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LIHTC Loan Processing & the New Chapter 14 MLA

Learn about the integration of FHA multifamily loan programs and LIHTC, and gain insights into the new Chapter 14 of the MAP Guide. Topics include processing tools, mortgage credit issues, application processing and underwriting considerations, and more.

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LIHTC Loan Processing & the New Chapter 14 MLA

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  1. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 MLA LIHTC Workshop Chicago, Illinois July 6th – July 7th, 2016

  2. Panel Members • Co-Moderators: • Thomas G. O’Neil, VP of FHA Operations, Dougherty Mortgage LLC • Wendy Stamnas, SVP, FHA Chief UW, Churchill Mortgage Investment, LLC • Panelists: • Elizabeth Arteaga, Acting Senior Program Manager, Tax Credit Programs • Scott Greuel, Underwriter Branch Chief, HUD Multifamily Midwest Region – Chicago Regional Center • Chris Nielsen, Underwriter Branch Chief, HUD Multifamily Midwest Region – Detroit Satellite Office • Miles Hapgood, Senior Vice President, Stratford Capital Group, LLC Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 2

  3. The importance of integrating FHA multifamily loan programs & LIHTC • Align a multitude of efforts by government and private sector players: • HUD’s mission to preserve and produce affordable housing nationwide • IRS/Tax Reform Act of 1986 goals and processes • State HFAs and regional and local government interests • Private sector players: mission-driven non-profits, developers, investors, syndicators, lenders, 3rd party vendors, specialists/consultants • Community Reinvestment Act goals • Equal Access/Fair Housing/Economic Justice goals • Etc. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 3

  4. Today’s Session Outline • Introduction: LIHTC and the New MAP Guide: Chapter 14 • Broader Considerations in Chapter 14 • Processing Tools: Checklists, Narratives and Wheelbarrows • Architecture/Engineering Considerations • Mortgage Credit Issues • Application Processing and Underwriting Considerations • Developer’s Fees, GC Profit and Secondary Debt • Tax Credit Equity Pay-in and Equity Bridge Loan Considerations • HUD and Lenders Working Together on LIHTC & Affordable Deals • Questions and Answers Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 4

  5. Introduction: LIHTC and the New MAP Guide: Chapter 14 Chapter 14 is newly-added and consolidates much of the previous guidance from various sources. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 5

  6. Introduction: LIHTC and the New MAP Guide: Chapter 14 • The LIHTC Pilot Program is not covered in Chapter 14 (14.20 “forthcoming”) • Few 223(f) Pilot transactions expected under the new MAP Guide • 221(d)(4) Pilot Program Update Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 6

  7. Broader Considerations in Chapter 14 • Historic and New Markets Tax Credits • Both credit programs are not housing-based but are subject to requirements outside of HUD. • To the extent legally permissible, both can be used with FHA loan programs similar to LIHTC funding; otherwise must conform to MAP Guide in all respects. • Further details in Chapter 16 of the New MAP Guide. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 7

  8. Broader Considerations in Chapter 14 • Subsidy Layering Review • Eliminated for LIHTC projects using FHA-insured loans, but no other sources of Federal subsidy. • Other public funds (e.g. HOME, CDBG) may require formal Subsidy Layering Review; this will be done by a state agency, other public entity or HUD. • Lender’s underwriter is not required to complete Criterion 11, but lenders are still responsible to understand the Source and Use statement and possible project overfunding. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 8

  9. Broader Considerations in Chapter 14 • Evidence of Tax Credit Awards in Applications • Firm applications should include evidence of LIHTC award (4% allocation of bonds or 9% state agency TC allocation) or equivalent form of verification for Historic or New Markets TCs. • If LIHTC allocation timing doesn’t allow, other evidence is acceptable (e.g. bond allocator assurances that bond cap remains viable for period in question). Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 9

  10. Broader Considerations in Chapter 14 • Other Important Issues • Age restrictions for 55+ are no longer allowable for 221(d)4 with the new MAP guide. However, if there is a three-year history, the exemption might be granted as long as all of the other requirements are met. • 3-Year Rule waiver transactions are eligible only under the PILOT program if building permits were received prior to September 19, 2014. However, the 55+ age target is no longer allowable for three-year rule transactions. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 10

