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The Housing Preservation Role for the FHA Insured Multifamily Programs

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Title: The Housing Preservation Role for the FHA Insured Multifamily Programs


1
The Housing Preservation Role for the FHA
Insured Multifamily Programs
  • 25th Anniversary
  • 2007 Enterprise Community Conference
  • November 14-16, 2007
  • Cleveland, OH

2
TOPICS
  • A. Applicable FHA Mortgage Insurance Programs
  • B. Benefits of FHA Financing
  • C. Limitations and Challenges of FHA Financing
  • D. Exclusive Section 202 Underwriting Criteria
  • E. The Insurance Upon Completion Option
  • F. Front End Costs Attributable to
    Underwriting,
  • Processing and Closing
  • G. FHA Insured Loan Preservation Production for
    FY
  • 2006/2007
  • H. Anatomy of Real Deals New Development
    Model
  • and Financing/Rehab of Existing Properties

3
Summary of Applicable HUD programs
  • 221(d)(4) Construction and permanent financing
    for multi family properties new construction or
    substantial rehabilitation.
  • 223 (f) Refinancing or acquisition of existing
    multi family properties.
  • 232 and Section 232/223(f) Financing for
    residential care facilities including low to
    moderate rehabilitation.
  • 221(d)(3) Construction and permanent financing
    to build new or substantially rehabilitate an
    existing multifamily rental property for
    non-profit owners only.
  • 231 Construction and permanent financing for
    new or substantial rehabilitation of existing
    rental property for seniors only (age restricted
    at 62 or older).
  • 213 Construction, substantial rehabilitation,
    and purchase of cooperative housing. Each member
    shares in the ownership of the whole project with
    the exclusive right to occupy a specific unit and
    to participate in project operations through the
    purchase of stock.

A-1
4
Benefits of FHA Insured Financing
  • No rate risk construction to permanent.
  • No Yield Maintenance.
  • High leverage.
  • Long term, fixed rate, fully amortized debt.
  • Up to 24 month forward rate locks.
  • No lease up risk to convert from a construction
    to permanent loan.
  • AAA credit enhancement for tax exempt financing.
  • No limits or caps on loan sizes or number of
    loans to one borrower.
  • Opportunity to pool geographically diversified,
    scattered site properties under one mortgage.
  • Very competitive cost of Capital.
  • Source of financing that is always in the market
    regardless of the economic environment.

B
5
Limitations of FHA Financing
  • Davis Bacon Wage Requirements for new
    construction and substantial rehabilitation may
    increase costs in some markets.
  • Takes longer from engagement to closing.
  • 6 to 12 months for new construction/sub-rehab.
  • 4 to 6 months for refinance or acquisition.
  • Statutory mortgage maximums can be an impediment
    in some markets and for some types of
    developments.
  • Fixed rate debt only.
  • Difficulty in structuring secondary debt.
  • Requirement that all equity be funded up front.
  • A significant amount of paperwork required.
  • Dealing with the Bureaucratic HUD/FHA culture and
    a multitude of statutory and regulatory
    requirements is a challenge.
  • No cash outs allowed in the 232/223(f) program.

C
6
Revisions to HUD Standard Underwriting Criteria
Exclusively for Section 202 Projects
  • Pursuant to HUD Notice 2002-16 as amended by HUD
    Notice 04-21, HUD
  • announced numerous changes to its standard
    underwriting criteria intended to
  • encourage refinancing utilizing either the
    Section 221(d)4, 223(f) or 221(d)3
  • programs
  • The following policies apply to all
    transactions
  • Refinancing proceeds can be used for capital
    improvements and replacement reserve funding.
  • Excess replacement reserve funds can be used to
    build an addition, assisted living facility,
    community center, etc.
  • The sponsor can now be either a Section 501(c)(3)
    nonprofit or a non-profit controlled limited
    partnership formed to obtain tax credits.
  • Developers of LIHTC projects can earn a
    developers fee equal
  • to the lesser of 15 of eligible basis or the
    state LIHTC requirement.
  • Developers of non-LIHTC projects can earn a
    developers fee up to
  • 15 of acceptable development costs and
  • Owners of LIHTC projects can earn an annual
    distribution equal to 6 of tax credit equity.

