Breaking Down the Guide March 14 2016 Highland

Breaking Down the Guide March 14, 2016

Highland Commercial Mortgage FHA/HUD Symposium 2016 HUD Multifamily Accelerated Process (MAP) Guide 2016 Mortgage Insurance Premium (MIP) Reduction Notice March 14, 2016

HCM Symposium - Agenda Introduction If you don’t know where you are going, you might wind up someplace else. –Yogi Berra - A look at where we started and where we are headed. MIP Reduction Notice - Affordable Housing - Energy Efficient Housing Energy Efficient Construction - Making the Grade Benefits of the 2016 MAP Guide - Roll-back of Risk Mitigation Policies New Definition of Substantial Rehabilitation The Section 223(f) Repair Limit Increases Reserve for Replacement (R 4 R) Calculations Section 221(d)(4) Streamlined Process Questions, Discussions and Conclusions

MIP Reduction Notice – Affordable Housing The Mortgage Insurance Premium (MIP) has been reduced for loans on certain properties that meet targeted criteria: Affordable Transactions • MIP reduced to 25 basis points for 'Broadly Affordable' transactions such as 90% Section 8 or LIHTC restrictions. • MIP reduction to 35 basis points for Affordable transactions where affordability restrictions or Section 8 contracts apply to between 10% and 90% of the unit. • There additional circumstances including local affordability restrictions, inclusionary zoning, density bonus set asides, etc. that may qualify for reduced MIP.

MIP Reduction Notice – Affordable Housing Green and Energy Efficient Housing • Annual MIP will change from current rates generally between 45 and 70 basis points, to 25 basis points for ALL multifamily FHA-insured loan types. • At the time of application for FHA mortgage insurance, the owner must evidence that the project has achieved, or the owner must certify that it will pursue, achieve and maintain, an industry-recognized standard for green building. (Enterprise Green Communities Criteria, U. S. Green Building Council’s LEED-H, LEED-H Midrise, LEED-NC, ENERGY STAR Certification, Earth. Craft House, Earth. Craft Multifamily, Earth Advantage New Homes, Greenpoint Rated Existing Home, and the National Green Building Standard (NGBS), or other industry-recognized green building standards in HUD’s sole discretion) • The owner must certify that it has achieved, or will pursue and achieve a score of 75 or better on the 1 -100 ENERGY STAR score, using EPA’s Portfolio Manager. • The owner must submit to HUD evidence that the specified, independent green building standard has been achieved, and provide a copy of the Portfolio Manager report showing building performance at or above 75, when those standards have been achieved, and no more than 12 months after completion of new construction, substantial rehabilitation, or renovations.

Energy Efficient Construction 1. Mortgage Insurance Premium (MIP) Reduction Notice: a. Requires SEP or SEDI >75 (where 75 is equivalent to ENERGY STAR® Certification) AND a. Requires Green Building Certification 2. Underwriting Energy Savings for NON-ENERGY STAR® sites: a. Section 223(a)(7), 223(f) and non-gut 221(d)(4) applications can reduce actual owner paid utility costs reported in operating statements by a sum equal to 75 percent of forecasted owner paid utility cost savings resulting from proposed conservation measures when such measures are documented by an ASHRAE Level II Energy Audit, identified in the CNA, and included in non-critical repairs.

Energy Efficient Construction MIP Reduction Notice 75 How do we get there?

How to get to a 75 • • Section 221(d)(4): Step 1: Get a SEDI Score and compare to MIP goal of 75 Step 2: If >75 proceed with Green Building Certification; but if <75. . then move to Step 3: Revisit energy models to determine most cost effective manner in achieving a score of 75 or greater Step 4: Redesign energy upgrades and enter Green Building Certification Program under the Prescriptive Path. Step 5: Post-construction monitor energy usage for 12 consecutive months to demonstrate an energy score of 75. Section 223(f): Step 1: Get a SEP Score and compare to the MIP benchmark of 75. Step 2: If >75, Congratulations! File for ENERGY STAR® Building Certification under the Performance Path. BUT if <75, continue to Step 3: Perform and ASHRAE Level II Energy Audit and evaluate recommended energy conservation measures based upon Saving to Investment Ratios (SIR). Step 4: Incorporate ECMs into Non-Critical Repairs and complete repairs. Step 5: Track the property’s utility consumption metrics in the “Goal” tab of Portfolio Manager and once a 75 score is achieved submit for certification.

How to get to a 75 - 221(d)(4) Flow Chart

Green Building Standards • MIP acknowledged Green Building Certification Standards - Enterprise Green Communities Criteria - U. S. Green Building Council's LEED-H, LEED-H Midrise, or LEED-NC - ENERGY STAR® Certification - Earth. Craft House / Earth. Craft Multifamily (Southface) - Earth Advantage New Homes - Greenpoint Rated New Home / Greenpoint Rated Existing Home - National Green Building Standard (NGBS) - or others at HUD's sole discretion. • Beware of “Tiers” of compliance with many of these standards, and a certified Green Building is not necessarily equivalent to an energy efficient building. • Certain states and geographic locations are more conducive to certain Green Certification programs (e. g. review SFHA QAPs). • Prescriptive Path requires a design phase, a construction phase, and a commissioning (Cx) phase.