  11. Broader Considerations in Chapter 14 • Processing Through the Single Underwriter Model; Post Transformation • HUD Underwriter has discretion and authority to determine level of technical review required for all MAP loans. • Can pursue full or partial technical reviews, or waive them altogether. • Cannot waive environmental site visit and 4128 form completion. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 11

  12. Processing Tools: Checklists, Narratives & Wheelbarrows • Processing Checklists • 221(d)(4) checklist outlined in Appendix 4 (dated 11/23/2015). • Consolidated to 6 sections; down from 10 sections on previous template. • New construction and substantial rehabilitation on same checklist. • The “Tax Credit Pilot Program Application Exhibits Checklist” is mentioned in subsection 14.9: http://portal.hud.gov/hudportal/documents/huddoc?id=Appendix_D_Checklist.pdf Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 12

  13. Processing Tools: Checklists, Narratives & Wheelbarrows • Lender’s Underwriting Narrative • All Tax Credit loan applications can use the Tax Credit Program Pilot Lender’s Narrative template. • This narrative should work for all tax credit deal types. • Found at that HUD Tax Credit Pilot web portal: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/map/maphome/taxcredit Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 13

  14. Processing Tools: Checklists, Narratives & Wheelbarrows • Wheelbarrow • All Tax Credit loan applications must use the Tax Credit Pilot version of the “Wheelbarrow.” • Found at that HUD Tax Credit Pilot web portal: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/map/maphome/taxcredit • The wheelbarrow replaces Forms 92264 and 92264-A. Lenders are not required to submit these forms separately. • Lenders should check “N/A” in Section 1-3 of the application checklist and note that Forms 92264 and 92264-A are included in the wheelbarrow. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 14

  15. Architecture/Engineering Considerations • A/E Submission Requirements • Tax credit refinances (223(f)) and sub rehabs (221(d)(4) or 220) must conform to CNA requirements. • ALTA survey waiver for refinances of properties w/ existing FHA mortgages. • Certification of no material changes or additions to the structure or property boundaries since original closing. • Delayed submission of plans and specs allowed, but no later than 30 days prior to closing. • A cost increase of 5% or more compared to prior plans and specs will trigger additional HUD review as outlined in MAP Guide 5.6.D. and E. • Sample special condition language can be found in 5.6.E. • A&E/Cost application checklist for Tax Credit Pilot applications: http://portal.hud.gov/hudportal/documents/huddoc?id=Appendix_D_Checklist.pdf Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 15

  16. Mortgage Credit Issues • 2530s/Previous Participation • Non-profit sponsors: only Execs of non-profit & Board officers required. • Passive Investors and Syndicators: • In lieu of 2530, “Identification and Certification of Eligible Limited Liability Investor Entities,” or “Passive Investor Certification” replaces the LLCI certificate: • http://portal.hud.gov/hudportal/documents/huddoc?id=Passive_Invest_Id_Certifi.pdf • Certificate and org chart are only items needed for submission. • Applies to true passive investors only: • No day-to-day control of operations. • Only uses authority for occasional decisions (e.g. new management agent, replacement of GP, high-cost capital items). • I-of-I between syndicator & GP or Managing Member triggers a 2530 filing, as does creation of a GP or LLC Managing Member entity by syndicator. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 16

  17. Mortgage Credit Issues • Special Limited Partners and the Pre-approval Process • Special Limited Partner can be established to assume GP duties for a limited period of time in the event of default or failure by GP. • Achieved through a “Rider to the Security Agreement for LIHTC Properties.” • http://portal.hud.gov/hudportal/documents/huddoc?id=Security_Instrument_Rider.pdf • Instructions can be found on the LIHTC Pilot Program web site: • http://portal.hud.gov/hudportal/documents/huddoc?id=Pre-appr_Process_Instru.pdf Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 17

