1. Texas Rural Rental Housing Preservation Academy Training
Transfer Principles Overview Training
February 28-March 1, 2018
Presented by Tim Chandler

2. Rural Housing Service’s Mission
Our Mission is to provide decent, safe, sanitary and affordable rental housing to low- and moderate-income persons living in rural areas. Our transfer process is one way we accomplish this mission. Our role is to ensure there is a need for the property, that it is placed in the hands of effective owners/management and minimize the impact on the tenants. While transfers offer an opportunity to improve the quality of housing through improved maintenance, rehabilitation, or better management, it can also increase the risk of loan default or poorer housing conditions unless we carefully evaluate each transaction.
We all have the common goal of preserving affordable rental housing – let’s work together as a team to accomplish this goal

3. Rural Housing Transfer Process Improvement
Changes to HB Chapter 7
Streamline process to support the Transfer Improvement Project, update policies to more closely adopt industry standards, eliminate redundancies, clarify program requirements, and correct oversights and omissions.
Shortened timeframe for RD reviews
Clarified minimum acceptable submission
Implements use of Preliminary Assessment Template (PAT)
Uses industry standards when appropriate
Recognizes allowable industry practices
Promotes loan making and servicing cooperation

4. Rural Housing Transfer Process Improvement
Changes to HB Chapter 7
Eliminated redundant forms and information submissions
Clarified responsibilities for RD and Applicant
Expanded opportunities to access available RD servicing tools
Emphasized Agency preservation goals
Considered internal and external customer comments and limitations
Applies to all RRH and FLH Transfers
Provides Guidelines and Direction to Staff
Requires Eligibility and other determinations
Relies on HB1-3560, Chapters 4 and 5
Requires Underwriter & Servicer Cooperation
Clarifies Objectives and Responsibilities
Establishes Goals and Timelines

5. Rural Housing Transfer Process Improvement
Changes to HB Chapter 7
Establishes use of PAT for documentation
Requires Agency Prior Consent and Approval
Applies to all RRH and FLH Transfers
Provides Guidelines and Direction to Staff
Requires Eligibility and other determinations
Relies on HB1-3560, Chapters 4 and 5
Requires Underwriter & Servicer Cooperation
Clarifies Objectives and Responsibilities
Establishes Goals and Timelines

6. Transfer Guidance Guiding Principles The community needs the housing
The property will be in the Hands of eligible owners
The transaction addresses physical needs
Post transaction rents don’t exceed market rents
Equity identified by a market value appraisal
Minimize tenant displacement

7. Transfer Guidance 3560 Regulations, Subpart I
References
3560 Regulations, Subpart I
Section MFH Ownership Transfers or Sales
Section Subordinations and – Consolidations
Servicing Handbook #3, Chapter 7

8. Transfer Guidance Eligibility
Key Analytical Concepts
Eligibility
The new proposed owner must be determined eligible.
Feasibility
The proposed transaction must be determined feasible.
Improve or Maintain Risk levels
Due to the fact that a transfer involves existing tenants and an existing property, it is necessary to reduce the risk of tenant displacement and ensure the property’s physical condition will be enhanced.

9. MFH Transfer Application Processing
Key Steps to a Timely Application Review and Approval
HB Chapter 7, Exhibit 7-1
Complete Preliminary Assessment Tool and meet with RD staff.
Initial consultation with Applicant, Development Team and Participating Partners.
Submit Complete Application to RD
RD begins Underwriting process. Notices sent to applicant every 30 days.
Completed Underwriting by State submitted to RD HQ for Authorization.

10. MFH Transfer Application Processing
Key Steps to a Timely Application Review and Approval
HB Chapter 7, Exhibit 7-1
Agency Decision to applicant within 45 business days of complete application/ 75 days for multiple properties.
Prepare Agency Approval Conditions for Signature by Applicant. Sent with in 15 days for Applicant acceptance.
Coordinate Loan Closing and OGC Loan Document Approval.
Schedule and Close Transfer
Complete Post Closing Review and verify that approval and closing conditions.
Complete the rehab and Place in Service.

11. Applicant Responsibility
MFH Transfer Application Processing
Applicant Responsibility
Provide complete, timely and accurate application information to RD
Adequate documentation to support the propose transaction
Provide timely revisions, clarifications and changes as requested by RD.
All business decisions are made by the Applicant.
Coordinate with any third party participants
Evaluating, Accepting and Implementing recommendations
Inform RD of any material changes to the transaction as soon as possible to avoid a delay or denial of approval and or closing.

12. MFH Transfer Application Processing
Procedure for Incomplete Transfer Requests
If at any point, the Loan Servicer determines that additional information is required from the purchaser in order to complete processing, the Loan Servicer will notify the purchaser in writing as follows:
Explain the deficiency and describe what additional information is needed and the timeframe for submitting the additional information.
RD’s timeframe for processing the transfer request may be extended for not more than 30 business days beginning with the date of the notice to the applicant.
If the information is not submitted within the extension period, RD will consider the transfer request to have been withdrawn and return the application.

13. Transfer Application Documents
Attachment 7-B-1 of Handbook 3
To shorten Agency processing time
Standard List of Transfer Application Requirements
Require only items needed to make informed decision

14. Transfer Application Processing
Effective Processing Strategy Recap
Set up a meeting with all parties early in the transfer discussion
Discuss proposal, Agency requirements for appraisals, CNA, application checklist, timeframes
Before applicant proceeds with ordering appraisal, CNA, or filing an application - all parties need to agree on whether or not rehab is going to be done as part of the transaction
If rehab is proposed, 2 CNA’s are needed:
1 to identify CNA/Scope of Work / Rehab; and 1 to size the reserve deposit “post rehab” for next 20 years
For the appraisal, refer to Attachment 7-E of HB-1, Appraisal Information Sheet.

