2. November 2009 Financial Integrity of a Rental Property – Whose Responsibility? 2010 North Carolina Affordable Housing Conference September 17, 2010 Jill Odom, CAHEC

3. Question - Who’s Responsible for achieving and Maintaining Financial Integrity?

4. Answer …Anyone with a vested interest in the property. This would include: The owner The management agent The syndicator/investor The lender(s) The State allocating agency Who else? Financial Integrity cannot be achieved without a coordinated team effort

5. Integrity 1.The state or quality of being entire or complete; wholeness; entireness; unbroken state; 2. Moral soundness; honesty; freedom from corrupting influence or motive; -- used especially with reference to the fulfillment of contracts, the discharge of agencies, trusts, and the like; 3. Unimpaired, unadulterated, or genuine state; entire correspondence with an original condition; purity. Syn: Honesty; truthfulness, veracity, reliability, honor.

6. What is Financial Integrity? – From the Investor’s perspective

7. Financial Integrity Synonymous with Financial Stability, or Financial Viability The ability of a property to achieve or exceed all of the financial projections relating to its development and operational phases Adhering to or exceeding expectations with regard to timing and delivery of projected tax credits Maintaining property performance standards in accordance with IRC regulations, Federal, State and local laws The ability to generate revenue and absorb costs with minimal variances using a realistic and achievable budget.

8. Tools for determining Financial Integrity AHIC Watchlist Criteria Development Phase, including lease-up Construction Delays over 3 months Construction cost overruns exceeding15% of contract or contingency reserves spent Leasing delays over 3 months First mortgage closing delays over 3 months Mechanics Liens Revenue & Expense variances Any change in qualifying units Litigation Bankruptcy

9. Tools for determining Financial Integrity AHIC Watchlist Criteria Operational Phase High Receivables/High Vacancies Debt Coverage Unpaid real estate taxes Insurance coverage Mortgage or guarantee delinquency or default Deferred Maintenance or extraordinary repairs not budgeted Physical Inspection/Physical Deterioration Significant life-safety issues Unauthorized debt Required Deposits and adequate funding of reserves GP Removal/replacement GP/management agent failure to perform Litigation or Bankruptcy

10. Tools for determining Financial Integrity Industry Best Practices – Risk Rating Policies Development Phase Construction/Lease-Up Schedules Financial (sources and uses) Construction Loan status Permanent Loan status Program Compliance General Contractor GP/Sponsor/Management Recapture risk

11. Tools for determining Financial Integrity Industry Best Practices – Risk Ratings Stabilized Phase Debt Service Coverage Occupancy Benefits (tax credit and losses) Reserves Physical issues GP/Sponsor/Management Program Compliance Insurance/Taxes Reporting Recapture/Foreclosure risk

12. Tools for determining Financial Integrity LIHTC Program regulations Contracts LIHTC Application and Awards letters Partnership Agreements Management Agreements Guarantee Agreements Loan Documents IRS 8823 Audit Guide

13. Tips to Achieving and Maintaining Financial Integrity

14. Tips to Attain Financial Integrity To the Owner Be aware of the terms and conditions of your agreements and contracts – insuring that they are reasonable and achievable Timing is EVERYTHING! Use realistic and achievable revenue and expense assumptions – Voodoo math can cripple a project Communication is CRITICAL – share the important details with your entire team, especially your property management agent

15. Tips to Maintain Financial Integrity To the Management Agent The success or failure of the first year of operations almost always determines the long-term viability of the project Hold a “kick off” meeting with your owners (and syndicator) – to confirm all the specifics of a new property Set-asides Rent/utility schedules Tax Credit delivery/lease-up schedule Review marketing plan Reserves: Funding amounts and timing Review budget Review all promises made in the TC application and pertinent terms of the partnership agreement (ie: reporting requirements)

16. Tips to Maintain Financial Integrity To the Management Agent Use a “By the Book” methodology of management Know which housing program handbooks are applicable and which regulations to follow for determining initial and continued compliance HUD 4350.3 Handbook 8823 Audit Guide State Allocating Agency guidelines and requirements Landlord/Tenant laws Fair Housing Laws Local Codes ADA/Accessibility & design requirements Know your market and advertise pro-actively. Focus on lease enforcement and resident retention Recruit experienced site staff: provide on-going training, support and motivation!

17. Questions or Comments? Jill Odom, CAHEC jodom@cahec.com