Example Without Going Green Example Going Green

Comparison Continued…

Benefits of the 2016 MAP Guide Discussion of BIG Chapter 5 Changes Roll-back of some previous Risk Mitigation Policies Revised substantial rehabilitation definition New repair cost limits for 223(f) Tiered levels of construction for 223(f) New 20 -year funding for Reserve for Replacement (R 4 R) Section 221(d 4) Streamlined Process

Loan Underwriting Benefits • Many loan parameters have been returned to previous levels: ✓ LTV/LTC to 85% from 83. 3% for market rate projects ✓ DSCR to 1. 176 from 1. 20 for market rate project ✓ Better terms are available for affordable transactions • Re-calculation of Replacement Reserve Requirements • Large Loan policy. Now one standard - only loans over $75 mm. All loans under $75 mm use standard processing.

Revised Definition of Substantial Rehabilitation • Definition of Substantial Rehabilitation (Section 221(d)(4) SR) 1. Exceeds in aggregate cost a sum equal to the base per dwelling unit limit times the applicable High Cost Factor; or 1. Replacement of two or more building systems, where a system is considered “replaced” when the costs of replacement work equal or exceed 50% of the cost of replacing the entire system. In the case of properties with multiple buildings, “entire system” refers to the referenced system of all buildings”.

Increased Repair Cost Limits 1. Exceeds in aggregate cost a sum equal to the base per dwelling unit limit ($15, 000/unit) times the applicable High Cost Factor. HUD ML 2015 -28, issued November 18, 2015, Annual Base City High Cost Percentage. 1. The base limit will be adjusted annually based on the percentage change published by the Consumer Financial Protection Bureau or other HUD published inflation cost index. 1. Examples: a. Richmond Virginia: $15, 000 x 265% = $39, 750/unit b. Atlanta, Georgia: $15, 000 x 258% = $37, 200/unit c. Honolulu, Hawaii: $15, 000 x 405% = $60, 750/unit

Revised Definition of Building Systems • For loan program eligibility there are five (5) building systems: - Structural frame, including foundations, load bearing walls, floor frame, and roof frame; - Building envelope, including exterior moisture and weatherproof membrane, roofing, cladding, siding, windows and exterior doors and openings; - Mechanical, including heating, ventilating and air conditioning equipment and related fuel supply or exhaust items, as well as specialized mechanical apparatus such as elevators and escalators; - Electrical, including all electrical appliances (not mechanical) and lighting fixtures, electrical supply lines and panels, breakers, warning systems, and telecommunications and related equipment; and, - Plumbing, including all potable water, grey water, and sanitary waste lines, valves, pumps, controls, and fixtures.

223(f) Increased Repair Limits – Tiered Levels of Work HUD will define repairs in a Section 223(f) pursuant to the IEBC 2012, Chapter 5. • Repair - Repairs include the patching or restoration or replacement of damaged materials, elements, equipment or fixtures for the purpose of maintaining such existing components in good or sound condition. • Level 1 Alterations - The removal and replacement or the covering of existing materials, elements, equipment, or fixtures using new materials, elements, equipment, or fixtures that serve the same purpose. • Level 2 Alterations - The reconfiguration of space, addition/elimination of any opening, extension of any system, or installation of any additional equipment. • Level 3 Alterations - Alterations where the work area [consisting of all reconfigured spaces] exceeds 50% of the aggregate area of the building.

The CNA – Classification of Work and Requirements Table 5. 3 “Required Architectural Services and Documentation by Construction Activities” SERVICES AND DOCUMENTS PROGRAM CLASS OF WORK* CNA** DESIGN CONSTRUCTION List of Immediate Repairs/Costs, bids for trade or component items >$25 k, dimensioned sketches of accessibility remedies, and work by qualified tradesmen 223(a)(7) None, Repairs & Level 1 Alterations less than $1, 500 per unit Required n/a 223(f) None, Repairs & Level 1 Alterations <$15, 000/unit*** Required n/a Same as above 223(f) Level 2 Alterations or any repairs and alterations =>$15, 000/unit*** Required Project Architect All above plus dimensioned drawings of reconfigured spaces, GC & HUD 2328 needed as determined by Project Architect 223(f) Level 3 Alterations Required Project Architect All above plus GC required for Level 3 Alterations 220, 221, 231, 241(a) All classes of work Required Project Architect Full drawings and specifications, Architect administration of construction, GC, 2328 and DBWR compliance * More than one class of work may apply to a building or a property. When construction costs are less than $15, 000 per unit, requirements for Level 2 and 3 Alterations apply to the buildings or spaces where the alterations are proposed (not all buildings or spaces). When Level 2 Alterations are singular or very limited (e. g. , alter a single space or interior, non-bearing wall) professional design services are not required. ** See Appendix 5 G for how CNAs are used by class of work and program. *** This $15, 000 per unit limit is different from the dollar per unit threshold for substantial rehabilitation and is not adjusted for the High Cost Factor.

