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Filling the Financing Gaps: What's New and on the Horizon

Susan WilsonNovogradac & Company LLP

MODERATOR PANELISTS

Michael HollidayNevada Housing Division

Michael ThomasGershman Mortgage


Acquisition and Rehab Agency & FHA

• GENERAL LOAN TERMS

• Loan to value: 80-90%

• DSCR: 1.11-1.25x

• Amortization: 30-35 Years

• Interest-Only: Available only for non-FHA

Acquisition and Rehab Agency & FHA

GENERAL LOAN TERMS


• DSCR: 1.11-1.25x

• Amortization: 30-35 Years

• Interest-Only: Available only for non-FHA

FHA 223(f) Agency TAH Express FNMA Preservation(MBS)

Freddie Mac Moderate Rehab

LTV increases to 90% for properties with 90% + section 8

Designed for small affordable properties (< $10MM in loan amount)

Applies to both 9% LIHTC and 4% LIHTC

Lower cost of issuance with no bond u/w, agency rating, etc.

Low interest rate (XX% today), DCR as allowed as low as 1.11x. LIHTC processing of 90-120 days.

LIHTC properties in at least year 11 of their compliance period. Streamlined processing.

Great for tenant-in-place rehab of existing AH.60-75 day processing time

Works well for tenant-in-place rehab with a 75-90 day processing time.

35 year term, fully amortizing- no balloon

Interest Only up to 5 years on a 15 year term

Short term bond structure with MBS guidelines

High renovation per unit.

High renovation per unit ( up to $40K*)

Subordinated lenders permitted**

Competitive interest rates To date pricing is less competitive than FNMA or FHA

New Construction & Substantial Rehab

GENERAL LOAN TERMS


• DSCR: 1.11-1.15x

• Amortization: 35-40 years

• Loan Term: 15-40 years

FHA 221(d)(4) Updated LIHTC PILOT

• Goal: 1) Close within 90 calendar days from full submission with Section 8*2) Close within 120 calendar days from full submission without Section 8*

*does not include 3rd party report and mortgagee underwriting

• Eligible Projects: 221(d)(4)/ 220 New Construction or Substantial Rehab with LIHTC

• 9% LIHTC; max. Loan-to-cost 65%

• 4% or 9% LIHTC w/ section 8; max Loan-to-cost 75%

Fannie Mae M-Tax Exempt Bond (Forward)

• 90 Day processing- Application to closing

• No Davis Bacon Wages Required

• Permanent only (requires a separate construction loan)

• Bond structure has higher cost of issuance and is a more complex transaction with more third parties

Freddie Mac Tax-Exempt Loan Program (Forward)• 90 Day Processing

• Fewer third parties, no rating agency

• Higher legal costs

• No bridge loan or Davis Bacon requirements

• Requires separate construction loan

• Only available in certain states

• Must have 4% LIHTC

Balance Sheet Bank- Tax Exempt Back-Back Structure (Citi Community EX)• Typical bank processing 60-90 days

• Construction and permanent loan from same source (two loan structure)

• Variable rate construction loan, higher rate on tax-exempt permanent loan

• Permanent 15 year term, max 18 with balloon maturity and max amortization of 35 years

• Depends on market and banks appetite for CRA

• Recourse during construction

Solving to Fill the GapFHA 221(d)(4) Fannie Mae M-TEB 24 Month

Unfunded ForwardFreddie Mac Tax Exempt- 24 Month Unfunded Forward

Bank Tax-Exempt, Back-to-Back Structure

• Largest maximum mortgage, 90-120processing under LIHTC PILOT processing.

• Competitive rate (usually the lowest)

• Competitive interest rate• 90 Day app to closing

• Higher rate, but lower transaction costs by about 40%

• 90 Day app to closing

• Competitive construction loan, higher rate tax-exempt perm.

• 60-90 Days app to closing on construction loan.

Longest fixed-rate term 40/40 with no balloon

15 year fixed/ 35 year am with balloon maturity

15 year fixed/ 35 year am with balloon maturity

Up to 18/35With balloon maturity

Single loan structure (no variable interest rate risk)

Two loan structure with separate construction loan

Two loan structure withseparate construction loan

Two loan structure (from single source)

Complex, requires Davis Bacon wages, short term, tax-exempt bond layer and possibly a LIHTC equity bridge

• No Davis Bacon, but higher cost of issuance due to tax-exempt bond structure

• Comparable rate but smaller mortgage due to shorter am

• No Davis Bacon• Higher rate, but lower

issuance cost• Smaller mortgage due to

higher rate and shorter amortization

• No Davis Bacon• Higher transaction costs

with tax-exempt bond underwriting

• Smaller mortgage due to higher rate and shorter am

Weighing in…

1. What is the greatest driver of your Gap?• Construction costs, short on soft funds, TC equity pricing?

2. What is the priority for your organization on your financing?• Lowest long-term rate, maximum proceeds, fastest processing?

