1. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT MULTIFAMILY CLOSING DOCUMENTS September 1, 2011

2. The documents can be found on: HUD Clips: http://portal.hud.gov/hudportal/HUD?src=/program_offices/adminis tration/hudclips/forms/ http://portal.hud.gov/hudportal/HUD?src=/program_offices/adminis tration/hudclips/forms/ The Multifamily Housing website: http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm Questions on the documents can be submitted on: The OGC website: http://portal.hud.gov/hudportal/HUD?src=/program_offices/general _counsel/mffaqs

3. Introductory Notes Summary of Changes Discussion of Specific Documents –Note –Security Instrument –Real Estate Documents –Lender’s Certificate –Opinion of Borrower’s Counsel –Construction-Related Documents –Regulatory Agreement –Subordination Agreement –Additional Financing Instruments –Completion Assurance Documents Table of Contents

4. Introductory Notes Multifamily closing documents were last revised 30 years ago. Updating closing documents was top priority of Secretary Donovan. Goals of New Multifamily Closing Documents: –Make insurance program more effective –Facilitate financing of affordable housing –Better conform to modern real estate practice Adoption of new closing documents will: –Eliminate need to rely upon numerous legal riders and regulatory waivers to complete otherwise routine transactions –Facilitate more effective and efficient loan closings –Allow FHA and lenders to better secure the borrower’s repayment obligations and prevent program waste and fraud New documents and regulations will apply to all transactions that receive FHA Firm Commitment on or after September 1. –Waivers will be available but only for borrowers who can demonstrate real and verifiable financial hardship based on reasonable expectations. Helen Kanovsky, General Counsel, HUD Carol Galante, Acting Commissioner, Federal Housing Administration

5. Summary of Changes The new documents: Add a Subordination Agreement for government subordinate lenders Contemplate multiple regulatory agreements in transactions Continue existing policy of “non-recourse” financing but hold certain controlling parties personally liable for losses caused by bad acts Introduce concept of Program Obligations as compilation of authorities: –Statutory requirements and regulations –HUD policy changes or updates through handbooks, notices, or mortgages, but Any policy change that requires notice and comment rulemaking will not be implemented until completion of that process. Policy changes will be limited to amplifying or clarifying terms and will not unilaterally add to, or delete, terms from the documents. Create two-tier default system: Financial Default and Covenant Default Require increased lender diligence in origination of loans Permit all escrow funds (even those exceeding $250,000) to be deposited in an account at a GNMA-approved depository institution Amplify and clarify the definition of Waste

6. List of RevisedDocuments Note (Form HUD-94401M) Security Instrument (Form HUD-94000M) Regulatory Agreement (Form HUD-92466M) Subordination Agreement (Form HUD-92420M) Lender’s Certificate (Form HUD-92434M) –Request for Endorsement of Credit Instrument (Form HUD-92455M) –Request for Final Endorsement of Credit Instrument (Form HUD-92023M) Opinion of Borrower’s Counsel (Form HUD-91725M) –Documents include a form opinion, instructions, and a certification of Borrower Additional Financing Instruments –Residual Receipts Note Nonprofit Mortgagor (Form HUD-91710M) –Residual Receipts Note Limited Dividend Mortgagor (Form HUD-91712) –Surplus Cash Note (Form HUD- 9223M) Lease Addendum (Form HUD-92070M) Borrower’s Oath (Form HUD-92478M) Slide 1 (of 2)

7. List of Revised Documents Construction Related Documents –Construction Contract (Form HUD-92442M) & Supplementary Conditions (HUD-92554M) –Building Loan Agreement (Form HUD-92441M) & Supplement (HUD-92441M-SUPP) –Escrow Agreements Operating Deficit Escrow (Form HUD-92476a-M) Working Capital Escrow (Form HUD-92412M) Escrow Agreement for Incomplete Construction (Form HUD-92456M) Escrow Agreement for Non-critical, Deferred Repairs (Form HUD-92476.1M) Additional Funds Agreement (Form HUD-92476M) Latent Defects Escrow (Form HUD-92414M) Request for Approval of Advance of Escrow Funds (Form HUD-92464M) –Surveyor’s Report (Form HUD-92457M) Completion Assurance Documents –Payment Bond (Form HUD-92452A-M) –Performance Dual Bond (Form HUD-92452M) –Sponsors Bond (Form HUD-92477M) –Offsite Bond (Form HUD-92479M) –Completion Assurance Agreement (Form HUD-92450M) –Agreement and Certification (Form HUD-93305M)

