Guaranteed Rural Rental Housing Program Tammy Daniels Senior Finance and Loan Analyst

1. Guaranteed Rural Rental Housing Program Tammy Daniels Senior Finance and Loan Analyst Tammy.Daniels@wdc.usda.gov

2. Section 538 GRRHP Guidance • 7 CFR Part 3565 and accompanying Handbook • Housing Act of 1949, as amended • https://www.rd.usda.gov/publications/regulations-guidelines

3. Section 538 GRRHP • Historical Information • Eligible Rural Areas (20,000/35,000) • Tenant Information • Borrower Eligibility • Property Requirements • Financing Terms

4. Section 538 Types of Guarantee Option 1 – Permanent Financing Option 2 – Construction/Perm Option 3 – Continuous Guarantee Construction Only

5. Basic Construction Requirements (Options Two and Three) • Pre-construction conference (borrower, lender, architect, Agency may attend) • Construction must meet the requirements of 1924 • The construction schedule –Can it be completed in a timely manner? • Construction Contractor experience: verify through SAM • Construction Contract – Agency will review and must concur • Architectural Services – must be a professional architect • Plans and specifications – Agency reviews, preliminary, and final • Change Orders – Agency reviews and approves • Final Cost Certification – Agency must review and accept final costs • Inspections – Will attend the footing, framing and final. (This is updated with the changes to Chapter 5). • Lender approves Pay Draws • During the construction period, the Lender must submit monthly reports to the Agency

6. Basic Construction Requirements (Options Two and Three) • Construction Advances: Agency guarantees up to 90 percent of the amounts advanced by the lender • Secured by an acceptable credit enhancement Examples: • Surety bonding or performance and payment bonding acceptable by the Agency; • An irrevocable letter of credit acceptable to the Agency. • A pledge to the lender of additional collateral that is acceptable to the Agency • Capital Needs Assessment is needed for all rehabs • Construction must be completed within 24 months

7. Eligible Uses of Loan Proceeds (List is not all inclusive) • New construction and associated costs • Rehabilitation and acquisition costs (when related to the rehabilitation) • Rehabilitation of existing multi-family units (stay-in-owner) • All rehabs must meet the minimum $6,500 per unit • Facilities related to the project (community space, recreation, storage, etc.) • Purchase and installation of appliances • Professional Services

8. Ineligible Uses of Loan Proceeds • Specialized Equipment for training or therapy • Cooperative Housing • Student Housing • Housing in military impact areas • Housing that serves primarily temporary and transient residents • Institutional type homes that require licensing as a medical care facility • Operating capital for central dining facilities • Refinancing of an outstanding debt

9. Section 538 GRRHP Portfolio at a Glance • Closed Loans (as of 3/31/2018) • $1,193,249,719 • 945 loans • 48,002 units • $1,096,096 Tax Credits • $99,153,575 Non-Tax Credits • Program is operated with ZERO subsidy • Delinquency rate is below 1% • Closed loans in all States except Hawaii, New Hampshire, and Utah

10. Section 538 GRRHP Funding Update • FY 2017 • Appropriated: $230,000,000 • Obligated: $176,969,693 • FY 2018 • Allotment: $250,000,000 • Obligated: $ 75,127,846 • As of March 31, 2018

11. Section 538 GRRHP Texas Activity • Obligated: $67,233,849 • Closed: $69,935,020 • Number of Closed Loans: 42 • Number of Units: 2,627 • As of March 31, 2018

12. Section 538 GRRHP Works with other funding sources HOME LIHTC and Bonds HAP Contracts Rental Assistance State Funding AHP ***Section 538 Loan will be in First Lien Position***

13. Section 538 GRRHP Other funding sources not needed, however: • Guarantee may be decreased (less than 90%) • Will need to target moderate income tenants

14. The Section 538 Notice of Solicitation of Applications (NOSA): • Informs the public of level of funding • Is contingent on Congressional Appropriations • Is published in the Federal Register • Invites the public to apply for funds by submitting a “NOSA Response” (pre-application) • Can be submitted electronically or in Hardcopy to the State Office where the project will be located • Current NOSA expires December 31, 2021

