff recommends approval of the Resolution recommending the New Braunfels Board of Trustees approve up to $500,000 in capital recovery fee waivers for the Park at Dogwood.