  18. Mortgage Credit Issues • Identities of Interest • Between lender and syndicator: • MAP Lenders can retain interests of up to 25% in the tax credit equity of projects for which they are the FHA lender, with no limit on the number of projects. • Supervised or publicly-held MAP Lenders may request prior approval to hold up to 100% of the ownership. • MAP Guide 2.7 addresses this. • Non-profits of currently insured or HUD-held properties: • May syndicate LIHTC properties and form new partnerships subject to HUD’s Transfer of Physical Asset (TPA) policies (per Housing Notice 2011-31). Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 18

  19. Application Processing and Underwriting Considerations • Underwriting Issues Specific to Tax Credit/Affordable Projects • 92264-A: 223(f) Tax credit applications involving ownership transfer to identity of interest buyers may be treated either as acquisition or refinance. • Underwriting Tax Abatements: If a purchase or refinance includes new or previously funded tax credit equity, the underwriting may recognize tax abatements even if they run with the sponsorship entity and not the land. • Sub Rehab Contingency: For projects that are not cost-constrained, HUD allows unused mortgageable contingency funds to be used to pay developer’s fee (deferred or not) or any other “reasonable project-related reimbursement item as defined by HUD.” • Projects qualify for affordable underwriting if they meet these requirements: • Rent and income restrictions must be imposed, monitored and enforced by a governmental agency for at least 15 years after Final Endorsement. • Either (a) a recorded Regulatory Agreement requiring the project to meet at least the minimum LIHTC restrictions of 20% at 50% of AMI, or 40% at 60% of AMI or (b) a Project-Based Section 8 contract for 90%+ of the units. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 19

  20. Application Processing and Underwriting Considerations • Calculation of Mortgage Amounts for TC Projects (MAP Guide 3.3 & 3.7) • 221(d)(4) and 220 (MAP Guide 3.3): • Criterion 3: 90% LTC for 90%+ rental assistance, 87% LTC for projects that meet the “Affordable Housing” definition. • Criterion 5: 1.11 DSCR for 90%+ rental assistance, 1.15 DSCR for “Affordable Housing.” • 223(f): • Criterion 3: 90% LTV for 90%+ RA/202/8 direct loans, 87% LTV for “Affordable Housing” projects with 10%+ below market rents, 85% LTV for affordable projects with less than 10% rent advantage. • Criterion 5: 1.11 DSCR for 90%+ rental assistance/202/8 direct loans, 1.15 DSCR for “Affordable Housing” projects with 10%+ below market rents, 1.176 DSCR for affordable projects less than 10% rent advantage. • Criterion 7 (for acquisitions) or Criterion 10 (for refinances). Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 20

  21. Developer’s Fees, GC Profit and Secondary Debt Developer Fees by Program: 223(f) • See Appendix 3.B of the new MAP Guide. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 21

  22. Developer’s Fees, GC Profit and Secondary Debt Developer Fees by Program: 221(d)(4) and 220 • See Appendix 3.B of the new MAP Guide. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 22

  23. Developer’s Fees, GC Profit and Secondary Debt • Treatment of Developer Fees • May be treated as mortgageable costs so long as they are: • 1) In amounts approved by the project’s LIHTC allocation agency, and; • 2) Scheduled for payment in amounts/times agreed upon with syndicator • No BSPRA or SPRA is allowed when developer’s fees (whether mortgageable or not) are included in the budget. • A nonprofit sponsor may establish a profit-motivated borrower entity for the purpose of owning a tax credit project or obtaining BSPRA. • If loan is up to 80% LTV, proceeds may be used for any purpose. • I-of-I between GC and Owner/Developer/Sponsor • Disclose in the application. • No imposition by HUD on GC profit amount, but must be “reasonable.” • GC profit & developer fee together can result in “excessive compensation.” • HUD generally relies on state allocator policies in these cases. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 23

  24. Developer’s Fees, GC Profit and Secondary Debt • Deferred Developer Fees • Treatment of Deferred Developer Fee: • Used to fill development gap as a source. • However, not a source during construction period. • Classification of Deferred Developer Fee: • Maybe be treated as secondary debt: • Subject to private debt requirements. • Deferred developer fee notes have no effect on mortgageable cost basis; 100% of developer fee is mortgageable. • May be treated as equity: • Must be in partnership agreement as obligation of upper-tier members and not an encumbrance on the property. • Does not need to meet secondary private secondary debt requirements. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 24

