1. 2016 SMAC MAY 10, 2016 PRESENTED BY: DENISE “DENNY” TROESCHEL BERKADIA COMMERCIAL MORTGAGE Who’s your principal? Mortgage Credit - MAP Guide Chapter 8

2. The Voice, LLC Mortgagor 100% Owner Adam Levine 76% Member Blake Shelton 24% Managing Member Sample Organizational Chart Limited Liability Corporation (For Profit)

3. The Voice, LLC Mortgagor 100% Owner Adam Levine 76% Managing Member Blake Shelton 24% Member Sample Organizational Chart Limited Liability Corporation (For Profit)

4. Born in Chicago, LLC Mortgagor 100% Owner Actors, LLC 50% Managing Member Harrison Ford 51% Managing Member Donald O’Connor 49% Member Singers, LP 50% Member Nat King Cole 49% General Partner Dancers, LP 51% Limited Partner Bob Fosse 25% General Partner Other Limited Partners < 10% each Sample Organizational Chart Limited Liability Company (For Profit) EFFECTIVE INTEREST 25.5% Eff 24.5% Eff 25.5% Eff 6.375% Eff

5. The Fab Four, LLC Mortgagor 100% Owner Eleanor Rigby, LLC 10% Managing Member Yoko Ono 1% Managing Member John Lennon 99% member Penny Lane, Inc. 90% Member Ringo Starr President George Harrison Secretary Paul McCartney Treasurer Sample Organizational Chart Limited Liability Corporation (For Profit) 80% Shareholder 20% Shareholder

6. The Fab Four, LLC Mortgagor 100% Owner Eleanor Rigby, LLC 10% Managing Member Yoko Ono 1% Managing Member John Lennon 99% member Penny Lane, Inc. 90% Member Ringo Starr President George Harrison Secretary Paul McCartney Treasurer Liverpool Ltd. A United Kington Corporation 100% Shareholder Sample Organizational Chart Limited Liability Corporation (For Profit)

7. Bootleggers, LLC Mortgagor 100% Owner Windy City, LLC 76% Managing Member Dion O’Banion 40% Managing Member John Dillinger 30% Member Alfonse Capone 30% Member Second City, LP 24% Member Sample Organizational Chart Limited Liability Company (For Profit) EFFECTIVE INTEREST 30.4% Eff22.8% Eff

8. Bootleggers, LLC Mortgagor 100% Owner Windy City, LLC 76% Managing Member Dion O’Banion 40% Managing Member John Dillinger 30% Member Alfonse Capone 30% Member Second City, LP 24% Member Bugs Moran 50% Managing Member Alfonse Capone 50% Member Sample Organizational Chart Limited Liability Company (For Profit) EFFECTIVE INTEREST 30.4% Eff22.8% Eff 34.8% Eff 12.0% Eff 34.8% Eff

9. Mortgage Credit Top 10 Issues Do the Principals has successful and comparable experience - Type, scope, size, operationally, market. Unclear and/or insufficient detail in the Organizational Charts/Borrower Narratives - Do they match the org docs Failure to adequately identify Section 50 Signatory Net Worth and Liquidity - Analyze and identify adjustments. Do they tie to the REO. VODs – Is there enough cash to close – if it’s a cash-out, do you need a VOD? REO/Debt Schedule - Insufficient analysis of portfolio and risk Active Principals, if aging and/or retiring, what is the succession plan?