15. Transfer Application Processing
Third Party Funding
Documentation for any requirements imposed as condition of 3rd party funding
LIHTC –show set aside by income level & unit type as well as income levels and max rents
Any loan, include proposed note, loan agreements, security instruction and regulatory agreement
Any grant, include proposed grant agreement

16. Transfer Application Processing
Appraisals:
Market Value Appraisal “Prospective Market Value, Subject to Restricted Rents within 7 CFR (b) (1) (i)” to determine security value
Market Value Appraisal - “Market Value, within 7 CFR (b) (1) (ii) with any current restrictions or prohibitions currently existing on the property taken into consideration”; or “Market Value within 7 CFR (b) (1) (ii) Premised upon a Hypothetical Condition As-If Unsubsidized Conventional Housing” to determine RD’s limitations on sale price and equity pay-out whenever an equity pay-out is proposed to the seller.

17. Transfer Application Processing
Appraisal Requirements:
Required for all transfers where the existing debt, plus any new debt, exceeds $100,000, or when equity payout is proposed
Provide instructions to appraiser on values needed by RD; and
If RUP in effect, inform appraiser so he can take into account any reduction in value attributable to remaining RUP

18. Transfer Application Processing
Capital Needs Assessment (CNA)
All transfers require completion of CNA
Properties 8 units or less can meet this requirement by:
a 3rd party CNA, or
the purchaser accepts Rural Development’s published average CNA needs
Resize reserve to meet 20 year inflated needs
Reference the CNA UL issued November 27,2017
CNA Provider must use most current version of CNA Template which is CNA template 1.5h. Available on the RD website.

19. Transfer Application Processing
Partnering
Understand criteria of all lenders
Are there any restrictions, i.e. income, rent, DSCR, handling of reserves
If different criteria, underwrite to most stringent, i.e. DSCR, reserve deposit
Share RD underwriting with lenders
RD’s Preliminary Assessment Tool (PAT) is available on the Multi-family Housing Website
Provides customers with the ability to develop transfers that will comply with RD underwriting thresholds and guidelines. The tool is not a substitute for underwriting analysis by the underwriters; however it will assist developers to structure transactions that address the thresholds and guidance used by RD in its own underwriting.
Underwrite with most current information, application, S&U, funding sources

20. Transfer Application Processing
Transfers – Genera Operating Account, T&I and Replacement Reserve Accounts
RD’s Operating Cushion is now built into the PAT.
Requirement that GOA have 20% of the proposed O&M less Tax & Insurance escrow at time of closing; and
Requirement to underwrite to 3 year average vacancy/bad debt plus 2%.
Some 3rd Party Lenders may have a requirement for an operating reserves as well.

21. Transfer Application Processing
Equity/Cash to the Seller from Third Party
Equity amount limited to lesser of amount documented in appraisal accepted by RD, or
Equity amount supported at rents within CRCU
Any restrictions on property must be considered when concluding market value
New 30 year Restrictive Use Period required
RD has the ability to subordinate it’s position to a third party lender if determined secured by the Security Value determined through an acceptable appraisal to the agency

22. Transfer Application Processing
Third Party Loan Requirements
The debt must be fully amortizing; or
The maturity date is after the maturity date of all Agency debt; or
There is an agreement by the 3rd party lender, acceptable to MPDL, to extend the scheduled maturity on terms that do not require rents above CRCU.
Equity Funded by RD
Agency only finances equity payouts for properties in prepayment process (Chapter 15); or
for the purchase of existing 515 properties by eligible nonprofits organized under state and local laws include

23. Transfer Application Processing
Limitations on Sales Price
RD places no limitations on sales price if paid solely by assumption of the existing debt plus non Agency funds that have no affect on Basic Rents
In other situations, 2 limitations:
1st limitation is total of appraised value of real estate, plus Reserve Account balance (transfers to purchaser)
2nd limitation is sales price that fits within CRCU rents
If a loan is put on the property that affects the debt service, then no more than the appraised value can be paid for the property. No matter if tax credit equity is being use or not.

24. Transfer Application Processing
Repair Agreement - if rehab proposed
Tenant relocation costs if relocation is necessary
Identify up-front repair items, timeframes for completion, cost estimates, funding source, who will do the work and any IOI between the transferee and the party doing the work
Division of responsibility for repairs between buyer & seller
If equity is proposed, a guarantee acceptable to RD that any excess costs will be paid from non project funds.
Signed by seller & buyer and agreed to by RD
Must address all repairs needed to bring property into compliance
If CNA prepared assuming certain work to be done
RD concurs in the repairs and cost estimates
Month by month estimate for disbursements
How will repairs be funded

25. Preliminary Assessment Tool (PAT)

26. Reference Preliminary Assessment Tool (PAT)
The link below will direct you to the Preliminary Assessment Tool (PAT) for your use in developing you transaction for underwriting by Rural Development.
Housing Preservation & Revitalization Demonstration Loans & Grants | USDA Rural Development

27. Pitfalls and Roadblocks- What to Know Upfront: Timeline, Rent Limits, Seller Equity

28. Pitfalls and Road Blocks
Bridges and Solutions
Timeline of the transaction
Complex transactions require coordination, communication and patience.
Understanding underwriting requirements of multiple participating funding sources
Closing the transaction – Scheduling to meet deadlines.
Third Party Reports
Environmental Reports
CNAs
Appraisals
Plans and Specification/Scope of Work
Rent Structure – LIHTC vs Conventional Rent for Comparable Units(CRCU)
Sales Price – negotiating cash/cash equivalent payment to seller.
Communicate
Hold regularly scheduled meetings
Engage qualified vendors for third party reports
Attend trainings provided by HFA
Request training from RD

29. Questions