Integrating FHA & LIHTC, along other Federal, State and Local Financing Opportunities Presented by: David PinsonJennifer Doran Massey Oppenheimer & Co.Highland Commercial Mortgage John RuckerJon Killough Merchant CapitalRockport Mortgage Corporation

“I went to see a fight and a tax-credit deal broke out”

Definition of Affordable Housing Mortgagee Letter “Affordable” is defined as:  Projects that have a recorded regulatory agreement in effect at least 15 years after final endorsement  Projects that meet at least the minimum Low Income Housing Tax Credit (LIHTC) restrictions of : –20% of units at 50% of the Area Median Income(AMI) –40% of units at 60% of AMI with economic rents (i.e. the portion paid by the tenants) on those units no greater than Low Income Tax Credit rents, and – mixed income projects if the minimum low income unit rent and occupancy restrictions and regulatory agreement meet the above criteria.

2010/2011 Underwriting Changes Debt Coverage & LTV Ratios Properties with 90% HAP units, or rent restrictions on 100% of the units and rents at least 20% below market, can continue to be underwritten up to a 95% occupancy; all others have a 93% maximum. Minimum Replacement Reserve deposit is $250/unit/year. A new PCNA is required every 10 years, along with a recalculation of the annual deposit. REO Schedules ODE & WC Changes

Low Income Housing Tax Credits 9% (9% of total eligible mortgageable costs annual allocation for 10 years with compliance period for 15 years.  Competitive process; strict time frames  Maybe 1 in 5 applications get selected particularly in popular markets.  Outlying markets and rural counties are less competitive  Biggest benefit in equity contribution from investment market.

LIHTC’s (cont.)  4% (4% of total eligible mortgageable costs annual allocation for 10 years with compliance period for 15 years.  Non competitive (except if duplicated in certain market areas). Just meet the allocation plan and application requirements.  Coupled with Tax Exempt Private Activity Bonds  Market pricing may not be as competitive as 9%’s but still are well accepted.  Equity benefit not as great as 9% but compliance is less stringent. (e.g. all or at least the minimum number of units may be at 60% of the AMI.

Key Multifamily Programs – Outside of FHA/LIHTC Multifamily HOME Programs (Administered by most State HFAs) The HOME Investment Partnerships Program helps expand the supply of decent, affordable housing for low and very low income families by providing grants to local governments and nonprofit and for profit developers for housing purposes. The Multifamily HOME activities include rental production for Community Housing Development Organizations (CHDOs) and other applicants, as well as operating expenses for CHDOs.Multifamily HOME Programs Housing Tax Credit Program The Housing Tax Credit (HTC) Program receives authority from the U.S. Treasury Department to provide tax credits to nonprofits, for-profit developers, and syndicators (or investors). The targeted beneficiaries of the program are low income families at or below 60% AMFI. The program's purpose is to encourage the development and preservation of rental housing for low income families, provide for the participation of for-profit and nonprofit organizations in the program, maximize the number of units added to the state's housing supply, and prevent losses in the state's supply of affordable housing.Housing Tax Credit Program

Key Multifamily Programs – Outside of FHA/LIHTC Key Multifamily Programs – Outside of FHA/LIHTC (continued) Multifamily Bond Program The Multifamily Bond Program issues taxable and tax-exempt mortgage revenue bonds (MRBs) to fund loans to nonprofit and for- profit developers. The proceeds of the bonds are used to finance the construction, acquisition, or rehabilitation of multifamily properties, with the targeted beneficiaries being low income households. Property owners are also required to offer a variety of services to benefit the residents of the development.Multifamily Bond Program Multifamily Preservation Preservation of existing affordable and subsidized housing stock is a critical element to achieving the Department's mission to provide safe, decent and affordable housing.Multifamily Preservation

Where FHA Financing works with LIHTCs 221(d)(4) NC & Sub-Rehab –HFAs Permitting (i.e. what constitutes a commitment), and timing constraints –Insurance Upon Completion 223(f) & 223(f) Pilot Program –Increase FHA’s Affordable Housing Production –Implement HERA’s Pilot Program Mandate Through Accelerated Processing Compatible with Tax Credit Program Requirements –Outcome: Complete FHA Loan Processing in 120 Days, from Application to Closing

General Overview of the LIHTC & Current Market Conditions General Overview and Industry Position –The LIHTC has a successful track record - The LIHTC program has low rates of foreclosure (less than 0.1%) and noncompliance with program rules and is maintaining affordable rental housing stock over the long- term. Attributed to the involvement of third party for-profit partners, the placement of construction, lease-up and occupancy risk on the sponsors and investors instead of the federal government, the delivery of LIHTC benefits over time, and state and federal oversight. –The LIHTC program can be used to enhance other government housing programs - Combining the LIHTC program with other affordable rental housing programs strengthens those other programs and enables the LIHTC to serve even lower income families and seniors and/or provide more services to residents. –Annual Investment is $8 to $10 Billion, producing 85,000+/- of affordable/workforce housing annually per NHBA.

