New Britain, CT; 56 Units, Project-Based Section 8 Senior Apartments
This affordable senior apartment project was acquired by the current owner in 2002 using tax exempt financing and 4% tax credits. Demand for the affordable units in New Britain, CT had been consistently high and the project had an excellent operating history.
Although moderate rehabilitation was done with tax credit proceeds in 2002, additional work needed to be done. This work included replacing all eight of the project’s aging boilers. The capital replacement reserve also was dangerously low. The transaction was complicated by the need to unwind the existing municipal debt and obtain releases of lien and bond escrows in order to close on the proposed FHA loan. The interest rate on the municipal bond loan was 7% -- more than double the rate available in the FHA market. The municipal bond loan, even though ten years old, carried a $73,000 prepayment penalty and CHFA was holding a $300,000 debt service reserve.
Rockhall was able to obtain a commitment for FHA mortgage insurance for a loan that would fund a $280,000 increase to the capital replacement reserve ($5,000 per unit). The FHA loan also funded the boiler replacements ($36,000), as well as addressing a number of critical repairs ($12,000). Rockhall was able to work directly with the owner of the municipal bond debt to negotiate a payoff. The FHA mortgage balance did not increase appreciably because the repairs and increase to the capital replacement reserve were mostly funded by the release of a $300,000 debt service reserve that CHFA was holding. FHA does not require debt service reserves on projects that meet debt service coverage requirements. The FHA loan reduced the project’s debt service burden by 40% and put the project on a sound financial footing.