10. Multi-layered financing - detailed S&U and flow of funds Acquisitions/Recently Acquired Projects - previous financials Processing Inconsistencies - HUD Forms, Narrative, etc. MAP Guide Handbooks Notices MLs HUD Forms IOD’s & Reserves Credit Reports Financial Stmts & REO

11. Single Asset Mortgagor Entity Acceptable Forms General Partnership (GP) with two or more general partners. Limited Partnership (LP) with one or more general partners and one or more limited partners. Corporation, C Corporation, or S Corporation with shareholder owners and corporate officers and directors who may or may not be shareholders. Limited Liability Company (LLC) composed of members, with one or more managing members and one or more investor members. Trust with beneficiaries and one or more trustees (when borrower is a trust the duration of the trust must be equal to or longer than the term on the FHA Note). Nonprofit Corporation with officers and directors. Any other public or private single asset borrower entity. Unacceptable Forms Natural Persons Delaware Statutory Trusts Foreign entities Tenants in Common

12. Mortgagor Entity with Foreign Nationals We know that foreign entities are not acceptable mortgagor entities. Both LLCs above are single asset mortgagor entities that are registered in the United States. Which of the above is/are acceptable HUD mortgagors? Hail to the Queen, LLC D. Beckham 50% Managing Member Foreign National residing in the US K. Knightly 50% Managing Member Non Citizen/ Non Foreign National AB JB+SG 4EVA, LLC Selena 5% Managing Member Non Citizen/ Non Foreign National Justin 95% Member US Citizen

13. Definition A person who was born outside the jurisdiction of the United States, is a citizen of a foreign country, and has not become a naturalized U.S. citizen under U.S. law. This includes Legal Permanent Residents (also known as Permanent Resident Aliens). This definition presumably also applies to anyone who has successfully renounced his or her U.S. citizenship.

14. Answer: A but not B Why? Generally, foreign nationals and corporate entities may participate as Principals. However, borrower entity must be registered in the United States. At least one principal with operational decision-making authority must be a United States citizen or a foreign national lawfully residing in the United States, having an immigration status granted by the United States government that would enable that person to exercise such authority. This is a departure from the current MAP Guide which requires at least one principal with operational decision-making authority must be a United States citizen (there is no foreign national allowance).

15. Who is a Principal? 2016 MAP Guide Definition: Individuals or entities that exercise operational and/or financial control over a project. There are two types:  Active Principal – responsible for mortgagor’s ability to execute any/all activities for the benefit of the project, regardless of the extent of ownership interest  Passive Principal – has limited or no decision making power or control, but has an ownership interest of >25% (10% for corporations) HUD’s 2016 MAP Guide Take Determination of a Principal is intended to be more subjective  Lender’s Underwriter’s responsibility to make the determination who is a Principal  Individual/Entity may be considered a Principal even though they don’t have control per the org docs and hold a less than the 25% (10% for corporations) interest if they are truly are the ones in control

16. Common attributes of a Principal: Maintains significant decision making authority May have significant ownership interest Involves active participation in directing the affairs of the entity

17. Who is a Principal? Q. On a 221(d)(4) project, you have an individual who is a 10% member of an LLC borrower entity. Because this person only owned a 10% interest and did not have a managing title, you did not include him in mortgage credit in your application. Now the project is under construction and all of the change orders and email correspondence with HUD are coming from him. Will this raise any concerns with HUD? (You’re in 2016 MAP Guide world) A. Yes. HUD has communicated that it is the lender’s responsibility to determine who is actually controlling the project.

18. So what could you have done differently? Ask about the organizational structure – don’t assume that the org chart they gave you tells the whole story. Read the organizational documents. Org docs should spell out exactly who has what authority. Paraphrase from Dan Sullivan: It is the Lender’s responsibility to determine who is actually controlling the project. If owner reconfigured structure to remove a Principal from scrutiny per the hard-line definition but that person is still running the show (all the emails come from them, and they are on all the conference calls) it would raise concerns to HUD about the integrity of the application.

19. The Three Contexts of a Principal 2016 MAP Guide specifies three contexts in which Underwriters should consider Principals: 1. 2530/APPS: Individuals or entities which must be disclosed for Previous Participation review 2. Section 50: Persons or entities required to execute Section 50 of the HUD Regulatory Agreement 3. Mortgage Credit Review: Individuals or entities which possess financial and/or legal control of the borrower, thereby requiring full or limited financial and credit analyses.