General Overview of the LIHTC & Current Market Conditions Reasons for Successful Track Record of LIHTC - There are several components that contribute to the successful track record of the LIHTC: –1. Large dollar investments from third-party investors (non-federal sources) –2. Screening of properties before development by third-party investors –3. Economies of scale and uniform practices –4. Construction and/or reconstruction risk and lease-up risk borne by investors and developers –5. Tax credits received for performance over time –6. State level allocation, customization and oversight –7. Regulatory guidance from the IRS and enforcement by IRS auditors

General Overview of the LIHTC & Current Market Conditions Overall Statistics since inception of LIHTC Program for Region IV HUD Region IVLIHTCs AllocatedNumber of Units DeliveredJobs Created 1Alabama $ 2,200,000,000 41,059 47,628 2Florida $ 6,800,000, , ,523 3Georgia $ 3,210,000, , ,631 4Kentucky $ 1,000,000,000 28,280 34,804 5Mississippi $ 2,000,000,000 45,454 52,726 6North Carolina $ 3,000,000,000 59,701 69,253 7Puerto Rico $ 2,000,000,000 12,972 15,047 8South Carolina $ 1,600,000,000 30,679 35,587 9Tennessee $ 2,400,000,000 54,334 60,027 10U.S. Virgin Islands Included in PR $ 24,210,000, , ,226

General Overview of the LIHTC & Current Market Conditions Programmatic Hurdles and legislative focus of the industry –H.R and S H.R. 3661S Making permanent and expanding the temporary minimum credit rate for the low-income housing tax credit program (9% LIHTCs). –Yield driven investors exiting the market, given that IRRs are approaching 6.00%+/-; larger syndicators are painting the picture for lower pricing for the remainder of –CRA still a focus of the money center banks that are still purchasing LIHTCs.

General Overview & Hot Topics in Tax-Exempt Bond Financing Combining Tax Exempt, Short-Term Bonds with Taxable GNMA Sale for Affordable Apartment Financings  In the fall of 2008 the world of long-term debt investors fled to the safety of U.S. Treasury bonds.  At the same time, yields on tax exempt municipals soared to new heights as concerns about credit quality and liquidity mounted.  Long-term AAA rated bonds rates soared above the rates of federally taxable US Treasury Bonds  We are in an upside down world today with continuing economic uncertainty in Europe  And with the uncertain future of municipal bonds

General Overview & Hot Topics in Tax-Exempt Bond Financing (continued) Long Term Rate Comparison: 30-Year MMD (Tax Exempt) (Green Line) versus 10-Year Constant Maturity Treasury (Taxable) (Yellow Line): Jan 1, Present

General Overview & Hot Topics in Tax-Exempt Bond Financing (continued)

General Overview & Hot Topics in Tax-Exempt Bond Financing Result: –TE Bond proceeds spent on qualified Project costs as contemplated by Section 142(d) of Internal Revenue Code –Bonds rated same high investment grade rating as GIC Provider – AA or AAA, with no separate credit enhancement Net Results – Borrower: –100+ BPS Savings in Permanent Borrowing Rate, resulting in a lower cost of capital over the life of the loan –Negative Arb. reduced from 6-8 points or more to 1-2 points –Full syndication value of 4% LIHTC equity on affordable units achieved

General Overview & Hot Topics in Tax-Exempt Bond Financing Net Results – IRS: –Tax-Exempt Bond proceeds used to fund Qualified Project Costs – significantly lower TE Bond amount than if FHA loan had been funded with long-term tax exempt bond issue –No arbitrage “artifice or device” - all TE Bond Proceeds (and replacement proceeds in GIC B) invested at far below TE Bond yield –No “over issuance” of bonds or “overburdening” of market - only enough TE Bonds to meet 50% test, and outstanding 2 yrs. versus 42.5 yrs.

Piecing It All Together: Case Study of Garden Oaks Apartments Previously Section 202 property with 100% HAP contract The project was HUD-held due to foreclosure following damage from Hurricane Katrina Experienced developer purchased the project from HUD Developer utilized 4% LIHTC to generate equity Short term TE bond issue during construction HUD’s focus was on the “conventional” 221(d)(4) Continued bond compliance period after redemption of bonds

Sources and Uses First Mortgage $ 9,000,000 LIHTC Equity $ 3,455,400 FHLB Funds $ 500,200 LOC $ 878,400 Total Sources$13,834,000 Development Costs $ 10,544,700 Operating Deficit $ 472,800 Working Capital $ 360,000 Other Costs $ 2,456,500 Total Uses $ 13,834,000

Piecing It All Together: Case Study of Garden Oaks Apartments Before Rehabilitation:

Piecing It All Together: Case Study of Garden Oaks Apartments During Rehabilitation:

What the Next Year Holds – as the programs continue to mesh together RAD –Number of Units to be addressed – 60k –FHA financing will be key to program success –9% cycles will be difficult given timing PILOT Program –Permanent 3-year rule waiver for affordable housing –Expanding Field of PILOT Lenders & Participating Offices

In Closing…