On March 27, 2015, Unity Homes closed a loan refinance that represented the end of a seven-year journey.
In 2006, Unity Homes—a San Francisco, federally-subsidized, cooperative—scored below the required “60” on its annual REAC (HUD) physical inspection, triggering a seven-year process that resulted in the aging development springing “phoenix-like” from its own ashe
According to HUD regulations, a score of 59 or less on a REAC inspection requires a formal response, detailing each finding, and the proposed rectifying action(s). In Unity Homes’ case, the site’s deleterious condition could be attributed to its 40 year age, and (according to the original plans) the fact that when built in 1973, the materials employed had only a “40-year useful life;” the development had, in essence run its course.
Bill Johnston, the EBMC District Manager into whose portfolio Unity Homes resides, has supervised the development for over 34 years, knew that a practical solution to passing the follow-up REAC inspection would require considerably more work than the development could afford. Unfortunately, failing the inspection would result in a default under HUD’s terms, and ultimately, losing the property from EBMC’s portfolio. So, using contacts established over his many years in the industry, Mr. Johnston put together a consortium, including a commercial lender, an ex-HUD architect, a major contractor, and a project manager: His formal REAC response proposed a complete rehabilitation and loan restructuring, and was accepted by HUD’s Los Angeles Development Enforcement Center (“DEC”). The program was initially budgeted to be $14,000,000 and take four (4) years from design-stage to completion.
The design phase lasted approximately a year, and involved almost weekly meetings with all the project principals, and a HUD representative assigned to ensure that the process remained on schedule. Once the drawings were approved, the hiring process (for workers) began. Due to San Francisco’s restrictive hiring (i.e. union) requirements, this proved to be one of the most taxing undertakings, and resulted in strikes that almost derailed the entire process. However, a combination of excellent weather (the start of California’s drought) and the contractor working at maximum efficiency, got the program back on track. Other logistical problems that required addressing included relocating the 94 families for periods of up to two weeks, and storing their personal belongings in a safe—but convenient—location.
With construction beginning during the winter months, the units’ interiors were addressed first—in phases—to minimize inconvenience to the families. Once fair weather was somewhat assured, the exterior renovation began, and lasted almost seven months. Landscaping was installed last, to avoid being damaged by the extensive heavy equipment present for much of the renovation. At long last, two years after lifting the first hammer, the physical restoration of Unity Homes was complete.
Despite this outstanding progression, only one of the three (3) issues originally identified (physical condition) had been addressed. Still remaining was paying for the new loan. While the original refinance tied to the rehabilitation, employed interest rates that were significantly lower than when the rehabilitation began, the resulting debt service on $14,000,000 would in the long run, prove prohibitive for the development to sustain over time.
To address this obstacle, Mr. Johnston contacted Dwight Capital, a major funding group based in New York, and set up a meeting between its principal and the Unity Homes Board of Directors. Dwight Capital stressed that it specialized in 223(a)7 refinances—specific to developments with HUD use agreements—and the Board signed an agreement to proceed with a rate lock that would ensure Unity Homes’ financial stability for the length of its 40-year loan.
Before the closing would proceed, Unity Homes’ by-laws required amendments to conform with current HUD regulations. Normally, this would only require a simple vote by the Board of Directors; however, Unity Homes being a cooperative, it would require a vote of “a majority of a quorum of the members.” With the rate lock due to expire at the end of March, closing would need to be complete before then, otherwise the rate lock deposit of $43,000 would be forfeited. Bill Johnston, together with the site staff and legal counsel, arranged for the formal vote in early March; however, a quorum of members could not be reached by the initial election date. A second election date—which pushed the closing date up against the March 30 rate lock deadline—was successful, and a successful closing took place on March 27th.
The final piece to the puzzle was a successful REAC follow-up inspection, which Unity Homes easily passed, as the result of its extensive renovation: Seven years, $14 million, and two loans later, Unity Homes sits ready for the next 40 years.