*Multi-family Housing Preservation and Revitalization Program MPR USDA Rural Development

*Multi-family Housing Preservation and Revitalization Program MPR USDA Rural Development

*Critical to Rural Infrastructure

*Basic Facts: 515/514 Portfolio (1-1-08) 16,500 Properties with 458,090 Units (28 units avg. size) $11.6 Billion Outstanding Principal (2.4% delinquent) 30% Properties in Counties with Declining Income The tenants who we serve: $10.2K Annual Average Income ($8.3K for RA) 62 % receive RA 15 % receive HUD project or tenant based subsidy or other 23% receive no deep tenant subsidy Tenant Households headed by: 59% Elderly 24% Handicapped or disabled 72% Female 30% Tenant turnover 30% Minority

*Where the MFH program is headed Build new units using cost effective Section 538 guarantees. Protect existing tenants by renewing all expiring rental assistance. Revitalize existing portfolio Use MPR and other available resources to preserve needed housing.

*Key Revitalization challenges: Nature of the portfolio Aging earliest projects form the 60 s Small properties Rural Markets Not enough RA Aging of physical structure is project specific Nature of ownership entities Aging owners and entities Conflicting interests within ownership Tax consequences for selling or not selling Cloud of Prepayment statute Franconia Damages to owners possible Tucker Act Settlement 731 projects going thru process Goldhammer APA violation to not follow regulation Limited pool of purchasers and funding resources Tightening Federal budget for traditional subsidized housing

*Key Revitalization Study findings Comprehensive Property Assessment (CPA) found: Irreplaceable rural rental housing option Portfolio in good shape, but aging and reserves under funded Addressing now is more cost effective Study also said (Portfolio breaks into 3 segments) 10% in great markets expensive to preserve 10% in bad markets not feasible to preserve 80% in the middle feasible to preserve Just using rent increases and more RA is too expensive We need new cost effective revitalization tools Reinvent program delivery for smarter & faster decisions

*The MFH Revitalization Strategy Goal Extend and enhance properties that continues to serve affordable rental needs. Road map for revitalization from CPA Protect tenants that leave program (Vouchers) Create and fund restructuring process and tools New long term commitment Strategy to get a revitalization program in place Proposed legislation (HR 5039 now HR 4002) Demonstrations of the key concepts (vouchers 2006-2008 and restructuring 2005-2008) Results: THEY WORK!

*The Revitalization Strategy Components of all deals Project is needed in market Post transaction Owner is eligible Basic Feasibility Thresholds CNA to determine capital needs, timing and funding Underwriting to determine feasibility and tools Seller payments are market focused Market value for equity loan CRCU limit for equity payment CRCU test before any MPR tools Consider impact on tenants Long Term Deal USDA s funding commitment Owners operational commitment

*Access to revitalization resources MPR (Revitalization Demonstration program) Access point to Agency rehab loan funds Simple (stay in owners) Complex (transfers) Portfolio Sales (more than one) Transfer With Agency funding With third party funding

*Key Revitalization access point issues MPR Must be selected through NOFA process All project loans to be deferred are pre-1992 Transfer Seller payment through 3 rd party funds (maybe 538) Prepayment process Must apply through statutory prepayment process Seller payment through Agency funds and RA

*Restructuring Tools (06/07 Demo results) 1) Partial or full 515 Deferral ($48M/$56M) 2) Bullet aka Soft-second loans ($4.5M/$2.8M) 3) Grants ($.2M/$.5M) 4) 515 Loan @ zero percent interest ($.3M/$2.6M) 5) Payment to owner of some costs (CNA from reserve) 6) Forgiveness of 515 Debt ($0/$0) 7) Re-amortization of 515 Debt (yes/yes) 8) Subordination of 515 Debt (yes/yes) 9) Consolidation of 515 projects (yes/yes) 10) Other RD funds (Section 538/515) ($8.8M/$25M+) 11) Third party funds ($1.8M LIHTC/$45M)

Simple 16 family units (7 RA) - Tower City, North Dakota Stay in non-profit owner built in two phases 74 and 79 Sources: $53.4 K MPR bullet $172 K MPR zero pct and $11.6 K MPR H&S grant $5 K local grant Uses: $237 K Rehab (to reserve) $ 0 Equity, and $5 K Soft $27.7 K - 20 year CNA per unit $9.2 K deferred RD ds, $8.9 K new ds Reserve deposit: $3.2K to $9.2K Rents: Pre-MPR $301 Post-MPR $332

Complex 74 family units (64 RA) Rogers, Connecticut Transfer (w/acquisition, rehab and consolidation) - $7.8 M TDC $2.8 M Existing RD debt Sources: $2.9 M tax credit equity, $2.1 M 3% HFA loan Uses: $2.1 M Rehab, $.9 M Equity, and $2.0 M Soft $20.5 K - 20 year CNA $72 K Annual RD debt service Reserve deposit: $30K to $51K Rents: CRCU $625, $775, $900 Pre-Transfer $480, $580, $705 Post-Transfer $500, $700, $825 w/mpr deferral, $465, $620, $765

