* FY 2010 Presentation by: Larry Anderson, Director, MFH Preservation and Direct Loans (MPDL)

1. Revitalizing Rural Development’s Multi-Family Housing (MFH) Portfolio“Saving and creating decent, safe, and sanitary affordable homes for rural renters” * FY 2010 Presentation by: Larry Anderson, Director, MFH Preservation and Direct Loans (MPDL) Housing and Community Facilities Programs - laurence.anderson@usda.gov

2. Basic Facts: 515/514 Portfolio (1-1-09) • 16,000 Properties with 452,610 Units (28 units avg. size) • $11.6 Billion Outstanding Principal (3.0% delinquent) • The tenants who we serve: • $11.2K Annual Average Income ($9.2K for RA) • 64 % receive RA • 15 % receive HUD project or tenant based subsidy or other • 21% receive no deep tenant subsidy • Tenant Households headed by: • 59% Elderly • 71% Female • 30% Minority • 24% Handicapped or disabled • 30% Tenant turnover • 30% Properties in Counties with Declining Income

4. Fiscal Year 2009 - Number of Units Served

5. Multi-Family Housing Delinquency • Delinquency is under control

6. Direct Loan and Grant Program Direction for FY 2010 • Preserve and revitalize the direct portfolio • Fully identify capital needs • Market based sustainable underwriting • Build “super green” new where most needed • Goal of “zero net” energy consumption • Goal for property is long term sustainability of rents • Use third party resources – ARRA and other • Simplify, clarify and support the process • Better working relationships with 3rd party funders

7. SUPER GREEN – What does that mean? • Energy conservation plus generation • Build “super green” new where most needed • Goal of “zero net” energy consumption • Goal for property is long term sustainability of rents • NOFA Scoring Criteria

8. Key Revitalization challenges: • Nature of the portfolio • Aging – earliest projects from 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 litigation now lifting • 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

9. 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 • Old way - Just using rent increases and “more” RA is too expensive • New way – Use new cost effective revitalization tools • Reinvent program delivery for smarter & faster decisions

10. The Working 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 • SUSTAINABLE RENTS = SUSTAINABLE PROPERTIES! • CNA needs - O&M - operating cushion – vacancy - accounts current • Seller payments and increased RTO is market based • Market value for equity loan • CRCU limit for equity payment and increased RTO • CRCU test before any MPR tools • Consider impact on tenants • Long Term Commitment – RD’s funding/Owner’s RUP

11. Access to revitalization resources • MPR (MFH Preservation and Revitalization Demo) • NOFA rules – Access RD rehab funds – key tool: deferrals (pre-92 only) • Simple (stay in owners) • Complex (transfers) • Portfolio (now includes transfers and stay in owners) • Transfer • Low rents = tight deals • “Pie split” issues common • Limited RD funding – rehab through MPR • 3rd party funding – only source of seller payment outside prepayment process • Prepayment process • Incentives (stay in owners or transfers) • Sales to Non-profits (transfers) • Substitution of GP’s or "no funds” transfers - “white knights” beware • 3rd Party – ARRA funds • DOE – HUD Green Retro Fit • LIHTC – TCAP or Exchange

12. Revitalization Activity • MPR (2006 – 76, 2007 – 87, 2008 - 135, 2009 – 94; SC top State) • Transfers (top State 2009 – SC) • 60% use third party funding • 2006 – 159 closed • 2007 – 194 closed • 2008 – 235 closed • 2009 – 165 closed • Prepayment process (top State 2009 – NC) • Incentive Loans, RA or Sales to Non-Profits obligated: • 2006 - 35 • 2007 - 48 • 2008 - 47 • 2009 - 57

13. Preservation Transactions

14. MPR Demo Overview - 06/ 07/08/09 results • Borrower applies per NOFA (4,100/2,400/1,700/1,250) • RD conducts competition and selects candidates (150/170/286/360) • Selected properties get: • Borrower, market eligibility review and CNA • Underwriting to develop a Financial Feasibility Plan (FFP) • Review Committee Approval • Documents prepared to reflect deal and new RUPs • USDA presents and owner approves the deal and mix of MPR tools • USDA obligates financing and arranges closing • Borrower and USDA close the deal

