Please note: PHB funds are limited. The PHB may not be able to provide loans to all eligible projects.
An Equity Gap Contribution (EGC) provides public funding for rental or mixed-use projects that provide public benefits and are owned by eligible non-profit organizations. An EGC is intended to fund the difference between the projected project costs and available sources of construction and permanent financing, including Housing Development Subordinate Loans (HDSL).
An EGC provides construction and/or bridge financing, that either partially or fully converts to term financing and is designed to work in conjunction with other public and private financing sources. An EGC is a "last resort" financing product and will be used only when other financing has been maximized and the housing project does not generate sufficient cash flow (after operating expenses and required senior debt service) to allow regular loan payments to the PHB.
The following summary outlines the general product characteristics available to project sponsors. For the EGC, the same general financing terms apply to the construction, bridge and permanent phases of financing. A more detailed description of terms specific to the EGC is outlined in the Product Specific Guidelines section below. In addition, all EGCs are subject to the General Guidelines for Direct Financial Assistance products.
Construction/Bridge & Permanent Financing Period
Interest Rate: 0.0%
EGC Amounts Per Unit: No set maximums but total direct financial assistance funding must compare favorably with PHB published averages (based on income level served)
Term: Outstanding until repaid
Repayment: No set repayment period; terms of financing require recapture through cash flow payments or at time of sale, change of use or refinance. Project Sponsor pays PHB 50% of Excess Cash Flow (see below)
Debt Coverage Ratio (DCR): Not applicable
Loan to Value (LTV): Total secured debt plus Equity Gap Contribution may not exceed 100% LTV
To be eligible to receive an EGC, Project Sponsors must meet the following criteria:
- Project Sponsor must be an eligible non-profit Organization. Project Sponsor must own the subject property or have site control,
- Other financing sources for the project, including primary debt and an HDSL, must be maximized,
- The Minimum Investment Requirement must be met (see link at bottom of page), and
- Designated Affordable Units must be affordable for 60 years.
Product Specific Guidelines
Eligible Project Sponsors: An Eligible Non-Profit with ownership or site control of rental property may apply for an EGC.
Eligible Projects: A project providing rental housing that furthers the goals and objectives in Portland's Comprehensive Housing Plan, Consolidated Plan, Urban Renewal Area plans or other applicable policy directives is eligible for an EGC.
Interest Rate: There is no interest charged on an EGC.
Participating Financing: Project Sponsors must seek maximum participating financing on the best terms available. Interest rates for superior loans should be at the current market rate or better for the financing type. Generally, the combined debt coverage ratio for all participating financing (other than PHB financing) should be no greater than 1.15-1.20 to 1:00 for superior loans, and/or the combined loan to value ratio (LTV) for all senior financing should be no less than 80% LTV. PHB evaluates bond-financed projects against current bond underwriting requirements. In addition, projects must utilize the maximum HDSL supportable by the project prior to qualifying for an EGC.
EGC Recapture Provisions: The provisions for recapture in the Equity Gap Agreement include the following two methods of repayment:
Sale, Transfer, Refinance, Exchange or Change of Use: In the event of sale, transfer, exchange, refinance, or change of use of the subject property, EGC is subject to recapture. Proceeds derived from such sale, transfer, exchange or change of use shall be used in the following order of priority:Senior debt.Accumulated interest on PHB amortized loans.Principal balance of other outstanding PHB loans on the propertyOutstanding balance of EGCs.
Security/Collateral: The PHB ensures security through a recorded instrument, an Equity Gap Contribution Agreement. The Agreement describes the amount, the conditions and the provisions of the EGC. Also, the Agreement describes the conditions under which the EGC may be recaptured in full by the PHB. There will be no provision for sharing project losses. The Equity Gap Contribution Agreement is recorded to evidence the project sponsor's obligation, although it is not a lien against the property. If a Project Sponsor receives an EGC only from the PHB, the PHB reserves the right to record liens against the property upon default.
Cash Flow Payment Requirement: PHB may require Cash Flow Payments in addition to scheduled debt service payments. These payments will be made from cash flow splits of Excess Cash Flow. Excess Cash Flow is determined when a priority cushion* for identifiable project risks that can be mitigated by available cash is deducted from Net Cash Flow. Net Cash Flow is Gross Revenue less Allowed Expenses, Permitted Loan Payments, and Required Reserve Contributions. The remaining Excess Cash Flow, if any, shall be split between the Borrower and the PHB.
The priority cushion may be shared among pools of assets prior to determination of Excess Cash Flow, if the Borrower has sufficient asset management capacity and is able to provide specific details of project needs, funding levels and an acceptable maintenance/replacement program.
See definitions of Gross Revenues, Allowed Expenses, Permitted Loan Payments, Required Reserve Contributions, Net Cash Flow and Excess Cash Flow under the definitions chapter.
Cash Flow Payments on EGC's shall be applied first to accrued interest on the PHB Note on the HDSL on the property, if any. After payment of any accrued interest, the Project Sponsor may elect whether the Cash Flow Payment will be applied to reduce the outstanding balance of the Equity Gap Contribution or to reduce the principal balance of the Note on any outstanding HDSL. (For Low Income Housing Tax Credit financed projects, PHB Loan Committee may make exceptions regarding priority of Cash Flow Payments.)
In summary, Cash Flow Payments are determined as follows:
NET OPERATING INCOME = (Gross Revenues) minus (Allowed Expenses + Required Reserve Contributions)
NET CASH FLOW = (Net Operating Income) minus (Permitted Loan Payments)
EXESS CASH FLOW = (Net Cash Flow) minus (The greater of 15% of Permitted Loan Payments or $600 per unit*)
CASH FLOW PAYMENT = (Excess Cash Flow) times (50%**)
* Currently the cushion is the greater of $600 per unit or 15% of Permitted Loan Payments and may be adjusted depending on project size and project risks identified during underwriting.
** See note regarding sizing of cash flow payment.
As part of the underwriting to determine the financial need for public financing, the PHB evaluates the project's internal rate of return over a 10-year period. (See Rate of Return Guidelines). If a project's projected return exceeds the maximum allowable, the PHB may require either a) an increased percentage of Excess Cash Flow from the project or b) an increase in the required Minimum Investment for the project.
For more information and details referenced on this page, view Housing Services: Investment & Return Requirements for Rental & Mixed-use Projects (PDF).