D-1
7
Revisions to HUD Standard Underwriting Criteria
Exclusively for Section 202 Projects Contd
  • For projects refinancing with FHA Insurance, the
    following additional benefits apply
  • Section 202 projects maintain their Mark to
    Market exemption status that is, Section 8
    rents can be above market comparable rent levels
    without any risk of mortgage restructuring.
  • Existing Section 8 rents can be used in the
    underwriting even if
  • they are above market comparable levels.
  • Section 223(f) loan terms are revised to allow
    for loans up to 90 of
  • value and 1.1 debt service coverage.
  • Appraisers can use a band of investment approach
    in determining
  • value which will result in lower cap rates and
    higher values.
  • Existing HUD approved meals programs can
    continue, and
  • When a mortgage is debt service constrained,
    lenders can finance
  • against tax abatements that run only with the
    sponsor.

D-2
8
FHA INSURED MULTIFAMILY HEALTHCARE
PROGRAMSINSURANCE UPON COMPLETION VS. INSURED
ADVANCES
  • How does it work and what are the benefits and
    limitations of FHA Insurance Upon Completion
    (IUC) versus Insured Advances (IA)?
  • A. What is the difference?
  • IA is the traditional method to fund an FHA
    insured construction/permanent
  • financing structure. FHA issues a Firm
    Commitment to insure loan advances
  • during the construction period and then the
    permanent loan. Two
  • endorsements (closings) are required.
    Initial Endorsement occurs
  • immediately prior to the start of the
    construction phase
  • and Final Endorsement occurs following
    completion of construction and prior
  • to amortization.
  • IUC does not insure any advances during
    construction. The FHA Firm Commitment is issued
    prior to the start of construction, but is not
    effective until construction is completed and
    Endorsement occurs.

E-1
9
FHA INSURED MULTIFAMILY HEALTHCARE
PROGRAMSINSURANCE UPON COMPLETION VS. INSURED
ADVANCES
  • How does it work?
  • An FHA Firm Commitment to Insure Upon
    Completion is obtained
  • by an FHA approved lender. Most of
    the same procedures and application exhibits
    necessary to process for an IA Firm Commitment
    through HUD/FHA are required.
  • IUC eliminates or postpones most of the
    construction oriented documents and
  • exhibits necessary for initial endorsement to
    the back end thereby
  • saving the Lender and Sponsor some time
    preparing the Firm Commitment application.
  • The IUC commitment is conditioned upon the
    submission and HUD/FHA
  • approval of most construction documents and
    exhibits necessary to
  • achieve initial and final endorsement of an IA
    Commitment, including Cost
  • Certification.
  • HUD/FHA inspects the property during the
    construction period and the FHA Lender that
    received the IUC Commitment provides compliance
    oversight. The Construction Lender administers
    the construction loan and disburses the approved
    draws.
  • Compliance with the Davis Bacon wage scale is
    required for IUC transactions.
  • An uninsured construction loan is obtained from
    the FHA Lender or a separate funding source. The
    IUC Commitment functions as the take out.

E-2
10
FHA INSURED MULTIFAMILY HEALTHCARE
PROGRAMSINSURANCE UPON COMPLETION VS. INSURED
ADVANCES
  • Benefits to the borrower of an IUC Commitment
  • Eliminates the HUD/FHA requirement that 100 of
    the equity be on deposit at closing of the
    construction loan.
  • Eliminates the potential HUD/FHA problems that
    can be experienced when bridge financing is
    desired to cover equity shortfalls at
    construction loan closing.
  • Circumvents the difficulty structuring seller
    financing to cover front end shortfalls until
    adequate syndication proceeds are received.
    However, a seller note must be paid off prior to
    an endorsement.
  • Opens up the possibility of variable rate debt
    during the construction period.
  • The 2 of the loan amount deposit for working
    capital is eliminated.
  • Escrow of a projected operating deficit guarantee
    not required until the completion of construction
    and closing of the permanent loan.
  • Eliminates the necessity of paying the MIP during
    the construction term.
  • Eliminates the HUD requirement for a 100 payment
    and performance bond.

