HUD Update Multifamily Production Presented by Daniel Goodall

HUD Update Multifamily Production Presented by Daniel Goodall, Senior Underwriter Detroit Satellite Office

Overview Multifamily Production - what do we do at HUD? Why HUD Programs? Production Process Typical Application Issues Program Updates Equity Bridge Loans CNA-e. Tool 221(d)(4) Questions LIHTC Pilot

Midwest Region Leadership Multifamily Production Leadership Steve Ott, Production Division Director - Chicago Stephen. P. Ott@hud. gov (312) 913 -8164 Branch Chief Teams in the Detroit Satellite Office Underwriter Branch Christopher Nielsen, Branch Chief Christopher. M. Nielsen@hud. gov (313) 234 -7511 Technical Specialist Eric Golicz, Branch Chief Eric. J. Golicz@hud. gov (313) 234 -7496

Multifamily Production - what do we do? The Office of Multifamily Housing Production provides direction and oversight for FHA mortgage insurance loan origination including the implementation of the Multifamily Accelerated Processing (MAP). The processing of our housing programs is done within our Multifamily Regional Centers and Satellite Offices.

Why HUD Programs? Better terms than conventional financing Provides mortgage insurance Non-recourse Two loans Primary HUD Programs: 221(d)(4) 223(f)

FHA Programs for Affordable Housing Projects: Section 221 d(4) New Construction or Substantial Rehabilitation 40 -year amortizing term 90 % Loan to Replacement Cost (90% rental assistance) 87% LTC (affordable) 83. 3% LTC (market rate) Intended for major repairs (over $40 k/unit or when more than 50% of two or more major building system components will be replaced)

FHA Programs for Affordable Housing Projects: Section 223(f) < 35 -year term 87% LTV (90% or greater rental assistance) 85 % LTV (affordable) 83. 3% LTV (market rate) Acquisition of existing property Refinance of existing property Minor repairs up to the statutory limit

Production Process Concept meetings scheduled within 10 business days of your request for a meeting Concept Meeting Close within 30 -90 days Close within 60 days Application Stage Pre-Application: Recommended for market rate 221(d)(4)s. Optional for 223(f)s or 223(a)(7)s Initial Closing Construction Firm App Review: 30 – 60 days depending on SOA Final Closing Hand-off to Asset Management

Typical Application Issues Application Deficiencies Ex. Missing or incomplete information Conflicting information between the lender narrative and the rest of the application Incomplete 2530’s Equity or secondary financing cannot be verified or is not in place Change in the Development Team, Principals or the Organizational Structure of the Single Asset Entity Borrower Delayed approvals from outside agencies ex. site plans Environmental Issues

Some reoccurring issues in FHA production Deficient 3 rd reports. 30 -40 year old property – decent shape but showing its age - original windows, roof, HVAC, VCT Flooring. PCNA indicates $3, 000 for a few accessibility items and $9000 for parking lot. The R 4 R schedule replaces in years 5 -15. The report may be accurate but often is not. It takes time to reach a consensus between HUD, lender, and owner. Appraisal expense data for comparables is outdated, more than five years old. The adjustments tend to be too light because of the outdated starting point. Several projects not able to close after firm commitments issued because of increasing construction costs. Added delays due to a variety of issuesenvironmental, ownership, 2530 changes, local approvals, secondary financing, etc. Contractors are unable to hold their pricing due to delays creating the need for owners to find additional funds. Delays because sites may have been re-contaminated after environmental reports were completed.

Program Update – Equity Bridge Loans HUD will now allow the general partnership of the ownership entity in an FHA LIHTC transaction to pledge its interest as security for an equity bridge loan. Reason: The 2016 MAP Guide was silent on whether the general partner (or the managing member for a limited liability company) of the property ownership entity may pledge it interest as security for the equity bridge loan. https: //www. hud. gov/sites/dfiles/Housing/documents/EBL_Mem o_030818. pdf

Program Update – CNA e. Tool The CNA e. Tool is now required as part of all new application submissions. This became mandatory starting November 1, 2017 for FHA multifamily mortgage insurance applications. Purpose: Streamline the review process Create a standardized electronic format Facilitate more accurate review of capital needs assessments across all of Multifamily Production Aggregate CNA results within a database to support a better framework for user feedback and consistent application of policy. Additional information can be found at: https: //www. hud. gov/program_offices/housing/mfh/CNA

Program Update – 221(d)(4) LIHTC Pilot Expedited Processing for Affordable 221(d)(4) Sub-rehabs and New Construction proposals with LIHTC and a 20 -year Section 8 HAP. Emphasis and reliance is on the lender’s underwriting and upfront due diligence to adhere to the MAP Guide requirements. Pilot Program Notice H 2019 -03 was issued 2 -21 -19 The New Pilot continues and expands the Department’s support for the LIHTC program which is the primary source of creating new multifamily affordable housing units and preserving existing units, and the primary tool for encouraging the investment of private capital in affordable rental housing.