15. “Notice to Proceed” with Complete Application (Award Letter) • Issued for responses deemed eligible • Not a commitment for a loan guarantee • Instructs lender to submit complete application within 90 days • Requests lender to contact RD to schedule Planning Meeting

16. Contents of the GRRHP Application Section 538 GRRHP Application Checklist, Chapter 4, Attachment 4-A • Agency Forms (Refer to HB-1-3565, Section 4.8B) • Borrower Information (borrower eligibility, credit reports, organizational documents) • Project Information (appraisal, market study, CNA (if applicable), management plan & agreement) • Lender’s Narrative, Supporting Documents & Certifications (lender’s conditional commitment, pro-forma budget, Environmental documents) • Agency will usually render a decision within 90 days of receipt a complete application

17. National Office Review and Concurrence • Congregate Care Facilities • Loan amount $5,000,000 or more • Loan-to-value or Loan-to-cost 75% or more • Any application at the discretion of the Director • If any of these conditions exist, take into account that this additional review must be included in the Agency’s 90 day review period.

18. Conditional Commitment • TERM • Original term not to exceed 24 Months • Case by Case additional 12-months granted by State Office • Total cumulative commitment period ≤ 36 months • Cumulative greater than 36-months  Director, MFGLD in National Office • Not used to extend guarantee period for construction • Government’s best interest • Lender must respond to Conditional Commitment within 60 days • All conditions must be met before the loan can close (Options One and Two) • All conditions must be met by the date indicated in order for the loan to remain in compliance (Option Three)

19. Closing Documents • Signed Form RD 3565-2, Conditional Commitment; • Promissory Notes; • Security documents (if applicable); • Personal or corporation guarantees with related security documents; • Form RD 3565-3, Lender’s Agreement; • Form RD 3565-4, Loan Note Guarantee; • Opinion of Lender's Counsel in form prescribed by OGC; • Regulatory Agreement with attached certification from the lender’s attorney • Deed Restriction or other recordable instrument acceptable to the Agency • Updated organizational documents • First closing in the State, documents must be reviewed by Agency Office of General Counsel

20. Section 538 GRRHP Fees • Application Fee: $2,500 (N/A under current NOFA) • Initial Fee: 1% of the guarantee amount is due at closing of guarantee • Annual renewal fee: 50 BP will be charged each year or portion of the year guarantee is in effect • Transfer Fee (After loan is closed): $1500 • Extension of a Conditional Commitment: $1500, first request; $2500 subsequent requests • Reopen a Commitment: $3500

21. Section 538 GRRHP Tidbits • Prepayment is allowed, borrower must abide by any prepayment restrictions from the lender. (Agency funds cannot be used for prepayment) • If a guaranteed loan is paid off, the Restrictive Use will remain in place until the expiration of the original term of the loan • If the guaranteed loan is paid off or terminated, the borrower will be required to submit an annual status report to the Agency that the housing remains available for occupancy in accordance with Agency Regulation (7 CFR part 3565 or successor regulations) • Whenever there are other funding sources involved in a 538 transaction, the most stringent requirements will prevail

22. What Does the 538 GRRHP offer Developers? • No restriction on return • Construction advances guaranteed • Guarantee on permanent loan • No Davis Bacon requirement • Uses include soft costs • Workforce housing eligible and compatible • Housing type flexibility (must be at least 5 units) • Up to 90% LTV for for-profit entities • Up to 97% LTV for non-profit entities • Qualified Allocation Plan (QAP) preference

23. What Does the 538 GRRHP offer Lenders? • Up to a 90% RD Guarantee • Lender’s underwriting standards • 100% of loan can be sold • CRA credits • Sell or hold servicing • Lender retains servicing fee • Not counted against lending limit • Funds can be from tax exempt source • Active secondary market – Ginnie Mae will Pool loans that have up to a 70% Loan to Cost • Best negotiated interest rate • 538 Loan Must be in First Lien Position

24. Who are the Section 538 Lenders? • Banks • Mortgage Companies • Housing Finance Agencies • Real Estate Investment Trusts (REIT’s) • Currently 89 lenders in the program • National Office and State Offices have access to the Eligible and Approved Lender List