8. Note Maintains non-recourse nature of financing Allows for different interest rates during construction and permanent phases Reduces time period for late payment from 15 days to 10 days –Consistent with time period in GNMA programs –FHA regulations revised to incorporate reduced time period Clarifies prepayment requirements –Contemplates conventions involved with tax-exempt bonds and GNMA –Allows prepayment premiums to be included in calculation of amount due More clearly represents Borrower’s obligations to HUD

9. Security Instrument Sets out Lender’s role in managing the Security Instrument –Note, e.g., §§ 7 and 8, imposition deposits, order of payments; § 14 inspection; and § 15 books and records §1.w: broadly defines “Mortgaged Property” –Not just real property, includes personalty (see §2) §1.jj: defines “Waste” –Any physical changes to Mortgaged Property without HUD & Lender consent, –failure to pay taxes giving rise to a superior lien on Mortgaged Property, or –retaining rents to which Lender is entitled. § 2: Acts as security agreement under UCC –Borrower grants Lender a security interest in various personalty § 22: differentiates between Financial and Covenant Defaults –Financial default: failure to pay amounts due under Note or Security Instrument; Lender can submit an FHA insurance claim –Covenant default: failure to perform or comply with provisions in Security Instrument or Regulatory Agreement; Lender must obtain HUD approval to submit FHA claim. § 34: binds and inures to successors and assigns of Lender and Borrower. § 48: Environmental hazards –Borrower obligated not to violate or permit violations of Hazardous Materials Law or an Environmental Permit on the Mortgaged Property or adjacent property –Indemnifies Lender and HUD for Borrower non-compliance Slide 1 (of 2): Significant New Provisions

10. Security Instrument Updates terms to Security Instrument, Lender and Borrower rather than Mortgage, Mortgagee and Mortgagor §6: Non-recourse nature of FHA-insured insured financing preserved, but –Certain controlling parties will be held personally liable for damages caused by their bad acts –These parties acknowledge this potential liability in Section 50 of the Regulatory Agreement and are identified in the Security Instrument §9: Security Instrument incorporates Regulatory Agreement provisions –HUD may ask Lender to declare Indebtedness due and payable if Regulatory Agreement violated. –Discretion to call a default left to Lender §12: Prohibits changes of use and unit mix in most circumstances §33: Single Asset Borrower –Regulatory change eliminated natural person and tenants-in-common as Borrowers *additional notes available under “Training Materials” on the FAQ page. Slide 2 (of 2): Additional revisions to existing provisions

11. Ground Lease Addendum When all or part of the Mortgaged Property consists of a leasehold estate, the Ground Lease shall include the provisions set forth in form HUD- 92070M, Instructions for Leasehold Projects (Ground Lease Addendum). The Ground Lease Addendum provisions must be attached to the Ground Lease and incorporated into the Ground Lease by reference prior to the execution of the Ground Lease, or if such incorporation by reference is not possible, must be separately executed by the Landlord and Tenant. A rider to the security instrument is not required.

12. Lender’s Certificate Lender Responsibilities –§16: Must obtain prior written approval of HUD where required in Security Instrument –§30: Must confirm that all licenses, permits, and government approvals are obtained –§40: Must certify that the security agreement and UCC filing statements are perfected and in first lien position and must maintain perfected lien position for life of the loan –§32: Must certify that there are no liens or encumbrances against Mortgaged Property not reflected as exceptions to coverage title policy (unless approved by HUD) –§32: Must immediately notify HUD of Regulatory Agreement violations –§35: Must certify that insurance policies comply with terms of Security Instrument Identity of Interest –§25: Lender must disclose any Identity of Interest between Lender and Borrower, any Principal of Borrower, Contractor, any subcontractor, or seller of land –Obligation to disclosure identities of interest continues until final endorsement. Lender Fees (§20(j)) –Lender may impose, but must disclose, reasonable fees and charges for investing cash in Reserve for Replacement accounts, Residual Receipts accounts, and other interest-bearing escrows; processing TPAs; and reviewing other matters –Details on servicing and administrative fees will be set forth in Program Obligations. Successor Lenders (§3) –Successor lender for purposes of servicing loan will be bound by provisions in the Lender’s Certificate related to the servicing of the loan.

