FHA Multifamily MAP Training May 30, U.S. D EPARTMENT OF H OUSING & U RBAN D EVELOPMENT

AGENDA –morning 8:45-9:15am … Pre-test. Introduction, overview of agenda and training objectives. 9:15 -10:00am …Processing/MF FHA :15am … Break 10:15am-12:15pm … Case study 12:15 pm – 1:30pm… Lunch 2 U.S. D EPARTMENT OF H OUSING & U RBAN D EVELOPMENT

AGENDA –afternoon 1:30-3:15pm … Case study 3:15-3:30pm … Break 3:30-4:45pm … Post-training Exam 3 U.S. D EPARTMENT OF H OUSING & U RBAN D EVELOPMENT

MF FHA 101 Basics of FHA financing Basics of FHA financing Overview of Processing Overview of Processing 4 U.S. D EPARTMENT OF H OUSING & U RBAN D EVELOPMENT

MF DEVELOPMENT – OUR MISSION BUILD COMMUNITIES SUPPORT AFFORDABLE HOUSING PROVIDE LIQUIDITY to CAPITAL MARKETS

History History 2000-present MAP 2000-present MAP 6 U.S. D EPARTMENT OF H OUSING & U RBAN D EVELOPMENT

M ULTIFAMILY INSURED LOAN ENDORSEMENTS OVER THE LAST TEN YEARS

PORTFOLIO OF FHA - INSURED MULTIFAMILY APARTMENTS, BY PROPERTY TYPE

MULTIFAMILY LOAN PORTFOLIO BY LOAN VALUE Total Insured Portfolio: $43-Billion as of November 29, 2010 Total Insured Portfolio: $43-Billion as of November 29, 2010

FHA P ROGRAM B ASICS MAP (Multifamily Accelerated Processing): NC/Sub Rehab, Refinance/Acquisition, Supplemental Loans forApartments TAP (Traditional Application Processing): for Other including co-ops, mobile home parks, lender identity of interest __________________________________________ LEAN/Health Care: Assisted Living, Board & Care, Nursing Homes, Hospitals

FHA P ROGRAM B ASICS New Construction / Substantial Rehab: Sections 220 for Mixed Use, 221(d)(4), 231 for Elderly, 241(a) Improvements/Additions Section 221(d)(3) -- to be suspended in FY13 Two stages of processing: Pre-application Firm

FHA P ROGRAM B ASICS Refinance / Acquisition of Existing Properties: Sections 223(a)(7) for already FHA-insured, 223(f) One stage processing only: No Pre-application

FHA P ROGRAM B ASICS What about elderly, age-restricted housing? 221(d)(4) & 223f: May restrict Head of Households (HOH) to 62+; cannot exclude children 231: All residents must be 62+ and/or disabled No FHA MF program may restrict HOH or residents to 55+ (otherwise OK under Fair Housings Hsg for Older Persons Act)

A DVANTAGES OF FHA F INANCING Permanent, fixed rate, long term, fully amortizing Construction/permanent loan combined Useable in C Markets Can be combined with other resources, e.g., Section 8, LIHTC (note: new Tax Credit Pilot) High Leverage, especially with Builders/Sponsors Profit & Risk Allowance (BSPRA) for NC/SR (note: new Risk Mitigation standards, especially for Large Loans) Non-Recourse (note: Regulatory Agreement #50 provision for bad boy carve-out)

D ISADVANTAGES OF FHA F INANCING With increased volume, long processing times (e.g. between 88 and 1,178 days from engagement letter to closing on transactions closed in the last few years by a typical lender) With increased volume and Risk Mitigation, uncertainty about results on deals and relationships with HUD Offices About % NC/SR, % existing property deals are approved; National Loan Committee is approving 90%

D ISADVANTAGES OF FHA F INANCING Mortgage Insurance Premium (MIP) Note increases proposed for FY13 Firm Commitments: NC/SR: from.50% to.70% a7s: from.45% to.50% 223fs, all others:.45% to.60% No increase if with LIHTC or Project Based Section 8 Audited Annual Financial Statements, REAC inspections, possibility of enforcement, semi-annual HUD approval to pull $ out, R4R Potentially more restrictive repair requirements (e.g. smoke detectors, Fair Housing and Accessibility requirements)

O VERVIEW OF P ROCESSING – W HO S W HO Borrower: What/who are they dealing with? Existing debt, partners, the IRS, lenders, the project Single asset mortgagor, management agents, tenants Your friendly lender: Correspondents, originators, [underwriters], construction loan admin, servicing Marketing, advertising, borrower contacts, structuring/ slotting, pre-screening, engagement

Your Friendly Local HUD Office : What they are doing... Screening, publishing queue listing Cashing check (soon to be pay.gov) or sending a letter HUD Technical Review ProgramsA&ECost ValuationEnv.Asset Mgt EMAS LegalFHEO Labor RelationsMortgage Credit Loan Approval – Issuing a Firm Overview of Processing – Whos Who

W HAT WE DO IN U NDERWRITING : Q UESTIONS W E A SK : Will they pay us back? Will enough people live here? When will they do so? How much will they pay for doing so? Will HUD approve it? Given specific program requirements -- e.g., 223f repair limits, Remaining Economic Life, DSCR/LTVs, commercial income standards, environmental requirements -- will it pencil out? Borrower, lender: Can we make money at this?