20. Who Is subject to Mortgage credit review?  Active and Passive Principals (previously defined)  Investors that have exceed the $250 million level for purposes of concentrated risk approval, or who wish to avoid exceeding the limit and invest as a passive investor with a less than 25% interest (10% for corporations)  An investor qualifying as a key financial partner from both a financial strength standpoint and cash requirement contribution but still maintains an ownership interest of less than 25% (10% for corporations). HUD’s 2016 MAP Guide Take Lender’s Underwriter needs to perform full due diligence to determine the extent of mortgage credit investigation. HUD is placing a larger burden on the Underwriter to decide if a full or limited credit analysis is appropriate.

21. $250 Million Concentration of Risk Q. You’re trying to determine if your application for mortgage insurance will cause a Principal to trigger the $250 million of outstanding FHA insured debt threshold. You see they have loans under four different programs: MAP, LEAN, a State Housing Finance Agency, and Government Sponsored Enterprise Risk Sharing. The loans under which of these programs should be counted towards the $250 million limit? A. MAP and LEAN. Only FHA insured loans are counted but make sure to include not only multifamily, but healthcare as well.

22. $250 Million Concentration of Risk Q. You have a Principal who is going to exceed the $250 million limit in their next application for FHA mortgage insurance. You are simultaneously underwriting a 223(f), a 223(a)(7), and a 232/223(f) for the this Principal. Which, if any, of these applications can you submit without prior credit approval? A. The 223(a)(7) and 232/223(f). 223(a)(7)s and healthcare transactions do not require prior approval for Principals with insured assets in excess of $250 million. All other MAP transactions require prior approval.

23. Who Is NOT subject to Mortgage credit review? 1. Investor entities with limited liability benefiting from tax credits (ie low-income housing tax credit) 2. Public Housing Agencies (PHAs) where the PHA is acting in its capacity as a PHA owning and/or operating public housing. However, PHAs are expected to form single asset entities to hold properties financed with FHA mortgage insurance. 3. Passive Principals who have limited or no decision making power or control over the ownership entity. A passive Principal’s financial or other obligations to the borrower and the property may be fixed and defined before endorsement, with the borrower or its Principals having limited or no power to compel a passive Principal to increase its obligations. A passive Principal may have limited power singly or with others, or no power to remove, replace or diminish the powers, or alter the compensation of Principals. As used here “limited” means that the rights of a passive Principal to exert control or effect decisions that are defined in organizational documents and are limited to specific actions intended to remedy negligence or default by a Principal, or to protect the passive Principal from loss due to a default or failure of performance by the borrower.

24. What is involved in A Typical Full credit review?  Resume  Credit reports/credit references  Form 92013-SUPP  REO/Debt Schedule  Financial statements  Verification of Deposits or Equivalent Statement  Internet Search  OFAC/Terrorism Check  Previous Participation - 2530/APPs

25. Full credit review Resume demonstrating experience in rental real estate and development Credit release and credit report Exception for non profits: Limit to the borrowing entity and its parent corporation (don’t need for members of a non-profit Board of Directors) Should be current within 60 days of submission Lender should explain items of concern such as low FICO/credit scores (under 650 considered negative), liens/judgments/lawsuits/bankruptcy, poor payment history HUD-92013 Supp REO/Debt Schedule with supporting documentation for loans that are of concern or Debt coming due in near future Financial statements VOD for financial partner(s) OFAC/ terrorism checks (Patriot Act) Limited denial of participation: shows entities restricted from using certain HUD programs (https://www5.hud.gov/ecpcis/main/ECPCIS_List.jsp)https://www5.hud.gov/ecpcis/main/ECPCIS_List.jsp OFAC: terrorist check (http://apps.finra.org/rulesregulation/ofac/1/)http://apps.finra.org/rulesregulation/ofac/1/ APPS/HUD-2530 – make sure ever entity and every person is registered n APPS if submitting paper 2530s.