13. Major Changes –Greater consistency with opinions in modern, conventional real estate financing –Limited by HUD’s unique role as insurer, as opposed to lender; and HUD’s obligations as a governmental entity –Shift certain responsibilities to Lender where appropriate Opinions No Longer Provided –UCC; usury; flood insurance requirements; necessary governmental certificates, permits, licenses, qualifications and approvals – all shifted to Lender’s Certificate –Proposed changes of law that are potentially detrimental –Litigation is no longer an opinion, shifted to confirmations Confirmations –New: no side-deals between Borrower and other parties to transaction. –Modified: financial conflicts and identities of interest confirmations Signatures –May be signed by authorized attorney of law firm, in name of such attorney, in the name of law firm, or on behalf of law firm –Opinion provider not required to be licensed in every relevant jurisdiction unless specific state law to contrary Opinion of Borrower’s Counsel

14. Construction Contract Merges the old “Cost-Plus” and “Lump Sum” contracts into one document –Includes alternative language depending on which type is used –Specific type of contract must be checked on page 1 Highlights and changes include: –1.A: Must disclose to HUD any side agreements between Owner and Contractor –2.C: Lenders are now required to sign Drawings and Specs. –3.E: Liquidated damages will be calculated using dollar amount per day, per unit not completed by Project Substantial Completion Deadline, divided by number of units. –4: Provides for incentive payments –5: Holdback may be reduced below 10% when permitted by Program Obligations –5.C: Requires Certificate of actual Cost (where applicable), delivery of as-built surveys, and warranties for final payment –9: Where permitted by law, Contractors are prohibited from filing liens and must execute a waiver of liens prior to commencement of construction –12: Defines roles of Lender and HUD; denies any liability of HUD or Lender to Owner –14: Adds space for names of Owner’s and Contractor’s designated job representatives –16: Invalidity of any provision in the contract shall not affect the validity of any other provision (Severability Clause)

15. Building Loan Agreement (“BLA”) Highlights and Changes – § 4(a): construction holdback may be reduced below 10% when permitted by Program Obligations – § 5: Amounts for initial operating expenses that accrue during construction should be included in exhibit, not itemized in BLA. – § 9: Event of default under Security Instrument constitutes a default under BLA. – § 11: Details rights of Lender and HUD to enter premises and inspect Borrower’s construction, materials, and books – § 19: HUD is not a party to BLA and has no obligation to Borrower or Lender, but HUD reserves right to approve or disapprove certain actions under BLA. BLA no longer includes (now set forth in Program Obligations) : –Certain exceptions to initial deposit requirements ( § 4c) –Borrower’s contribution disbursement provisions ( § 4c) (see Disbursement Agreement) –Factors used to determine when loan is in balance ( § 4e) Making BLA Consistent with Modern Construction Financing – § 20: Limits Borrower’s liability under BLA to same extent as Note – § 21: Limits Lender’s waiver of its rights under BLA – § 22: Any changes to BLA or other loan documents must be made in writing. – § 23: Releases Lender from any obligations under BLA if Lender assigns its interests – § 24: Borrower and Lender each agree to waive trial by jury.

16. Escrow Agreements Slide 1 (of 2) Escrows modified to provide greater uniformity in structure and requirements Some escrow agreements are new forms; others replace or modify existing forms –New forms include the Working Capital and Latent Defect escrows. Elements Common to All of the Escrow Agreements: –Letters of Credit (if applicable), though not reviewed by HUD, must be attached; Lender certifies that duration and issuer comply with Program Obligations. –Lenders may, at any time and for any reason, draw upon any letter of credit included in the escrow and convert the same to cash. –Escrows (when cash) must be held in accounts and with entities acceptable to GNMA; Program Obligations and Housing guidance will spell out criteria. –Programs Obligations will set Lender fees and what party receives interest earned; Lender must disclose fees to Borrower. –Escrows are cross-defaulted with Security Instrument. In event of borrower default, HUD can apply escrow balances to outstanding Indebtedness. –Amended to capture recent Risk Mitigation guidance issued by Housing Each particular escrow agreement provides the terms of when and how each is established and funded, and precisely how escrowed funds are disbursed. –Request for Approval of Advance of Escrow Funds (HUD-92464M)

17. Escrow Agreements Slide 2 (of 2) Some escrows that might be required: Operating Deficit Escrow – If operating deficits are projected, see MAP Guide §7.14 and use form HUD-92476A-M. Working Capital Escrow – See form HUD-92412M, and MAP Guide §12.15.C(1-3). Escrow Agreement for Incomplete Construction – If required at final closing. Form HUD-92456M. Escrow Agreement for Noncritical Deferred Repairs – Form HUD- 92476.1M Additional Funds Agreement – If additional funds are needed for project completion, HUD may require the use of a Sponsor Escrow, form HUD- 92476M. This may be accompanied by a Sponsor Bond, HUD-92477M. Latent Defects Escrow – Form HUD-92414M. Performance may be ensured by a cash escrow, letter of credit, or surety bond.

