Proposed Revision to Uses of Portfolio Management Fund

Kerri Dorman

Good afternoon,

I’d like to suggest a possible revision to the Resolution pertaining to the designation of funds.

Specifically, I am concerned about the use of the new Portfolio Management Fund for “non-recurring legal fees.”

To me, the main reason for the fund is reserves for various investments into existing Strategic HFC portfolio properties (such as purchases of partnership interests and loans to partnerships for capital improvements). In other words, helping make deals go and improving properties.

Legal fees, on the other hand — even for one-time projects — are operating expenses that can quickly mount, often are not related to housing itself, and could deplete this new fund we are designating especially to help provide safe, affordable housing.

At least, that’s my way of looking at it.

So, below are a couple of ways we might consider revising the proposed Resolution to make it clear that legal fees should not come out of the fund except in very limited circumstances.

#1. LEGAL FEES ALLOWED ONLY WITH PRIOR BOARD AUTHORIZATION, SEPARATE TRACKING REQUIRED

IV. Portfolio Fund
Fund Purpose

The Portfolio Fund is intended to create a source of funds available for investment in the organization’s portfolio. Examples of likely uses include purchases of an investor’s interest in a portfolio property and loans to partnerships to improve conditions in a portfolio property. [NEW LANGUAGE] — Non-recurring legal obligations arising directly from the operation of of the organization’s portfolio may be funded only with Board approval and shall be clearly identified and itemized.

#2 — NO EXISTING DISPUTES CAN BE FUNDED, FUTURE LEGAL FEES MUST ARISE FROM THE OPERATION OF THE PROPERTY

IV. Portfolio Fund
Fund Purpose

The Portfolio Fund is intended to create a source of funds available for investment in the
organization’s portfolio. Examples of likely uses include purchases of an investor’s interest
in a portfolio property, loans to partnerships to improve conditions in a portfolio property, or non-recurring legal obligations that may arise from the [NEW LANGUAGE] operation of the organization’s portfolio properties. [NEW LANGUAGE] — Notwithstanding the foregoing, no funds may be expended from the Portfolio Fund in connection with claims or disputes existing as of the date of this Resolution.

Thanks for your consideration and see you Thursday in our new digs!

Kerri D

Julio Gonzalez Altamirano

Thank you, Director Dorman. These points make sense to me. We had a prolonged discussion about them at the Real Estate Committee level.

Your amendments directly cover 4 topics and imply a 5th one:

Board approval
Itemization
Legacy exclusion
Direct operation
Reasonable cost

On (1) board approval, I wanted to make sure you saw paragraph 3 of Section VII in the posted policy:

Any withdrawal or transfer out of the Board Designated accounts requires Board action authorizing said expenditure or transfer.

I believe this satisfies your intended policy goal on board approval for the Portfolio Fund. That was certainly REC's understanding.

On (2) itemization, I would assume that staff would present the spending specifics of the transfer for Board action, but I would suggest we move your amendment language of "shall be clearly identified and itemized" to Section VII to make sure it happens across all funds.

As for (3) exclusion of legacy claims and disputes, in the event the Board does want to authorize additional expenditure for legacy legal strategies, from which source does it make sense to fund it from? It's not the main budget, which we want to keep lean and is about predictable overhead. It's not HPF which is about supply generation. So that leaves the Operating Reserve, which is really about emergencies stemming from the cyclical nature of our enterprise revenues. And it would require the same Board approval as the portfolio fund. I certainly don't want to fund any costly legal bills based on legacy claims or disputes, but if for some reason we decide to do so, this is probably the correct source. We had a discussion at REC about a reasonable legal cost cap here but couldn't develop a reasonable standard. "Predictions are hard, especially about the future."

I noted your edits feature the word "operation" in the resolution language and believe that perhaps you may be using the phrase (4) "directly from the operation" as a term of art for legal exposure. Could you tease out a bit more how this phrasing alters the types of allowable activities? Where would a willing Board fund the indirect operation- and/or ownership-generated claims from? Alas, you are saddled with a bunch of colleagues without a JD on this one.

Finally, in my opinion, it seems a powerful concern driving your amendments is ensuring that our enterprise manages (5) legal costs and avoids creating a moral hazard for what I refer to as "costly legal adventures". I share this concern. REC shares this concern. The policy focus here is designation of fund scopes, fund sizes, and the funding waterfall. We may want to develop a separate layer of performance management and policy to address that comprehensively so the Board makes quality decisions related to legal procurement across the budget, transactions, and Portfolio Fund withdrawals. I certainly hope for your leadership in developing that layer!

JGA

Kerri Dorman

Thank you, Director Altamarino — very good points.

I apologize for missing the language in Section VII(3) and agree that adding “shall be clearly identified and itemized” resolves my concerns on that point.

I also think I see what you’re saying about the limited scope of this Resolution, which bears how to best handle the other concerns in my original post.

I plan to bring copies of an updated proposed revision to the meeting tomorrow.

Again, thank you.