  25. Developer’s Fees, GC Profit and Secondary Debt • Deferred Developer Fees (continued) • Payoff of Deferred Developer Fee in Subsequent Transaction: • If note was treated as debt of the ownership entity or the project, it may paid-off and considered as other debt, or assumed by the purchaser to remain in place after the refinance. • If deferred fee is an obligation of principal(s), it will be treated as equity and will not be mortgageable for consideration as eligible indebtedness. It must be satisfied and not remain in place after the FHA loan closing. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 25

  26. Developer’s Fees, GC Profit and Secondary Debt Secondary Debt Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 26

  27. Developer’s Fees, GC Profit and Secondary Debt Secondary Debt (continued) Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 27

  28. Tax Credit Equity Funding and Equity Bridge Loans • Tax Credit Equity Pay-in Schedule • Net Equity equals Total Equity less 1st Equity Pay-in less Allowed Reductions. • Allowed Reductions equals Deferred Developer Fee, Delayed Developer Fee and Investor Reserves paid after 100% Completion of Repairs (223(f)) or Final Endorsement (221(d)(4). • Allowed Reductions are limited to 25% of Total Equity. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 28

  29. Tax Credit Equity Funding and Equity Bridge Loans • Equity Bridge Loans • What is an Equity Bridge Loan ? • Financing Tool to allow Equity Investors to delay capital contributions. • Investors yield is IRR driven. • Slower equity pay-in increases yield to Investors. • Bridge Loans allow Investors to contribute more equity to a project. • Interest Rate on Bridge Loan generally less than Equity return. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 29

  30. Tax Credit Equity Funding and Equity Bridge Loans Example Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 30

  31. Tax Credit Equity Funding and Equity Bridge Loans Example (cont.) Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 31

  32. Tax Credit Equity Funding and Equity Bridge Loans • Equity Bridge Loan Security and Repayment • Although an Equity Bridge Loan is a useful tool, it’s a loan that ultimately must be repaid. • Source of Repayment is Equity. • Security for Equity Bridge Loan: • Cannot be secured by lien on the real estate. • Equity Bridge Loan must be totally non-recourse to the Borrower. • Guarantees from GP and/or ILP. • Assignment of ILP’s interest in the Partnership. • Pledge of ILP’s Tax Credits. • Timing of Repayment: • MAP Guide has “no later than” dates. In practice, Investors will want Equity Bridge Loan fully-paid by Final Closing (construction financing paid off) to avoid capital account issues. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 32

  33. HUD and Lenders Working Together on LIHTC and Affordable Deals • Alignment of Goals • Affordable housing is core to HUD’s mission, vital to communities nationwide and a key part of the lending industry. • Communication • From the HUD side: the HUD Underwriter. • From the lender’s side: the MAP Underwriter and Loan Processor. Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 33

  34. Questions and Answers • Contact Information: • Thomas G. O’Neil, Vice President of FHA Operations, Dougherty Mortgage LLC • Phone: 612-317-2122; Email: toneil@doughertymarkets.com • Wendy Stamnas, SVP, FHA Chief UW, Churchill Mortgage Investment, LLC • Phone: 603-893-8100; Email: wstamnas@CSGfirst.com • Elizabeth Arteaga, Acting Senior Program Manager, Tax Credit Programs • Phone: 817-978-5498; Email: Elizabeth.H.Arteaga@hud.gov • Scott Greuel, Underwriter Branch Chief, HUD Multifamily Midwest Region - Chicago Phone: 312-913-8193; Email: Scott.R.Greuel@hud.gov • Chris Nielsen, Underwriter Branch Chief, HUD Multifamily Midwest Region - Detroit Phone: 313 234-7511; Email: Christopher.M.Nielsen@hud.gov • Miles Hapgood, Senior Vice President, Stratford Capital Group, LLC • Phone: 978-535-5600, ext. 124; Email: MMH@stratfordcapitalgroup.com Day 1 Panel: LIHTC Loan Processing and the New Chapter 14 Slide 34

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