18. Surveyor’s Report Lender must provide Form HUD-92457M, Surveyor's Re port. Surveyor must sign within 120 days before initial closing by a licensed surveyor. This document has been recently modified to conform to industry standards

19. Regulatory Agreement Part I: Definitions –Now includes detailed definitions of Fixtures, Personalty, and Mortgaged Property –List of 17 items constituting Mortgaged Property; provides clear, accurate description of what HUD expects to be included as collateral for HUD-insured mortgage Part II: Construction; Refinancing –Incorporates language from current Mortgagor’s Certificate with minor changes –Regulatory Agreement now clearly applies to both construction and refinancing. Part III: Financial Management –§10: Reserve for Replacements account (for defraying costs of replacing major structural elements and mechanical equipment of the Project) Funds must be deposited in accounts insured or guaranteed by federal agency Every 10 years, borrower must submit analysis of past and projected use of funds Interest earned on investment shall be deposited in account –§14: Distributions may not be taken: Before completion of Project If Borrower received of Notice of Violation from HUD or Event of Default occurred If necessary services have not been provided at the Project by Borrower Part VI: (Borrower) Actions Requiring Prior Written Approval of HUD Slide 1 (of 2)

20. Regulatory Agreement Part VII: Defaults & Enforcement provisions –§37: Violations of the Regulatory Agreement listed (e.g. failure to comply with provisions, fraud or material misrepresentation, commencement of forfeiture action) –§38(a): Procedures for Declaring Default 30-day notice & cure period But, HUD may declare default without notice to protect tenants’ health and safety. –§38(b): Remedies Following Declaration of Default If HUD holds Note, HUD may declare Indebtedness immediately due and payable. If HUD does not hold the Note, HUD may request acceleration of Indebtedness. Collect rents to meet Borrower’s obligations and pay expenses to operate project Take possession, operate, and maintain project; or seek appointment of receiver –§39: Measure of Damages Damages = cost of repairs to return the Project to decent, safe, sanitary condition and good repair (plus other available damages/remedies) Part VIII: Miscellaneous –§40: If conflict exists between Regulatory Agreement and another HUD agreement executed by Borrower, more restrictive agreement governs. –§49: Borrower is not a beneficiary to Contract of Insurance between Lender and HUD. *additional notes available under “Training Materials” on the FAQ page. Slide 2 (of 2)

21. Subordination Agreement Replaces Secondary Financing Rider Differentiates between Project and Non-Project sources (§1j, §1k) –In case of default under HUD-insured loan: Payments may be made to subordinate loan from Non-Project sources only. Prior approval from FHA lender is required for payments from Project sources. Provides for notice of default to Subordinate Lender when provided to Borrower (§6a) Sets forth Subordinate Lender’s rights and remedies upon default of Subordinate Loan documents (§6) Sets forth cure rights of Senior or Subordinate Lender upon default under either loan (§ § 6 and 7) Permits up to 75% of surplus cash to be applied to service subordinate debt Eliminates automatic discharge of subordinate lien when default occurs

22. Additional Financing Instruments Permissible forms of unsecured promissory notes, if approved by HUD, include: Residual Receipts Note Nonprofit Mortgagor – form HUD 91710M Residual Receipts Note Limited Dividend Mortgagor – form HUD 91712 Surplus Cash Note – form HUD-9223M

23. Completion Assurance Documents Payment Bond – form HUD-92452A-M, guarantees that certain labor and material bills associated with the project will be paid. Performance Dual Bond – form HUD-92452M, protects against financial loss if contractor fails to complete the project. Sponsors Bond - If additional funds are needed for project completion, HUD may require the use of a Sponsor Escrow and a Sponsor Bond. May be accompanied by form HUD-92476M, Agreement of Sponsor to Furnish Additional Funds. Offsite Bond – May be required to assure completion of off-site improvements. Completion Assurance Agreement – see MAP Guide §3.4.M.

24. Questions/comment can be e-mailed to: MultifamilyDocumentReview@hud.gov