3. What is your key driver on risk tolerance?• Construction cost increases, timing, variable interest rate risk

4. What is your view on interest rates, market timing?• Concerns about LIBOR, variable rates risking, permanent pricing?


Growing Affordable Housing Program (GAHP)Nevada Housing Division• Leverage use of the Housing Divisions tax-exempt bond & 4% tax

credit program• Developments can receive up to a $3 million loan• Repaid from residual cash flow of development

• Initial allocation of $6 million per year for 2015 and 2016

• Secondary Allocation of $9m for 2017 and $6m for 2018• $24 million committed or applied for as of November 2017

Boulder PinesNumber of Units 168

Location Las Vegas – Boulder Highway

Who served Families

Total project cost $32 million

GAHP funds awarded $ 3 million

GAHP as percentage of total 9.3%

Summit ClubNumber of Units

584: 467 market rate and 117 affordable workforce

Location Reno – near Summit Sierra Shopping center

Who served FamiliesTotal Project Cost $114millionGAHP funds awarded $3 millionGAHP as percentage of total 2.6%

Summit Club

Vintage at VirginiaNumber of Units 230

Location Reno – near Damonte Ranch Parkway

Who served Seniors

Total Project Cost $37 million

GAHP funds awarded $ 3 million

GAHP as percentage of total 8%

Vintage at Virginia

Madison PalmsNumber of Units 54

Location Las Vegas

Who served Seniors

Total Project Cost $14.3 million

GAHP funds awarded $ 750,000

GAHP as percentage of total 5.2%

Results• 1,839 units created

• Avg. of $13k loan per unit• 536 units for Seniors• 1,303 units for Families


• Overview of compliance requirements for FHA-insured properties

• Common compliance findings/issues

Outline

• Regulatory Agreement (Form HUD-92466)

• HAP Contract (Form HUD-92458)

• Other• Use Agreement/Operating Agreement

HUD Governing Documents

• Occupancy Requirements of Subsidized Multifamily Housing Programs (4350.3 REV-1)

• Financial Operations and Accounting Procedures for Insured Multifamily Projects (4370.2 REV-1 CHG-1)

• Includes chart of accounts• Accounting treatment for specific transactions• Financial statement and supplemental information presentation

• Management Agent Handbook (4381.5 REV-2)

Handbooks and Other Important Docs

Handbooks and Other Important Docs

• Appendix A of the Industry User Guide for the Financial Assessment Subsystem (REAC)

• IG2000.04 REV-2 CHG-1 “Consolidated Audit Guide for Audits of HUD Programs”

• Other handbooks specific to certain projects

December 31

•Deadline per regulatory agreement: 60 days

March 30

•REAC/FASSUB: 90 days

•Automatic/global extensions?

April 9

•10-day “grace period”

Audit Requirement

Audit Deadline

• What if the deadline is missed?• APPS flag (2530) • DEC referral• Other admin sanctions, including monetary penalties• No owner distributions, even if surplus cash

Common Compliance Findings/Issues

Internal Controls

• Characterization of control weaknesses:• Significant deficiency• Material weakness

Internal Controls – Common Issues

• Ineffective controls or lack of controls over cash receipts and/or disbursements

• Failure to comply with established internal control procedures for cash receipts and/or disbursements

• Lack of adequate documentation of internal control procedures being correctly followed

• Failure to deposit cash on a timely basis

Why are internal controls important to HUD?• Bad books mean unrecorded liabilities and missing assets

• Inaccurate records indicates improper asset management

Security Deposit Account

• Underfunded Security Deposit Cash Account

• Borrowing money from Security Deposit Account to fund operations

• Security deposits not held in an interest-bearing account (where required)

• Revised Section 8• Required by some states

Management Functions

• HUD Chart of Accounts

• Management Agent Not Approved by HUD• OR Approved Agent Splitting Fees with Non-approved Agent

• Overpayment of Property Management Fees

• No “Employee Dishonesty” Insurance

• Open findings from MORs

Perceived “Equity Skimming”

• Distributions when no Surplus Cash is available

• Surplus Cash vs. P.A. waterfall

• Loans of project funds (including “due from…”)

• Payments on related party and “other” loans

• Commingling of funds among projects

Distributions to Owners

• Generally, distributions are only allowed twice a year

• Project must be in surplus cash position

• Includes related parties

• Includes advances to fund operations


• Includes entity-related fees and expenses• Asset management fees• Compliance monitoring fees• Debt refinancing fees• Investor service fees

• Interest paid on certain subordinate debt

• Includes payment of development fees


• Cannot make distributions when mortgage is in default or there is any default under a Regulatory Agreement

• Must be incompliance with all REAC inspection and MOR findings related to proper maintenance of the project


• Project expenses: reasonable and necessary to the operation of the project

• Entity expenses (mortgagor or corporate expenses): attributable solely to the entity

• Entity expenses can only be paid from mortgagor contributions or surplus cash

Project vs. Entity Expenses

Project Expenses

• Audit fees• Fees for tax return preparation• Legal fees on behalf of the

project• Bookkeeping fees for the

project• Costs to convert FS from tax

basis to GAAP

Entity Expenses

• Officer salaries• Federal and state taxes• Tax prep fees for individuals and

LPs• Legal fees attributable to

project owner• Amortization of organization

expenses• Consulting services

Mortgage Payments

• Late/missed payments

• Default

Replacement Reserve

• No Monthly Deposits to Replacement Reserve (even if loan servicer error)

• Deposits in an incorrect amount

• Reserve Balance is in Excess of FDIC Insurance Limits and Bank Ratings are Not Monitored

Residual Receipts

• Applies to LD and 236 Projects

• Failure to follow proper cash flow payment priority to repay residual receipts loans before distributions

REAC (FASSUB) Findings

• Generated after REAC acceptance of audit

• Responding:• Involve the auditor where/when applicable• Ask auditor to review your response before sending to HUD• Clear, comprehensive response. Reference the FS package. Provide

support

• Hopeful response – “case closed”

• If not, potential DEC referral

DEC Findings

• Some REAC findings trigger automatic DEC referral• Unauthorized distributions• Equity skimming

• Some DEC referrals are a result of the REAC agent’s review

• Violations may be subject to:• Full owner repayment• Civil money penalties• Other administrative sanctions

Filling the Financing Gaps: What's New and on the Horizon


MODERATOR PANELISTS

