Description

Cathedral Place Apartments is a 192 unit Section 236 project located in Mobile, AL. The Project was developed in the mid 1970's and is sponsored by the Archdiocese of Mobile. At the time, the HUD Section 236 loan program was one of a few avenues to finance housing specifically for the elderly. In a 236 project financing, the original loan was placed with an investor at the prevailing interest rate but HUD provided a subsidy in the form of an Interest Reduction Payment (IRP). The Project was required to pay a interest at a statutory rate of 1% while the IRP made up the difference between 1% and prevailing rate, in this case, 7.75%.

Challenge

In the recent years, the Project became plagued by a failure in the roofing and window systems which lead to an infiltration of water; thereby rendering nearly a third of the units non-operational. Since the buildings' reserves alone were insufficient to rectify the water infiltration problem, the situation forced the Sponsor to commit scarce funds in an effort to mitigate the problem but in the end the Sponsor lacked the funds to rehabilitate the damaged units. With the damaged units off-line and not generating any Section 8 rental income, the financial condition of the Project quickly deteriorated. With the building closing in on its 35th anniversary of service and in much need of an overhaul, the Sponsor looked for various ways to recapitalize the project.

Solution

With the assistance of the management agent and the Borrower's consultant/legal counsel, Sims Mortgage Funding proposed a three pronged plan to revitalize the Project and keep the elderly residents in a comfortable, safe housing complex. Firstly, by commissioning a Rent Comparability Study, we were able to determine and persuade the local HUD office that an increase in the Section 8 rents were needed and justified. Secondly, the remaining IRP subsidy totaling more than $1.1 million dollars was still available for use by the Project. HUD allows for a "Decoupling" of the IRP subsidy from the Section 236 loan and permits the recasting of the subsidy which in turn provides additional source of funding. Finally, Sims underwrote and placed a FHA insured Section 223(f) loan with the proceeds being utilized to repay the outstanding Section 236 indebtness. The new insured loan proceeds funded $1.78 million in renovations, paid all loan closing charges, replenished the reserves accounts, reimbursed the Sponsor for previous loans, and provided funds to temporarily relocate the residents within the building as renovations progress. All of these items were accomplished with the Sponsor not "coming out of pocket" with any monies and, in fact, receiving funds previously loaned to the Project.