D ETERMINING INSURABLE MORTGAGE AMOUNT : V ALUE, D EBT S ERVICE C OVERAGE, C OST Net Operating Income (NOI) = Rental Income less Expenses. So what to consider in determining these? See 2264 Section F. Rental Income = Estimated total potential project income + estimated ancillary project income X residential occupancy % = Effective Gross Income (EGI) Subtract total residential & ancillary project expenses = Net Residential Rental Income If commercial income involved, factor it in also, same approach with total potential commercial income X commercial occupancy %, less commercial expenses. = Net Commercial Income Net Residential + Net Commercial = NOI

D ETERMINING INSURABLE MORTGAGE AMOUNT : V ALUE, D EBT S ERVICE C OVERAGE, C OST Value = Net Operating Income Cap Rate Example: NOI = $678,500_____ = $10,051,851 Cap Rate = 6.75% or.0675 If 223(f) market rate, mortgage cannot exceed 83.3% of value. So: $10,051,851 X 83.3% (or.833) = $8,373,100 max. ins. Loan Value = Criterion 3 on HUD A

D ETERMINING INSURABLE MORTGAGE AMOUNT : V ALUE, D EBT S ERVICE C OVERAGE, C OST DSC mortgage = Net Operating Income X Program Limit (Interest rate + MIP + Initial Curtail Rate) Example: NOI = $678,500 X 83.3% (4.5% +.45%MIP % Initial Curtail) = NOI = $678,500 X.833 ( Initial Curtail) = $8,655,000 Debt Service = Criterion 5 on HUD A

D ETERMINING INSURABLE MORTGAGE AMOUNT : V ALUE, D EBT S ERVICE C OVERAGE, C OST Cost-limited mortgage = Mortgageable Costs X Program Limit Mortgageable Costs = Fixed Costs + Variable Costs (e.g., fees) Example: It costs $100 in fixed costs to build a project and 8% of the total costs are variable costs. The mortgage amount is 90% of the total costs. How much is the mortgage?

MORE ARITHMETIC – B ASIC A LGORITHM FOR THE R EPLACEMENT C OST F ORMULA W ORKSHEET Total Cost = $100 (Fixed) + 8% (variable) of Total Cost TC – 8%TC = $100 92%TC = $100 TC = $ = $ Mortgage = 90% of TC = $97.82 Replacement Cost = Criterion 3 on 2264-A Lowest of criteria = controlling mortgage amount

S OME O THER I MPORTANT P ROGRAM R EQUIREMENTS THAT MAY IMPACT UNDERWRITING Davis-Bacon for NC/SR Statutory Limits = Criterion 4 on 2264-A Section 223f repair costs less than $6500/unit X HCP (new policy under review) Commercial limits by Program and Net Rentable Area, EGI More conservative DSC/LTV for Large Loans >$40M Reserve for Replacement $ determined by PCNA Current MAP Guide, e.g. Chapter 9 Environmental 25

B ACK TO THE L ENDER Borrower Acceptance Good Faith Deposit Rate Lock Prep Closing Docs Submit Closing Docs, HUD reviews, ENDORSEMENT!! Construction Loan Administration Transition to Asset Management After the Firm Commitment is issued

C OMING POLICIES (T O BE DISCUSSED ON T UESDAY ) Underwriting (a)7s PCNA/R4R requirements MAP Guide Revision 2 Rental Assistance Demonstration (RAD) lending Lender/underwriter tiering regulation 27

28 10:15 AM -12:15 PM 1 ST C ASE S TUDY : 10:15 AM -12:15 PM 1. Get in teams, introduce each other, and ensure team is familiar with case 2.A Team presents the loan, focusing on strengths and weakness, and issues they analyzed; B Loan Committee Team asks questions 3. Loan Committee deliberates (apart from A team), votes, briefly writes up decision (approve, approve with conditions, or disapprove), hands written decision to a monitor 4. All teams/groups reconvene in main conference room; leaders of B teams acting as loan committees will be prepared to state reasons for their teams decision 5. HUD Trainer moderates further discussion, conducts summary presentation 6. Final questions from participants