Mutual Redevelopment Houses. Inc.

Financial PresentationWalter Mankoff, Treasurer

October 26, 2014

TODAY’S PRESENTATION

•Focus today is on new and future financial developments. •HVAC financing• J-51 benefits•Refinancing in 2021

•Last year’s results are amply covered by the Annual Report.•Full CPA audited report•Cash flow projections for Fiscal Year ended June 30,

2015•Treasurer’s Report

HOLDING THE LINE ON EXPENSES

•One current item is presented because of its importance.

•Operating expense has been kept in line for the 6th year.

•Increased expense since 2011 is solely due to higher interest cost on our borrowing for the HVAC project.

$0$3,000,000$6,000,000$9,000,000

$12,000,000$15,000,000$18,000,000$21,000,000$24,000,000$27,000,000$30,000,000$33,000,000$36,000,000

FY 2

00

4

FY 2

00

5

FY 2

00

6

FY 2

00

7

FY 2

00

8

FY 2

00

9

FY 2

01

0

FY 2

01

1

FY 2

01

2

FY 2

01

3

FY 2

01

4

FY 2

01

5 (

Est.

)

TOTAL OPERATING EXPENSE

Operating Expense Except Interest Interest

HOW HAVE WE KEPT EXPENSES IN LINE?

•Our management team has done a superb job.

•They were not distracted by the burdens of the HVAC project

•How?• Inventory control•Bidding on purchases as well as contracts•Doing more work in-house•Quality supervision

HVAC

Original HVAC Budget Was Far Too Low

•The $95 million budget was prepared by expert consultants and contractors. We had no reason to doubt it.

•Reasons for underestimate: •Never done before in occupied apartments •Residents needed more help•Too much work to do in 3 years•It paid to do additional ground floor work while ceilings were down

PROJECTED COST TO COMPLETE PROJECT

• Larger, more qualified contractors $ 26.1 million More•Greater Penn South costs $ 5.5 million more• Legally required environmental

monitoring $ 1.1 million more •Addition of fourth year $ 5.0 million more•Added scope – lobbies,

ground floor $ 5.4 million more

_________________Total $ 43.1 million more

DECISION: BORROW $45 MILLION MORE

•The 2011 mortgage had a provision for expansion if more funds were needed.

•FNMA and Wells Fargo agreed to lend us the $45 million if we increase carrying charges to cover the increased debt service.

•AFL-CIO Housing Investment Trust bought the $45 million interest-only mortgage with a very advantageous interest rate of 3.89%.

HOW TO PAY FOR THE $45 MILLION LOAN

•The additional annual interest payment of $1.75 million required a carrying charge increase of 8% which took effect July 1, 2014.

•This brought total HVAC project cost to approximately $145 million.

•The funds on hand are sufficient to complete the project.

TOTAL PROJECTED COST OF HVAC PROJECT

HARD COSTS (CONSTRUCTION) Asbestos removal $11,458,418

Purchase fan coil units from TRANE $7,684,210

Pipe, pump and fan coil replacement $102,640,243

Ceiling and lobby restoration $3,088,370

Other $1,084,607

SOFT COSTS Design and engineering $2,488,257

Environmental monitoring $2,394,941

Owner's Representative $2,518,087

MRH HVAC costs: payroll, lost rent, etc. $9,284,600

Other consultants and contingency $1,800,145

GRAND TOTAL: $144,441,878

UNDER BUDGETING SAVED US $8 MILLION

•The Board and Management have been criticized by some cooperators for not borrowing $140 million up front. We did not know the full amount of project cost in 2011, but had we known we would have thrown away $8 million.

•Wells Fargo required escrowing sufficient funds to complete the project. If the budget were $45 million more, we would have been required to borrow and escrow these funds up front.

HOW WE SAVED $8 MILLION

•We would have paid interest for 3 years on funds we didn’t need until 2014 at the 4.56% interest rate. Total extra cost = $6.1 million

•We would have paid interest for 7 years on the $45 million at the 2011 loan rate of 4.56% instead of the 2014 rate of 3.89%. Total extra cost = $1.9 million.

