S ILK S TREET A PARTMENTS Silk Street Apartments 1 Hogg Avenue Kansas City, Mo A Substantial Rehab 221D-4 project 180 units, 21 Buildings, with retail space A revitalization project A direct-to-firm application MAP Training Material 1

2 SILK STREET APARTMENTS 1 HOGG AVENUE KANSAS CITY, MO CASE MATERIALS INDEX 1.WHEELBARROW SUMMARY REPORT* 2.WHEELBARROW LENDERS DOCUMENTS REPORT* 3.HUD NARRATIVE (AKA LOAN COMMITTEE SUBMISSION)* 4.SLIDES *MATERIALS TO BE HANDED OUT FOR REVIEW BEFORE TRAINING; OTHER MATERIALS TO BE DISTRIBUTED DURING THE TRAINING S ILK S TREET A PARTMENTS

WEAKNESSES  SPONSORSHIP HAS NO EXPERIENCE WITH SIMILAR REHAB/TURNAROUND PROJECTS  THE PRINCIPALS HAVE LIMITED EXPERIENCE  COMPLEX REHAB INVOLVING A COMPLETE LEASE-UP  SOME OF THE PRINCIPALS HAVE LOW CREDIT SCORES  THE OVERALL AMOUNT OF WORKING CAPITAL IS LOW  CONTINGENCY IS CITED AT THE MAX, BUT THIS IS ONLY TRUE UNDER THE PRE-RISK MITIGATION GUIDELINES.  REHAB SCOPE OF WORK IS LIMITED  PROPERTY IS FUNCTIONALLY OBSOLESTE, UNATTRACTIVE AND UNDER-MAINTAINED  “AS IS” OCCUPANCY IS LOW (48%)  “AS IS” NOI IS NEGATIVE  ALL EQUITY IN THE DEAL COMES FROM THE “AS IS” VALUE 3

S ILK S TREET A PARTMENTS Weaknesses (continued)  ENVIRONMENTAL ISSUES - MOLD AND ASBESTOS  LOW OCCUPANCY IN PMA (80% OCCUPIED )  DETERIORATED AND UNMAINTAINED SURROUNDING PROPERTIES  SUBMARKET PRIMARILY 30+ YEAR OLD PROPERTIES, SOME WITHSIGNIFICANT DERERRED MAINTENANCE.  NO PMA POPULATION GROWTH PROJECTED  UNRELATED & DETERIORATED COMMERCIAL PROPERTY ON THE FRONTAGE  NOT PART OF THE OWNERSHIP, LEGAL DESCRIPTION, OR SUBJECT MORTGAGE.  NEGATIVE NOI AND THE “AS-IS” VALUE IS MORE THAN THE EXISTING INDEBTEDNESS. 4

STRENGTHS  OWNERSHIP HAS $3.2 MILLION IN LIQUIDITY  GENERAL CONTRACTOR HAS PREVIOUS EXPERIENCE IN REHAB PROJECTS.  GENERAL CONTRCTOR IS STRONG FINANCIALLY.  UPON COMPLETION OF THE PROPOSED RENOVATION, THE SUBJECT WOULD BE IN MANY RESPECTS SUPERIOR TO MOST OF THE APARTMENT COMMUNITIES IN THE PMA.  THE PROJECT WILL HAVE NO ADVERSE AFFECT ON OTHER HUD INSURED APARTMENT PROPERTIES IN THE MARKET AREA.  THE MANAGEMENT COMPANY AND CONTRACTOR ARE CONSIDERED TO HAVE THE FINANCIAL CAPACITY EXPERIENCE, MOTIVATION AND INTEGRITY TO BE SUCCESSFUL IN THE LONG-TERM OPERATION OF THE SUBJECT PROPERTY. Silk Street Apartments 5

MORTGAGE CREDIT MODULE  OWNER EXPERIENCE  RESUMES?  OWNER HAS LIMITED EXPERIENCE  NO EXPERIENCE WITH SIMILAR REHAB OR DISTRESSED PROJECTS OF THIS SIZE Silk Street Apartments 6

 MORTGAGE CREDIT MODULE (CONTINUED)  FINANCIAL CAPACITY: WOKING CAPITAL ANALYSIS: (EXAMPLE) CURRENT ASSETS/CURRENT LIABILITIES = 2% OR GREATER Current Assets = $1,525,500(FROM STATEMENTS) Current Liabilities = 525,500(FROM STATEMENTS) Working Capital = 2.9% Silk Street Apartments 7

