1. THOUGHTS ON PRESERVING RD MFH BEFORE IT’S MORTGAGE MATURITY CRISIS Larry Anderson VP RHPA 571-296-4746 landerson@rhpallc.com 4-15-2016

3. What’s the Mortgage Maturity crisis? In FY15 - RD released data showing three quarters of the MFH portfolio will be lost in ten years (14,492 projects to 3,979) due to mortgages reaching the end of their loan term. Loss is despite a large and growing need for affordable rentals RD provides stopgap measures (4-15 UNL) to extend life for those before FY19 (ream, deferral, MPR priority) and protect tenants (apply for prepayment - notice). How’s that working? No plan yet for those leaving in FY 2019 and after. Why no plan? Some tough issues to consider are what happens to the RA WINDFALL, and the CHALLENGE of preserving maturing properties with limited resources Are there solutions? Sure – Use RA WINDFALL as it becomes available, make it easier for mission based owners to stay in the program, and encourage more preservation

4. RA WINDFALL - The loss of MFH projects mean dramatically fewer tenants and less RA funding needed. Will this be just “deficit reduction” or used to preserve the remaining portfolio? MFH will be three fourths gone in 10 years – The pace of the loss picks up sharply in FY19 when 1,100 projects go RA funding drops – RA funding drops from $1.1 B in FY15 to $350 M in FY 24. Less than $1B by FY 19

5. Washington mortgage maturity loss – remaining balances

6. RA WINDFALL – As RD continues to disinvest and old mortgages mature – RA outlays drop significantly – peak in FY 14 Data in millions – estimates of windfall if obligations freeze at FY17 level Rural Housing Preservation Associates, LLC - contact Larry Anderson at landerson@rhpallc.com

7. Outlays peak at $1.146 B in FY14 – Obligations (grey) peak in FY16 at $200 million over outlays (tan) – What happens to extra RA? Data in millions – Estimates for FY 17 obligations and FY16 -17 outlays Rural Housing Preservation Associates, LLC - contact Larry Anderson at landerson@rhpallc.com

8. Significantly, USDA occupancy reports show RA units peaked in FY13 – the portfolio is now losing roughly 850 RA units a year

9. A realistic balance between outlays and obligations based on RA losses since FY 13 – The potential for a $200 M RA surplus is identified below.

10. What does RD HQ say about an RA surplus? “We can’t tell you until the end of the fiscal year” - why is this a problem? RD built the RA Tool to identify future renewal need – they have the data! Delay increases the risk of the loss or burial of the RA surplus Why is it important for RD to make RA available for “servicing” now? 54,000 tenants who are eligible and need RA don’t have it Thousands of properties that need RA to charge sustainable rents can’t Thousands of preservation deals to avoid mortgage maturity can’t be funded Time is needed for an effective and fair distribution of RA resources What has RD done in the past with more RA than needed? Owners told no RA available for servicing RA buried and used to future fund renewals What’s different now? RA funding tool is accurate, need for speculative future funding reduced “Future funding” creates “peaks & valleys” - reduces credibility in requests Sustainability/preservation RA needed NOW to address mortgage maturity!

11. * For owners ready to go – no tenant obligations is a good thing. Key preservation challenges How close to maturity is the loan? Is the owner market or mission based? Is the property in poor, good or great market? Is the property in poor, good or great condition? How much RA – do rents relate to the market? What are the restrictions? How long does it take to process a transfer? What is the availability of State funding? What is the availability of RD funding? Will RD use available servicing options? Do tenant protections encourage or discourage leaving the program? Does RA policy encourage or discourage leaving the program? * For tenants, mission based owners, purchasers, rural communities and advocates – No tenant subsidy or protections is a big worry. * Key question: What does it take to keep it or get it into the hands of an owner who is mission based?

12. RD preservation activity has been declining and the portfolio has already been shrinking Elimination of incentives, uncertainty over rules and tightening of underwriting has led to a steep decline in the number of projects preserved. Retiring or holding “unused” RA, aggressive servicing, and withholding incentives or workout options have encouraged thousands to leave the program.