GRAND TOTAL SAVED$6.1 MILLION + $1.9 MILLION = $8 MILLION

J-51 BENEFITS

J-51 HELPS KEEP HOUSING AFFORDABLE

•J-51 is a City program that provides real estate tax credits to help pay for major capital improvements. •Specific benefit amounts are provided for each kind of work. The benefits are called Certified Reasonable Costs (CRC). Quarterly tax credits in a standard program are given for 90% of CRC over a 12 year period.•Over the years, Penn South has been granted J-51 benefits totaling $6 million for projects such as windows, elevator modernization, construction of gas fired generating plant, etc.

J-51 FOR HVAC

• In planning the HVAC project we explored J-51 possibilities. This was difficult to do because the law had expired on December 31, 2011 and was not renewed by the State until January 2013 and by the City until December.

•We anticipated receiving about $5 million in tax credits based on estimates of the amount of work to be done. The benefits were increased under the new law and we started getting actual data as work was completed.

•The HVAC project alone would now have a CRC of $6.2 million, a 90% tax credit of $5.5 million and an annual tax credit of $461,000.

J-51 BENEFITS FOR THE HVAC PROJECT

J-51Benefits J-51BenefitsFor

2,820 Units Per Unit

J-51 for HVAC project

• Asbestos removal $1,919,183

• Piping $3,795,286

• Pipe Insulation $ 435,573

• Total Certified Reasonable Cost (CRC) $6,150,042 $2,181

• 90% of CRC $5,535,038

• Annual J-51 abatement (over 12 years) $ 461,253

ENHANCED J-51 BENEFITS

•In reading the new J-51 rules early this year we discovered the possibility of more than doubling the anticipated benefit.

•If certain kinds of work were done, and the Certified Reasonable Cost per apartment unit was at least $2,500, the project would become what is defined as a Moderate Rehabilitation.

HOW TO GROW OUR J-51 BENEFITS

•Government assisted Moderate Rehabs receive tax credits equal to 150% of CRC instead of the standard 90%. Our HDC and 8A loans would qualify us if we could increase the HVAC unit CRC of $2,181 to $2,500. The additional work did not have to be part of the HVAC project.

•We immediately thought of our power plant where aging equipment would have to be replaced in the next few years and where J-51 benefits would apply.

POWER PLANT J-51

•First on the replacement list were the two Kewanee boilers we installed in 1986. They were near the end of their useful life and increasingly inefficient. We also need larger boilers for future use. We must expand our chiller capacity and plan to install electric chillers that would no longer provide the supplemental heating we get from our present heater/chillers.

•Next to be explored were the electric distribution panels on the mezzanine that funnel power to our buildings. They are over 50 years old and a failure could leave several buildings in the dark.

CLOSING THE GAP!

•Not in the power plant but qualifying for J-51 was the Local Law 11 facade work we did on our buildings in the last few years and a new house water tank we plan for the top of Building 5.

•Adding the Certified Reasonable Cost of these items to the HVAC total fills the gap and qualifies us for the enhanced Moderate Rehab benefit.

•The enhanced J-51 benefit pays for the boilers and the electric distribution panels.

FILLING THE GAPBenefits For Benefits

2,820 Units Per Unit

Total HVAC Certified Reasonable Cost (CRC) $6,150,042 $2,181

CRC for Other Major Capital Improvements

2 1,000 HP Boilers $481,406

Electronic Boiler Controls $25,000

Electric Distribution panels $319,200

Local Law 11 work $267,988

House tank, Building 5 $34,500

Total HVAC & Other CRC $7,278,136 $2,581

Fan Coil Units $2,007,923

GRAND TOTAL -- CRC $9,286,059

150% OF CRC $13,929,089

Annual J-51 Abatement (over 12 years) $1,160,757

JUNE 30, 2015 DEADLINE

•A major complication to the J-51 filing process is the fact the law expires on June 30, 2015. Benefits are available under the present law only for projects completed and approved by the Building Department before that date.