26. Principal Credit Review Q. According to the MAP Guide, Principals with repaired credit may be considered for approval provided that a positive credit history has been established for a sustained period of time encompassing both favorable and unfavorable economic conditions and that the principal has during that time been engaged in financial transactions and/or business enterprise comparable in scale to the proposed insured mortgage transaction. This period should be at least how many years? A. 7 Years

27. Non-profit principals  Generally understood to mean the borrowing entity and its Board of Directors.  “Sponsor” – informal term used to define persons or entities who assist in development of the project oSponsor is not the Single Asset Mortgagor Entity though they may also act as a Principal in the ownership entity.  Nonprofit Principal and Sponsor Must demonstrate financial strength, credit history, experience and capacity. oExecutive officers and any development consultants must provide resumes evidencing experience oOfficers will only provide the previous participation certification.

28. Other Participants Credit Review Q. Answer the following true/false questions (you are in 2016 MAP Guide world): 1.You have a GC that is a 0.01% member of the mortgagor for purposes of BSPRA. In most circumstances, you should collect an REO/Debt Schedule for this entity. A. False. But you do need an REO/Debt Schedule for a true IOI GC not just set up for BSPRA purposes. 2.You have a third party Management Agent. You need to collect a credit authorization and run a credit report on this entity. A. True. Note this is a change from the 2011 MAP Guide.

29. Other Participants: What is required?  General Contractor: Must provide identical exhibits as a Principal (less REO) For true IOI GC, not just BSPRA, also need REO  Management Agent: Resume and Credit report oFor IOI Management Agents, financial statement review is also required  Fee Developer: Resume, Credit Report, Financial Statements  Consultant: Resume  Design Architect/Engineer: Resume

30. Section 50 Q. You have a non-profit mortgagor entity and are recommending Section 50 signatories. Can you recommend the non-profit mortgagor entity itself? (You are in 2016 MAP Guide world) A. No - The mortgagor entity itself should not be recommended as the Section 50 signatory, even in the case of a non-profit borrower. This is a change from the 2011 MAP Guide. So who do you recommend?

31. Regulatory agreement - Section 50 The lender shall recommend the individual(s) and/or entity(s) to sign Section 50. This person/entity should possesses a positive credit history and adequate financial strength relative to the size of the loan. Privately Held Entities (most typical): Generally requires two signatures (1) an individual in his or her individual capacity and (2) the project parent/sponsor entity to sign in a corporate capacity.  In some circumstances, particularly involving large, capitalized, and experienced corporate entities with complex corporate organizational structures, the underwriting may not reveal any apparent individual to reasonably serve in the required capacity, whereas the parent/sponsor entity itself may possess such necessary characteristics to act as the sole necessary signatory. Publicly traded corporations, REITs, Nonprofit organizations: Parent/sponsor entity itself is acceptable as the sole signatory.  The individual signing on behalf of the corporate entity does not sign in an individual capacity, but to bind the parent/sponsor. No personal liability will be claimed against the individuals signing in such a capacity.  For nonprofit borrowers, the parent/sponsor entity should be named. The Single Asset Mortgagor Entity should not be the signatory named in Section 50.

32. Note that the Section 50 signatory is NOT the mortgagor. It is usually the “main” Principal Sometimes there won’t have another entity; may just be the individually directly owning the mortgagor Current MAP Guide didn’t specify two signatories so we should hopefully see a reduction in offices requesting multiple individuals to sign the Section 50. The current MAP Guide specifies that the Non-Profit borrower may be the signatory itself. This has been altered in the new MAP Guide Don’t forget Section 50 pertains to 223(a)(7)s also.