SC MFH Portfolio Transfer 23 Projects in the transfer, 3 consolidations 15 project in MPR Portfolio transaction, 3 consolidations Long term A&B Bonds, 4% LIHTC w/subordination of RD lien position Converted to Short Term A Bonds $15,812,000 & $1,948,070 B Bonds, 4%LIHTC $16,968,347, 515 Sub. Loans$15,812,000 RD515 funds to provide permanent financing at favorable terms Savings: reduce debt service from long term Bonds @5.75%, 30 yrs to RD 1%, 50 yrs. Reduce debt service $567,247/yr; RA savings $248,100/yr Rents reduced (average) $45/U/Mo. Rents maintained @CRCU MPR will further provide cost savings to the properties to save RA and protect tenants from excessive rent increase.

New Mexico USDA Rural Development CARMEN N. LOPEZ MULTI-FAMILY HOUSING COORDINATOR Carmen.lopez@nm.usda.gov (505) 761-4941 MPR Website: http://www.rurdev.usda.gov/rhs/mfh/mpr/mprhome.htm

Preservation Tools 515 mortgage subordination and tax credit resyndication to reposition properties. 9% LIHTC are possible with strict adherence to old and cold Bond transactions combining multiple sites have been closed repeatedly

Preservation Tools We have seen a number of non- Preservation preservations, sometimes called 4010s. Use transfer process.

Preservation Tools Will have guidance on tiered rents for LIHTC properties Approval requirements will be clarified New 30 year RUP required CRCU rents will probably continue to be the standard Equity can be paid by non-rd sources or from RD sources with appraisal 20 year CNA

Preservation Tools USDA transfer Handbook, HB-3-3560, Chapter 7 Revision underway to conform to transfer bill, H.R. 3873 Will be single comprehensive application Will be timeframe for RD review 1 property 45 days 2-10 properties 90 days 11 or more properties 120 days

ELIHPA Handbook HB-3-3560 Chapter 15 Apply to prepay Must be complete but completeness can vary by office Must demonstrate ability to prepay with loan commitment or assets You can receive incentives equity take-out loan From RD 1% interest rate but little money and long wait Obtain yourself must locate and educate lenders

ELIHPA You may be able to prepay with a life -estate use restrictions for current residents If housing determined to be unnecessary If no adverse impact on minority persons And/Or you can offer for sale to a non-profit, at apprised value Must offer for 6 months If non profit makes offer, have up to 24 months to close If neither happens, can prepay

ELIHPA The Emergency Low Income Housing Preservation Act of 1987 ( ELIHPA ). Even if your documents say you can prepay; ELIHPA says you can t - - not without asking. ELIHPA sparked lawsuits, including Franconia, resulting in damages payments to owners

Richard Michael Price Nixon Peabody LLP 401 Ninth Street Suite 900 Washington, DC 20004 Telephone: (202) 585-8716 Facsimile: (202) 585-8080 E-Mail: rprice@nixonpeabody.com

2008 Summer Institute NH&RA Santa Fe, New Mexico July 25, 2008 Section 515 Case Study: Three RD Preservation Projects in Imperial County, CA David Beacham PACIFIC HOUSING ADVISORS, INC.

USDA RD Regulation 3560 New Regulation 3560 made effective February 25, 2005 Intended to replace all regulations governing: Section 515 rural rental housing Section 514 and 516 farm labor housing Section 521 rural rental assistance programs Chapter 15 provides guidance on transfers (acquisitions) of existing RD properties

Transfers Under 3560 Property transfers (acquisitions) are similar to approving a new loan. RD must ensure that the transferee meets the same eligibility criteria and has the financial capacity and management experience to be a project borrower. The transferee contributes additional funds for repair or rehabilitation, and RD agrees to recognize a higher initial investment for purposes of determining the allowable Return on Investment (limited dividend) Transfers involve rehabilitation as approved by RD, and as identified by a Capital Needs Assessment

Transfers Under 3560 (cont d) Existing RD loan may be reamortized over 50 years (subject to remaining useful economic life) Interest remains at 1% effective rate Existing RD loan may be subordinated to new debt Subordinated RD loan plus new loan may not exceed appraised value Third source of funds: low income housing tax credit equity

Transfers Under 3560 (cont d) RD is not obligated to provide Rental Assistance (RA) for projects with less than 100% RA, as under a prepayment incentive offer Comparable rents are established using an RD-approved market value appraisal Comparable Rents for Comparable Units = CRCU Basic rents may not exceed CRCU (but existing rents may be adjusted upward to CRCU)

Transfers Under 3560 (cont d) Immediate and long-term repair and rehabilitation needs are identified by a capital needs assessment Reserve requirements for the housing project will be reviewed by RD and adjusted to cover the cost of addressing the property's capital needs. Planned rehabilitation is taken into account RD may approve the release of the current replacement reserve amount to the transferor provided the transferee agrees to deposit the amount to cover the project's immediate needs into a new reserve account at closing