•The timing urgency will require our boilers to be replaced in the wintertime requiring temporary boilers to keep buildings warm.

•Our elected officials must work to see that J-51 is extended to preserve affordability.

HOW WE PAY FOR THE BOILERS

•Reserve funds that would have been available for chiller replacement in 2016 will have to be used this year for the boilers and electric distribution panels. We have arranged a $5 million credit line with the Amalgamated Bank to provide funds for the chiller replacement.

•We will pay interest only until July 2016. We then start paying down the principal on the loan using J-51 tax credits. In 2021 we will refinance the balance on the loan.

REFINANCING IN 2021

REFINANCING IN 2021

•Our long-term debt matures in 2021 and the outstanding balance will have to be refinanced.

•Unless we have surplus funds and can reduce the balance, we will have to refinance $131 million:

• Balance on $134 million borrowed in 2011 $82 million• Balance on $45 million borrowed in 2014 $45 million

• Balance on $5 million borrowed in 2014 $ 4 million

Total $131 million

LOOKING AHEAD TO 2021

•There have been concerns voiced about the impact of the refinancing on our financial status and our affordability.

•With our traditional due diligence approach to issues we have carefully examined what may happen in 2021.

•The charts that follow show what our research found:• Unless interest rates in 2021 are double-digit, simply

refinancing will cost less than we are now paying on our loans.

• We can use the shortfall to borrow additional funds for new projects without increasing cost to cooperators

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

4% 5% 6% 7% 8% 9% 10%

COST TO REFINANCE $131,000,000 IN 202120 YEAR AMORTIZATION

Current Debt Service

New Debt Service

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

4% 5% 6% 7% 8% 9% 10%

COST TO REFINANCE $131,000,000 IN 202130 YEAR AMORTIZATION

Current Debt Service

New Debt Service

IMPORTANCE OF DEBT REDUCTION

•We don’t know what the financial situation will be in 2021.

• How high interest rates will be

• What major projects will be pending and how much will they cost

• What reserves will be on hand

•Regardless of the situation it is critical that every effort be made to reduce debt by choosing the most aggressive amortization schedule possible. Our history proves the value of this policy

A WISE CHOICE

•Our 2011 experience is an ideal example. We opted for 20 year amortization instead of 30. Had we not made this wise choice, we might not have been able to borrow the additional $45 million we need to finish the HVAC project. If we had a 30 year amortization schedule we would be refinancing a $175 million balance in 2021, not $131 million.

•Refinancing a $175 million balance would call for a significant increase in carrying charges if interest rates exceeded 5%. That would put the co-op and our affordability at risk.

BORROWING FOR MAJOR CAPITAL PROJECTS

•While Penn South has tried over the years to finance capital projects with assessments rather than operating funds or loans, many major projects have been financed fully or in part with the help of loans.

• Cogeneration retrofit in 1986 and gas plant addition in 2000.• Electric conduit replacement in 1987 and again in 2003.• Roofs, and asbestos removal from public areas in 1987.• Window replacement in 1996.• Elevators in 1990 and 2003.• Garage in 2000.• Power house chillers in 2000.• HVAC in 2011 and 2014.

MAXIMUM ADDITONAL BORROWING IN 2021 WITHOUT INCREASING COST TO PENN SOUTH

INTEREST 20 YEAR AMORTIZATION 30 YEAR AMORTIZATION

4% $44,000,000 $89,000,000

5% $29,000,000 $69,000,000

6% $19,000,000 $44,000,000

7% $4,000,000 $29,000,000

8% $14,000,000

We hope to defer new major projects, not now on our

drawing board, until 2021. We have explored the amount of

additional funds we can then borrow without increasing the

debt service cost to our co-op. The data suggest that

substantial additional borrowing will be possible.

The End!