33. Analyzing Credit Reports Purpose: Demonstrates the individual/entity’s: 1.Willingness and ability to pay creditors in accordance with agreed terms 2.Ability to deliver timely and satisfactory performance of contractual or business obligations 3.Mitigation of litigation risks by honoring prior loan obligations (especially during adverse market/financial conditions)  Compare information from credit reports to financial statements. Resolve or explain contradictory information.  Determine if in default on any type of federal debt including direct loans, HUD insured loans, student loans, Small Business Administration loans or judgment liens against the property. oDelinquent federal debt then must include (a) detailed written expiation from applicant, (b) letter from affected agency saying debt is now current or arrangements have been made, and (c) lender’s reason for recommendation  Investigate/explain adverse information such as late payments, actions, or judgments. oCredit scores below 650 generally considered negative

34. Analyzing Financial Statements Current Assets: can be made liquid in 12 months or less.  Cash  Readily marketable stocks and bonds (value at current market value)  Receivables to be collected within 1 year  Inventory if statement is audited (disregard if statement unaudited)  Prepaid expense Long-term Assets: cannot be made liquid within 12 months.  Receivables that include: amounts due from officers and employees, amounts advanced to associated companies, disputed amounts, past 60 days due  Cash equity in land and/or properties that are not readily marketable and intended for the sale market Current Liabilities: payables due within 12 months.  Liabilities relating to marketable land and/or properties that were treated as current assets  Amounts due officers, employees, affiliates, or stockholders unless obligations have a definite long-term maturity  Current portion of long-term liabilities  Current year tax payables Working Capital = current assets – current liabilities Net worth = total assets – total liabilities

35. Financial Statements Things to Keep in Mind Personal Financial Statements  If spouse included on form, must also get spouse’s signature. If can’t obtain signature of spouse, must only have assets for individual  New certification language contained in Appendix 8A Audited Financial Statements  Lots of information can be found in the notes to a financial statement notes so read these! Here are some examples: Name of ownership, type of entity, date of inception Property description Date property was placed into service/owned by borrower Clarification on recognition of income Explanation of capital expenses and operating expenses Identification of annual replacement reserve deposits Mortgages payable Advances from affiliates or related party transactions Management Fees Restricted cash 3 rd party contract commitments Property, plant, and equipment valuation Capital leases and leasehold improvements Contingent liabilities Pending legal actions Impairment of long-term assets

36. Analyzing REO/Debt Schedules Purpose: To determine exposure to risk associated with real estate. Generally, the REO Schedule lends credibility to asset values reported on the principal’s financial statements by requiring detailed information on each real estate asset, and serves as a cross-check to the financial statements. Notes:  Only properties used for commercial purposes need to be included on Schedule  UW should perform an analysis of properties’ net operating income, outstanding indebtedness, cash flow and valuation estimates. Especially important for projects that have maturing balloon debt.  Explain properties that have: oOccupancy below 85% oMaturing debt (within 5 years) oDSCR < 1 (assuming portfolio as a whole is performing) oLTV > 80%  UW should reconcile/explain when REO schedule materially differs from the financial statements, and are not due to minor variations arising from timing of statements or changes in principal balances.

37. Other 2016 MAP Guide Changes to Note  Defeasance Fees/Yield Maintenance: Now allowed if less than 10% of the proposed FHA insured loan amount.  Equity out Procedures: Waivers to allow holding back less than 50% of cash out proceeds will be considered when the holdback is greater than both $1,000,000, and the assurance of completion escrow is 20% of repair costs. The owner must have demonstrated the ability to complete repairs in a timely manner, and a commitment to keeping the property in good repair with no deferred maintenance.

38. Final Question Q. Mr. Smith, one of two managing members of the LLC mortgagor, has a history of being 35-40 days late on some of his mortgage and credit card payments. He says he’s busy and sometimes forgets to pay on time. Is he a mortgage credit reject? A. It depends.

39. Mortgage Credit is subjective. It is not black and white, and it is not check the boxes. Things to consider: Does he have the money to pay his bills? How is the rest of his mortgage credit analysis? Is the other managing member responsible with strong mortgage credit? What is the performance of his REO?

40. SPECIAL THANKS TO ANGELA FOLKERS AND RICK SHERMAN Questions?