13. RD actions that have fostered disinvestment need to be reveresed now! MPR (MFH Preservation and Revitalization Demo) MPR NOFA funding going to vouchers – Annual funding for about a 100 projects in jeopardy to pay for higher than requested voucher funding Transfer FY 12 started to retire RA(2,200 lost) in paid off projects FY 13 stopped States from re-using RA(2,600 to 10,000 held in limbo) Tighter appraisals - new debt rarely works, esp. if RUPs in place Underwriting UNL discourages NPs, rent increases and 3 rd party funders No MFH control over slow CNA, appraisal, architectural or legal reviews Prepayment process No USDA NP advance request since FY 2010 budget No USDA Incentive RA request since FY 2010 budget Current arbitrary freeze on new incentive offers or funding of sale to nonprofits since July 30, 2012. S2NP ban quietly lifted during FY2015. Cloud on all incentives encourages Tucker Act actions. Sales of Inventory Projects – No credit sale funding requested since FY 12 and selling fixed up program properties as “non-program.” Ended all New Construction in FY 2012 – Avg. of 2,000 units lost each year Discouraging Work Outs – Forcing the cancelation of SWOPs, refusing to use rent incentives, no funding for accessibility changes, discouraging consolidations of small properties, not using available RA. Rural Housing Preservation Associates, LLC - contact Larry Anderson at landerson@rhpallc.com

14. Time for a new plan now! – Things to talk about: Use the RA windfall – the RA funding crisis is over Provide guidance and TA to encourage mission based ownership Provide more and better information to support preservation effort Make it easier to get ownership change and rehab accomplished Get preservation numbers up by using existing prepay incentives Use available funding to encourage portfolio transactions Publish funding rules – use 515 money more openly and effectively Better partnerships with States funders who want to save units Bring in the full RD Team – CNA reviewers, appraisers, architects to speed up process – PAT great, but so much more to improve Eliminate incentives to convert to market – huge reserves, no cost tenant protections, refusing to approve common sense servicing plans, allow for re-ams, clarify what happens after 30 year term Steady the RA Boat - Stop pulling RA units out of the program, fully fund RA units, transfer unused RA, no more surprises!

15. Some basic advice on a preservation strategy: Look for deals that work – the four “R” analysis RENTS - What’s the gap between current basic rents, FMR’s and 60% LIHTC? RA - How many RA units and %? Can loans be deferred to reduce RA increase? RUPS – Find out about RUPs and prepayment restrictions (pre or post 89) REHAB – How much (CNA & SOW)? Rehab or Transfer/Rehab? Next Level – RTO, management fee, reserves, current occupancy & eligible for LIHTC, cash flow, RD classification and findings Line up third party money Lots of competition for 9% LIHTC 4% LIHTC with tax exempt bonds are less utilized, but need more units Combine with MPR – usually only deferral is needed (only pre-92 loans) 538 may be an option – expensive, but access to developers fee Consider partnership with NP to score well for AHP or LIHTC Line up green money for long term operational saving, maybe energy generation Work with all to keep process simple and open Meet early and often! Foster strong, positive, friendly, working relationship Rural Housing Preservation Associates, LLC - contact Larry Anderson at landerson@rhpallc.com

16. More ideas beyond the PAT to improve the preservation process Work with developers “upfront” to help manage expectations Sit down, review potential deals, discuss options and make a plan Find better ways to work with properties that don’t fit a market based solutions, but still meet a significant need in the community Use dormant tools – such as consolidations, waivers, deferral, write offs, protective advances or unused RA Make a quick decision on underwriting Use a sales price option that covers “exit taxes” No requirement that sales price equals equity Clarify how “other” components and RUPS fit into a sales price Don’t turn down free money No requirement that all funds are “fungible” Encourage GP buyouts by strong NPs or good mission based entities Two step process – helps facilitate portfolio transactions Develop a new protocol to “pool” reserve funding and reduce project costs - trade easy access to funding for reduced rents Rural Housing Preservation Associates, LLC - contact Larry Anderson at landerson@rhpallc.com