15. MPR Deals obligated by State 06/ 07/08 65 SC 4 GA, IL, KY, PA, VT • ME 3 VI, MI, AZ, CT, IN, MA, NY 22 MO 2 WA, NV, OH, OR, MS, CA • NC, OK 1 VA, NH, NM, RI, MN • LA 0 AL, AK, CO, DE, MD, HI, NJ, PR • IA UT, WV 10 WI • ID, MT, SD • NE, ND • AR, KS, TX 5 FL, TN

16. MPR “Tools” - 06/07/08 Demo results • Partial or full 515 Deferral ($48M/$56M/$100M) • “Bullet” aka “Soft-second” loans ($4.5M/$2.8M/$13M) • Grants ($.2M/$.5M/$.4M) • 515 Loan @ zero percent interest ($.3M/$2.6M/$12.6M) • Payment to owner of some costs (CNA from reserve) • Forgiveness of 515 Debt ($0/$0/$0) • Re-amortization of 515 Debt (yes/yes/yes) • Subordination of 515 Debt (yes/yes/yes) • Consolidation of 515 projects (yes/yes/yes) • Other RD funds (Section 538/515) ($8.8M/$25M/$58M) • Third party funds ($1.8M LIHTC/$45M/$65M)

17. Operational Goals for FY 2010 MPR • Gear up to handle more transactions • Encourage portfolio transactions/multiple property financing • Find ways to use more third party funding • Build capacity in all States • Improve key decision making points and reduce bottlenecks • CNA, CNA reviews Agreed to “scope of work” • Underwriting review and analysis • Develop routine supervising and servicing • budget integrity and reserve use per CNA • Establish long term internal controls • Continue to build funding pipeline of approved transactions • Expand LH participation

18. Other Demo Related Improvements • Transfer handbook updated • One - simplified application process • Processing deadlines per HR 3873 • Better handling of third party funding • Working with portfolio transfers • Additional guidance • CNA and CNA review unnumbered letter (August 2008) • Underwriting unnumbered letter (October 23, 2008) • Construction unnumbered letter (under construction) • Improve outreach to buyers, sellers, and funders • Clarify program benefits and rules • Reduce barriers to participation • Website access at: http://www.rurdev.usda.gov/rhs/mfh/MPR/MPRHome.htm • Continue to seek permanent legislation

19. Revitalization Battleground – Sizing the split: rehab, seller and soft costs • Sustainable rents – • What does CRCU support? • Rehab • upfront/spread out • Seller payment • loan or cash? • Soft costs • loan/cash • upfront/deferred

20. Key concepts with the “pie split” and the MPR • Stay in owners – No split - It’s all about rehab • Underwritten once • Full use of MPR tools to fund rehab • Some soft costs may be included. • Transfer – It’s a three way split • Underwritten twice • First to fit the CRCU test • seller payment and soft costs must make economic sense • RD funds can be included if “in hand” • If not in hand - use 538 at AFR to size the transaction • Second to fit MPR underwriting • Deferral used to keep rents affordable • MPR tools not used for seller payment

21. Why is the MPR a good idea for the Program? • Cheapest way to revitalize a project • Deferral, soft money, grants and zero percent loans are cost effective tools • 08 average MPR rents went down by 2% or $17 PUPM • May be the only feasible way to address existing capital needs • Last year – rehab plus 20-years CNA needs over $29K per unit • Typical project could not afford rehab or higher reserves within CRCU without MPR • Without MPR tools the cost is carried by RA • Without MPR tool rehab is limited and may leave the job half done • Many owners have no ability to sell or pay off • The gap between current rents and CRCU is a pivotal feasibility measure • Many projects don’t have the market position to satisfy all expectations • Bringing in third party funds through a transfer not an option – project starts a death spiral • Mechanism for stay in owner to recapitalize • Over 50% of MPR transactions with stay in owners last year • Government funds not used for equity payout or huge developer fees • Magnet for third party funding • Last year $100 Million leveraged by $30 Million in MPR BA • Provides additional funds to get the transaction to work

22. Portfolio Management Direction for FY 2010 • Reduced portfolio energy consumption • Improved operations at the property • Promote energy generation at the property • Seek better operations by Industry Collaboration • Role model - IPIA improvement • Continue to reduce duplicate monitoring • Major update to automation systems • Increase flexibility to new programs and relationships • Improve Servicing – focus on major challenges and reduce the burden of routine tasks