E-3
11
FHA INSURED MULTIFAMILY HEALTHCARE
PROGRAMSINSURANCE UPON COMPLETION VS. INSURED
ADVANCES
  • Construction Loan financing and permanent loan
    rate risk
  • Tax Exempt financing
  • - The permanent loan interest rate is locked
    at Construction Loan closing by selling AAA rated
    tax exempt bonds at a fixed yield and investing
    the proceeds in a GIC for the period of the
    Construction Loan.
  • - A fixed or variable rate construction loan
    is obtained from the FHA Lender or from another
    source with the IUC Commitment and forward rate
    lock as the exit strategy/take out.
  • - Based on the current rate environment the
    up front negative arbitrage and a 20 day lag
    deposit would be about 1.8 of the loan amount,
    approximately 1 higher than with an IA
    undertaking.

E-4
12
FHA INSURED MULTIFAMILY HEALTHCARE
PROGRAMSINSURANCE UPON COMPLETION VS. INSURED
ADVANCES
  • Taxable financing
  • - A 12 to 24 month forward rate lock for the
    permanent loan is secured to eliminate rate
    risk. The interest rate for the 40 year
    permanent loan is locked prior to the start of
    construction.
  • - A fixed or variable rate construction loan
    is obtained from the FHA Lender or from another
    source with the IUC Commitment and forward rate
    lock as the exit strategy/take out.
  • - Mortgagor escrows a good faith deposit with
    the lender in an amount equal to 2 of the loan
    amount, refunded when the permanent loan is
    closed.
  • - The permanent interest rate is
    typically calculated based on a 2 basis point per
    month add on over the rate for a typical 60 day
    delivery. Example - if the rate for a 60 day
    delivery was 5.50, the rate for an 18 month
    forward would be 5.50 16 months x 2 bps a
    5.82 note rate.