Program Update – 221(d)(4) LIHTC Pilot Goal: Streamlined processing under 2 Processing Tracks with a Direct-To-Firm application submission. Track 1. Expedited Processing within 30 days or Less for review and issuance of a firm commitment with an anticipated closing 60 days from issuance of the firm commitment. Track 2. Standard Processing Timeframe of 60 days to firm commitment.

Eligible Projects for Tax Credit Pilot Nine (9)% LIHTC, New Construction Projects built with a new LIHTC allocation and new equity investments. 90% or more of the units must be restricted for LIHTC occupancy, and the market analysis, appraisal and underwriting must conclude that the achievable LIHTC unit rents will be at least 10% below comparable market rents for each unit type. Four (4)% or 9% LIHTC, Substantial Rehabilitation Projects with Project. Based Section 8 Housing Assistance Payment (HAP) Contracts covering at least 90% of the residential units. Must have a 20 -year HAP contract (or 15 years in the case of Project Based Vouchers) that is executed in advance of, or in conjunction with, the financing transaction. If a multi-year HAP contract term is already in effect, the Owner and HUD must terminate it (an “early termination”) and execute a new Renewal Contract with a minimum 20 -year term.

Eligible Projects for Tax Credit Pilot Four (4)% or 9% LIHTC, Substantial Rehabilitation projects being resyndicated with LIHTC/Tax Exempt Bonds without Section 8 rental assistance and which have reached the end of their initial taxcredit compliance period. 90% percent or more of the units must be restricted for LIHTC occupancy and the market analysis, appraisal and underwriting must conclude that the achievable LIHTC unit rents will be at least 10% below comparable market rents for each unit type.

Projects ineligible for Expedited Processing due to additional complexity A. Four 4% LIHTC, new construction projects; B. Rental Assistance Demonstration (RAD) projects; C. Projects involving Historic Tax Credits or New Markets Tax Credits; D. Projects involving adaptive re-use of non-residential structures; E. Projects involving significant demolition with new construction or rehabilitation; F. Projects involving gut rehabilitation; G. Projects involving inexperienced Development Team Members, including property managers. H. Projects over 200 units. By regulation (24 CFR 50. 32) Environmental Assessments covering over 200 units must be sent to the Field or Regional Environmental Officer for review and comment All of these projects are eligible for Standard Processing Track

Program Update - 221(d)(4) LIHTC Pilot Eligibility Criteria - Low Risk Transactions Only 200 units or less Satisfy the min requirements for a 221(d)(4) Over $40, 000/unit in proposed repairs or Replacement of 2 or more building system components exceed 50% replacement measured by cost MUST have HUD Experienced Development Team Construction plans and specifications must be 100% complete at firm commitment application. No environmental issues that require extensive analysis - i. e. - clean site

Environmental Issues that may be allowed for Expedited Processing Track a) radon mitigation, b) asbestos remediation, c) Lead Based Paint (LBP) remediation, d) removal of intact Underground Storage Tanks (UST) with no evidence of release and soil contamination, and e) previously contaminated sites with a No Further Remediation or No Further Action letter at residential standards

Environmental Issues requiring extensive analysis not eligible for Expedited Processing Track 1. Noise measurement above 65 d. B, 2. Historic properties, 3. Contamination that will require construction period site remediation to achieve regulatory closure through a No Further Remediation/ No Further Action (NFR/NFA) letter beyond the typical risks allowed under the Expedited Approval Process track, 4. Project sites containing a floodplain or wetland that do not meet an exception at 24 CFR section 55. 12(b) or (c), 5. Acceptable separation distance (ASD) risks from adjacent Above Ground Storage Tanks (ASTs) subject to HUD’s regulation at 24 CFR Part 51 Subpart C, and 6. Acceptable separation distance risks from high pressure pipelines transferring flammable and combustible liquids and gases as referenced in MAP Guide 9. 5. P. 1. 7. The property having been built before 1978 and not having been found to be lead-based paint free by a lead-based paint inspection by a certified lead-based paint inspector or risk assessor, for which, abatement of all lead-based paint on the property is required by 24 CFR 35. 630

Program Update - 221(d)(4) LIHTC Pilot Concept meeting is key: Lender, Borrower/Developer Team, HUD MF Production and Asset Management will meet to discuss the process to firm up the proposal and verify a clean, straight forward deal. Legal Documents – Begin the process early, HUD Office of General Counsel to coordinate with Lender/Borrower Counsel. If 9% LIHTC; then max LTC is 65% If 4% or 9% LIHTC w/ Section 8; max LTC is 75%

Program Update - 221(d)(4) LIHTC Pilot Eligibility Criteria – Continued 2530 clearance issues satisfied prior to firm application 20% of the LIHTC equity cannot be bridged at the time of initial closing. All other equity bridge loan requirements remain the same. Section 8 HAP contract with a 20 -year term is in place at application submission. Equity pay in schedules, Sources and Uses, underwriting and due diligence must be available and complete at the time of submission which should include the proposed tax credit structure of the Limited Partners and General Partner with the required HUD single asset entity borrower entity.

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