New 20 -year Funding for Reserve for Replacement (R 4 R) • Remains a 20 -Year Reserve for Replacement (R 4 R) Analysis, however, significant change to the Funding Schedule calculations. • Years 1 -10, IDRR + ADRR deposits must be greater than repairs + 10% in any given year. • IDRR + ADRR is not applied to Years 11 -20, and these later years are allowed to go negative within the funding schedule. • MAP Lenders must demonstrate that forecasted capital expenses in Years 11 -20 are no greater than 50% of the accumulated loan amortization. • No more “formula” basis for R 4 R calculations within Section 221(d)(4) New Construction and Sub-Rehabilitation

R 4 R Schedule – Comparison Old to New Section 223(f): 2003 -built Property, 240 Units Class B Property with all original components OLD METHOD NEW METHOD IDRR $1, 500/unit ADRR (20 Year) $578/unit $360/unit 20 Year Total $1, 271, 764 $864, 000 = $407, 764 or $1, 700/Unit in additional cash flow over 20 years = 1 ST Year savings of $8, 880 capped at 6. 50% = $136, 615 more value = If ADRR is escalated annually in years 1 -10 in new scenario, IDRR can be reduced to $1, 130

R 4 R Schedule – New Construction Deal 88 Unit LIHTC Property Old Scenario (. 006 x Total Structures) $350/Unit or $30, 800 New Scenario (R 4 R Schedule) $250/Unit or $22, 000 Additional NOI of $7, 656 , or approximately $143, 000 in additional loan proceeds

Expansion of the Section 221(d)(4) Streamlined Process • Streamlined processing of architectural design, specification, construction, and cost estimation exhibits is available to: - expand use of HUD’s LIHTC Pilot Program - to expedite CONVENTIONAL loan applications • Streamlined processing means that less than 100% complete plans and specifications may be submitted with the application for Firm Commitment. • Final project drawings and specifications must be submitted for HUD review and comment/approval at least thirty days prior to Initial Endorsement. • Any HUD comments on the proposed final drawings and specifications must be resolved and permit ready drawings and specifications be delivered not less than ten calendar days prior to initial endorsement. • Construction costs during the process cannot vary by >5%

221(d)(4) AEC – Expansion of the Streamlined Process 1. Eligible to select 221(d 4) conventional (market-rate) projects, with the selection process discuss at Concept Meeting or Pre-Application 1. To be Eligible, the entire development team (borrower, architect, GC and due diligence providers) must demonstrate previous 221(d 4) experience 1. Exemptions for complex projects include: Any claim of exemption from Fair Housing Act design and construction (e. g. site impracticality, terrain unsuited to accessibility; Projects where costs not attributable to residential use must be calculated because Criteria 4 of the form HUD 92264 A, Statutory; Projects with complex mixed use, commercial use, or use of new, complex construction technology; and, Projects with complex environmental remediation issues or with historic preservation objectives. Projects involving complex public-private partnerships. What has been our experience piloting this program?

Questions?

Miscellaneous 1. 2. 3. Implementation of New MAP Guide - May 28, 2016 • Waivers available Property Insurance During Construction • Public Liability Insurance on a Commercial General Liability form with limits not less than $500 K per occurrence • Vehicle Liability Insurance with limits of not less than $300 K for one person and $500 K for more than one person to protect against bodily injury/death and not less than $100 K for property damage • For properties in Special Flood Hazard Areas on a FEMA FIRM, flood insurance is required during construction when available Permanent Insurance • Deductibles may not exceed $25 K or 1% of the Insurable Value for any particular building up to a maximum amount of $250 K • Mortgagor must have casualty insurance in an amount that exceeds any applicable co-insurance requirement • Exceptions for large properties with multiple tiers of casualty loss coverage

Miscellaneous 4. Definition of Key Principals • Active Principals are individuals or entities that exercise operational and financial control over a project • 5. Passive Principals are individuals or entities with limited or no decision-making power or control over the Borrower but who have an ownership interest of 25% or more (10% for corporations) in the Borrower 241(a) Program • Eligible for MAP Processing 6. Commercial Space Limitations • 221(d)(4) and 231 are limited to 25% of total net rentable area and 15% of EGI • 220 is limited to 25% of net rentable area and 30% of EGI • 223(f) is limited to 25% of net rentable area and 20% of EGI

Tax Incentives for Real Estate Section 45 L Energy Efficient New Homes Tax Credit • • Single family and multi-family properties up to 3 stories Dwelling units must be 50% above the 2006 International Energy Conservation Code (IECC) (Energy consumption must be 50% less than this standard). • $2, 000 per unit for newly constructed or qualified owner-occupied or rental housing • Must be located in the US • Can claim for prior years on amended returns Cost Segregation Studies • • • Reclassify certain costs out of building to 5, 7, & 15 year life property An immediate increase in cash flow A reduction of current year tax liability The deferral of taxes Look back to prior years and claim missed deduction currently (without amending tax returns). For more information, please contact: Joel Mc. Dowell joel. mcdowell@tidwellgroup. com m: 205 -789 -3801 o: 205 -271 -5508

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