E-5
13
HUD/FHA FYE 2007 Initial Endorsements by HUB
Program Category P.1
G-1
14
HUD/FHA FYE 2007 Initial Endorsements by HUB
Program Category P.2
G-2
15
HUD/FHA FYE 2007 202, LIHTC IRP Decoupling
Initial Endorsements
G-3
16
HUD/FHA FYE 2007 LIHTC Projects by State
Program Category P.1
G-4
17
HUD/FHA FYE 2007 LIHTC Projects by State
Program Category P.2
G-5
18
HUD/FHA FYE 2007 Refis of 202 Loans by HUB
Program Center P.1
G-6
19
HUD/FHA FYE 2007 Refis of 202 Loans by HUB
Program Center P.2
G-7
20
HUD/FHA FYE 2007 IRP Decouplings by HUB
Program Center
G-8
21
Real Deal I
H-1
22
A Texas Senior Facility
A certain Senior Facility is a rental community
designed specifically for Seniors and insured by
FHA, pursuant to Section221 (d)(4) of the
National Housing Act. The FHA Insurance was
utilized to credit enhance the tax exempt bond
issue to fund a 9,555,000 mortgage for both the
construction and permanent loan. The Mortgagor
entity is a Texas city housing finance
corporation created by the local housing
authority. The community was developed by a
local limited partnership with an entity of the
housing authority as the sole general partner.
The development was funded in part by the
syndication of Low Income Housing Tax Credits
issued by the Texas Department of Housing and
Community Affairs. The total development cost is
15,917,796. Under TDHCA rules, 100 of the
units are income restricted at 30 to 60 of
median income for the area (less utility
allowances), which plays a key role in advancing
affordable housing for the elderly in this Texas
city.
H-2
23
A Texas Senior Facility (continued)
The 196-unit development is a mid-rise, senior
rental community of six, two-and three-story
buildings with two variations of unit floor
plans. There will be 100 1BR / IBA and 96 2BR /
2BA units. The rents will be 519 per month for
the 703 square feet 1BR units and 624 per month
for the 986 square feet 2BR units. Unit amenities
will include individual HVAC units and hot water
heaters, Cable TV outlets and internet access in
the living room and all bedrooms, full-size
washer/dryer connections, microwave, frost-free
refrigerators with ice-makers, dishwashers,
disposals, smoke detectors, nine-foot ceilings,
storage closets, ceiling fans, patio/balcony and
monitored unit security. This Senior Facility o
ffers a clubhouse, laundry facility and
elevators. There is to be an activity center, as
well as a swimming pool, gazebo, carports, open
parking spaces, picnic area, horseshoe or
shuffleboard court, walking trail, limited access
gate entry and perimeter fencing.
H-3
24
A Texas Senior Facility (continued)
The clubhouse features amenities such as a beauty
salon, offices, great room, lavatories, kitchen,
business center, card room, fitness center, media
theatre and a game room. At least one resident
per unit is restricted to 62 years of age or
older. This restriction does not apply to any
additional resident(s) of the unit.
There follows a financial summary for the Facili
ty.
H-4
25
H-5
26
Real Deal II
H-6
27
H-7
28
A Non-Profit Low Income Family Community
FHA 221(d)(3) Insurance
Harriet Tubman Terrace Apartments (Tubman) is an
existing Project located near the central
business district of Poughkeepsie, NY. The
Project includes 20 buildings, with two and two
and one-half stories, which were originally
constructed in 1972 utilizing a FHA 236 insured
mortgage. A Section 8 HAP contract was placed on
93 of the units in the Project, which continues
on a year to year basis. The Project is now
undergoing substantial rehabilitation.
AME Zion-Trinity Housing Development Fund Compan
y, Inc. (AME), is the mortgagor for the Property,
it was established in December 1970 by the
congregations of the Smith Street AME Zion and
Poughkeepsie United Methodist churches. Since
the purchase of the land and the original
construction of the complex in 1972, via HUDs
Section 236 loan program, the sole purpose of
this venture has been to provide a high-quality,
affordable rental housing alternative for
residents in the Poughkeepsie area. AME is
governed by an 8-Member Board of Directors. Six
of the 8 Board members are elected from the two
congregations, 3 from each church, and the
remaining two consist of one pastor from each
church.
H-8
29
A Non-Profit Low Income Family Community
(continued)
FHA 221(d)(3) Insurance
AME engaged Northeast Management and Development
Company, LLC (NE) to provide development services
for the rehabilitation of the Project. NE is
also the Management Agent for the Project. It
was established by two individuals who were
previously employed by the Poughkeepsie Housing
Authority. With the help of a Consultant and NE
, AME submitted an application to American
Capital Resource (ACR) for FHA mortgage insurance
pursuant to Section 221-d3 with a request to
de-couple the 236 mortgage and incorporate an
IRP mortgage. The Project includes one, two,
three and four bedroom units. A Community
Building provides space for an after school child
care center, maintenance shop and administrative
offices. Environmental testing at the pre-appli
cation stage identified asbestos containing
material which can be controlled with procedures
in an environmental Operations and Maintenance
Plan. Such a plan for asbestos control was
completed and accepted by HUD.
H-9
30
A Non-Profit Low Income Family Community
(continued)
FHA 221(d)(3) Insurance
ACR determined the maximum insurable base
mortgage to be 13,401,400 which was constrained
by the economics of the Project at 95 occupancy.
The loan recognizes two components to the
mortgage, one for that amount with a 480 month
term which will be serviced with rental income.
Another, for 1,410,300 will be structured with a
112 month term and will be serviced with Interest
Rate Reduction (IRR) payments resulting from the
de-coupling of the 236 mortgage.
The Nonprofit Developers Fee permitted in the 2
21-d3 mortgage provides funds for
H-10
31
A Non-Profit Low Income Family Community
(continued)
FHA 221(d)(3) Insurance
The transaction was closed with surplus mortgage
proceeds of 744,752 resulting from the
difference in As Is value of the Project and
the pay off of the existing first mortgage.
Since there are no specific guidelines for
utilization of IRP proceeds, the Lender
recommended that surplus mortgage proceeds be
treated as the Initial Deposit to the Replacement
Reserve Escrow thereby providing significant
funds for future needs of the Project and
expenditures will remain under HUDs control.
H-11
32
H-12
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