VALUATION MODULE  THE PROJECT HAS NEGATIVE NOI AND WILL CONTINUE TO OPERATE AT A NEGATIVE NOI DURING CONSTRUCTION.  WHAT ARE THE ACCEPTABLE TECHNIQUES TO VALUE A NEGATIVE CASHFLOW PROPERTY?  RESIDUAL NOT PREFERRED, BUT ACCEPTABLE IF NO DATA  DIRECT COMPARISON WITH SIMILARLY DISTRESSED PROPERTIES PREFERRED METHOD  IS THE INCOME & SALES COMPARISON “AS IF STABILIZED” APPROACH USEFUL?  IS THE PURCHASE PRICE A RELIABLE INDICATOR OF VALUE?  ANSWER: APPRAISER DID MORE THAN HE NEEDED TO, AND SUPPORTED THE CONCLUSION MORE THAN ADEQUATELY  WILL THE LIMITED REHABILITATION SCOPE OF WORK CURE THE FUNCTIONAL OBSOLENSCENCE? Silk Street Apartments 8

VALUATION (CONTINUED)  MARKET RELATED ISSUES:  EMAS OPINES INSUFFICIENT GROWTH IN DEMAND TO ADDITIONAL UNITS IN PMA.  THE PROJECT IS LOCATED IN A MARKET WITH A VACANCY OF 20%, YET THE MARKET STUDY IDENTIFIES PENT-UP DEMAND. IS THIS POSSIBLE AND CAN YOU BASE DEMAND SOLELY ON PENT-UP DEMAND?  WILL THE REHABILITATION AND CHANGE IN OWNERSHIP OVERCOME A PROPERTY STIGMATIZED BY A BAD REPUTATION? Silk Street Apartments 9

VALUATION (CONTINUED)  COMMERCIAL PROPERTY NOT PART OF THE PROJECT:  LACK OF CONTROL MAY NEGATIVELY AFFECT THE PROJECT  UNDESIRABLE OR UNSAVORY COMMERCIAL TENNANTS COULD BE A PROBLEM  DEFERRED MAINTENANCE COULD BE A PROBLEM  PARKING AND TRAFFIC RELATED ISSUES COULD BE A PROBLEM  POSSIBLE MITIGANTS:  BUILDING DESIGN COULD POTENTIALLY MINIMIZE THE COMMERCIAL PROPERTY’S IMPACT  LANDSCAPING OR SITE DESIGN TO SEPARATE OR OTHERWISE MINIMIZE THE POTENTIAL IMPACT Silk Street Apartments 10

VALUATION (CONTINUED)  LOCATED IN AN OLDER, FULLY DEVELOPED PART OF KANSAS CITY:  MAJORITY OF SURROUNDING PROPERTIES ARE 30+ YEARS OLD, CLASS B & C PROPERTIES  MAY BE AN OVER-IMPROVEMENT FOR THE MARKET.  DOES IT MATCH IT’S SURROUNDING ENVIRONS?  COMPARABLES WILL LIKELY BE FROM OUTSIDE OF THE PMA BY NECESSITY, THEIR RELEVANCY MUST BE SCRUTINIZED.  MITIGANT:  NO NEW PRODUCT PLANNED, THE SUBJECT WILL LIKELY HAVE LITTLE COMPETITION DURING LEASE-UP. Silk Street Apartments 11

VALUATION (CONTINUED)  MEDIAN HH INCOME IN PMA IS LOWER THAN THE KANSAS STATE AVERAGE, AND GROWTH HAS BEEN SLOW.  AFTER REHAB, RENTS WILL INCREASE. THE PROPOSAL INDICATES A RISE OF APPROXIMATELY $50/MO/UNIT. IS THIS SIGNIFICANT?  WILL THE ANTICIPATED 86 CURRENT TENANTS REALLY STAY AFTER COMPLETION? WILL THEY BE ABLE TO AFFORD THE NEW RENTS? HOW WILL THIS IMPACT THE ABSORPTION ANALYSIS? Silk Street Apartments 12

VALUATION (CONTINUED)  ENVIRONMENTAL ISSUES:  ASBESTOS, LEAD BASED PAINT AND MOLD IDENTIFIED ON SITE.  OLD FEMA FLOOD DATS. (AND FLOOD ZONES ON THE NORTH AND WESTERN EDGES OF THE SITE INDICATE FLOODING IS AN ISSUE) Silk Street Apartments 13

DECISION  WHAT WOULD BE YOUR DECISION?  WHY? Silk Street Apartments 14

SILK STREET APARTMENTS The Answer THE NATIONAL LOAN COMMITTEE WAS UNABLE TO APPROVE THE ISSUANCE OF THE FIRM COMMITMENT FOR SILK STREET APARTMENTS. THE NLC RECOMMENDED THAT PRIOR TO FURTHER CONSIDERATION OF THIS PROJECT, THAT THE LENDER TAKE INTO ACCOUNT THE FOLLOWING: 1. THE ANCILLARY INCOME IS TOO HIGH IN PROPORTION TO THE RENTAL INCOME. 2. THE DEVELOPER DOES NOT APPERR TO HAVE SUFFICIENT INVESTMENT IN THE PROJECT. 3. THERE IS NO EVIDENCE THAT THE DEVELOPER HAS SUFFICIENT EXPERIENCE TO REHABILITATE A PROJECT THAT HAS SUCH A TROUBLED HISTORY.