Transfers Involving LIHTC RD represents new layer of regulation and approval Projects characterized by very low senior debt relative to subordinated RD loan If bond-financed, over-funded construction loan is common, to allow 50% test to be met New tax credit equity is basis for ROI calculation Regulation 3560 allows for up to 8% ROI Economic cash flow generally very low, however Portfolio aggregation possible Subject to State QAP Subject to lender and investor requirements

CASE STUDY THREE RD PRESERVATION PROJECTS IN IMPERIAL COUNTY

Imperial County Portfolio Cottonwood Apartments, 32 units built in 1989, located in Calipatria, Imperial County, California Redondo I Apartments, 36 units built in 1988, located in Westmorland, Imperial County, California Redondo II Apartments, 32 units built in 1990, located in Westmorland, Imperial County, California (adjacent to Redondo I) TOTAL OF 100 UNITS IN THREE PROJECTS

RD 515 Profile Cottonwood 20 year RD use period ended September, 2009 23/32 units with HCD RCHP contract 4/32 units with RHS RA Existing RD 515 loan of $43,366/unit Redondo I 20 year RD use period ended September, 2008 32/36 units with RHS RA Existing RD 515 loan of $39,971/unit Redondo II 20 year RD use period ended September, 2010 32/32 units with RHS RA Existing RD 515 loan of $43,706/unit

LIHTC Profile El Centro MSA 2006 AMGI $50,800 DDA (was in 2006, but is no longer in 2007) Current rent @ 102% of maximum LIHTC rent Appraised land value $5,500 per unit 80% at 60% AMGI, balance at 20% AMGI (driven by CDLAC points)

Purchase Profile Cottonwood $51,424 purchase price/unit $10,087 seller equity/unit 5.83% cap rate on Purchaser NOI Redondo I $62,877 purchase price/unit $24,881 seller equity/unit 6.53% cap rate on Purchaser NOI Redondo II $62,878 purchase price/unit $19,172 seller equity/unit 7.42% cap rate on Purchaser NOI

Purchase Profile (cont d) Seller kept replacement reserves of $503,852 Purchase price determined as development residual

Development Pro Forma Rents reduced by $8/unit (on average) due to CRCU > existing rents Vacancy assumption = 5.0% (prior year was 5% for Redondo and 7% for Cottonwood) Expenses at $3,990/unit including reserves of $514/unit (reduction from prior year approximately $1,200) Rehab of $21,140/unit including contractor OH&P Deposit to reserves of $507,500 TCAC $170,000 RD 80,000 LIHTC Investor 250,000 Lender 7,500

Development Pro Forma (cont d) Sources Permanent Bond Loan @ 5.82% interest (all in) $ 2,600,000 Subordinated & Assumed 515 Loan @ 1.00% interest 4,225,232 LIHTC Equity @ $1.01 (Federal only) 3,469,494 Deferred Developer Fee 24,449 Total Sources $10,319,175

Development Pro Forma (cont d) Uses Land + Buildings $ 5,921,255 Renovation Costs 2,114,039 Third Party Reports 106,955 Financing Placement (including COI) 188,274 Other Fees and Costs 305,591 Reserves 507,500 Developer Fee 1,175,560 Total Uses $10,319,175

Development Outcome Rehab of $21,140 per unit provided: Roofs Windows Cabinets & Countertops HVAC Landscaping Cash flow at $97,899/year with 5% vacancy (top of waterfall) Non-deferred developer fee of $1,151,112, paid over 18 months NOTE: This is the Low Hanging Fruit, not the norm!

Brunswick House Apartments 1100 Peach Orchard Lane Brunswick, MD A USDA Rural Development Section 515 52 Unit Senior Housing Preservation Project Volunteers of America Project Sponsor

SOURCES OF FUNDS 4% Low Income Housing Tax Credits Tax Exempt Bonds Rental Housing Production Program Funds USDA Rural Development Transfer & Assumption of Mortgage Marked down to 1% interest Transfer of HUD Section 8 HAP Contract on 100% of the units, 20 year HAP Contract Total Development Costs -$5,954,011

SOURCES Source From Amount A. Equity Limited Partner $1,471,000 B. Permanent Debt Tax Exempt Bond $1,690,000 USDA RD Sec 515 $1,111,072 C. Other Debt Rental Housing Production Program D. Other Sources Existing Reserves & Escrows $1,500,000 $122,432 GP Equity $147 Construction Period Income $59,360 TOTAL $5,954,011

SCOPE OF WORK $40,386 per unit hard construction costs New elevator New fire sprinkler system New roof New floor coverings New entry and unit doors & frames HVAC system upgrades Numerous other upgrades and improvements

USES A Acquisition Costs $2,019,504 B Construction/Rehabilitation $2,100,053 C Professional Fees & Other Soft Costs $422,145 D Financing Costs Construction Loan Only $162,000 D Financing Costs Permanent Includes Bond Cost of Issuance of $135,858 $337,287 F Developer Fees $602,406 G Tax Credit & Syndication Costs $32,616 H Start Up Costs, Reserves & Escrows Includes operating reserve of $182,000 $278,000