25. Section 538 Lender Eligibility Approval Process • Basic Eligibility Test • HUD, Freddie Mac, Fannie Mae and Ginnie Mae approved multi-family housing lenders • Originated at least one multifamily loan in the last 24 months and/or is currently servicing at least one multifamily loan

26. Section 538 Lender Eligibility Approval Process • Demonstrated Eligibility Test • Housing Finance Authorities, Federal Home Loan Bank Members, and any lender demonstrating: • BBB rating or better from a lender rating agency • Capacity to underwrite, originate, process, close, service, manage and dispose of multi-family loans; • Track record of at least 3 multi-family loans, including at least 1 active loan in the past 2 years

27. Requesting Lender Eligibility • Application for loan approval is submitted • With the first loan NOSA Response OR • Independent of a loan application • Lender application review conducted at the National Office. Applicant will receive a written response within 30 days of submission. Lenders who are currently approved in other RD loan programs are NOT automatically approved in the Section 538 GRRHP.

28. Section 538 Lender Eligibility vs Lender Approval • An Eligible Lender has met the Agency’s requirements but has not yet issued a Loan Note Guarantee • An Approved Lender has closed a Section 538 loan, the Agency has issued a Loan Note Guarantee and the lender is actively servicing a 538 loans

29. Maintaining Lender Approval Status A Lender remains in the program unless the lender: • Is inactive for three consecutive years; or • Fails to maintain requirements for eligibility; or • Voluntarily withdraws from the GRRHP; or • The Agency removes the lender from the program for just cause

30. Reapplying for Lender Approval Status • Must reapply to regain approved status • Past program performance may be used for demonstrated ability • At the least, submit: • recent financials • updated Resumes • Updated Contact Person

31. Section 538 Lender Reviews • Conducted by the Agency • Periodic Onsite Visits (Once every 3 years) • Conducted to ensure compliance with RD guidelines and regulations • Responding to Findings (do so in a timely manner and thoroughly)

32. Section 538 Lender’s Reporting Requirements • Monthly • Quarterly • Annual • Lenders should be established on the Application Authorization Security Management System (AASM) Requires E-auth Level 2 • Electronic reports are submitted through the Lender Interactive Network Connection (LINC)

33. Lender’s Reporting – Monthly Reporting • Properties in Monetary or Technical Default • 1980-44, Guaranteed Loan Borrower Default Status • Indicate why the loan is in Default, when the default will be cured • Indicate the corrective action plan to cure the default • Indicate the physical condition of the property • The occupancy rate of the property • Lender must report on the loan until the default is cured • Workout Plan should be submitted to the Agency for Loans in Default

34. Lender’s Reporting – Quarterly Reporting • Quarterly reports detail the current financial status of the GRRHP loan – Should be submitted by the last days of January, April, July and October • Submitted to the State Office using Form RD 1980-41, “Guaranteed Loan Status Report” • Lenders may also submit via LINC

35. Lender’s Reporting – Annual Audits Within 120 days of the end of each project’s fiscal year, the lender must submit a report to the Agency detailing their review of the project’s annual financial statement.

36. Lender’s Reporting – Annual Audits (Report to the Agency) • Debt Service Coverage Ratio • Tenant Information • Vacancy Levels • Compliance with the Affirmative Fair Housing Marketing Plan and Fair Housing • Certification that Borrower is in Compliance with Rent Restrictions • Physical Condition of the Property • Any Physical and Financial Deficiencies • Borrower’s Annual Fair Housing Report • Replacement Reserve and Escrow Accounts • Any Unresolved Issues From the Previous Report

37. Lender’s Reporting – Annual Audits (Eligibility) • Active Lenders must submit annual audit • Due to the National Office within 120 days of end of Lender’s fiscal year • Conducted in Accordance with GAGAS • Financial and Program Performance

38. Section 538 Lender’s Annual Inspection Requirements • First Annual Inspection must include 100 percent of units • Annual Inspections must be documented on Form RD 3560 -11 • Include Photos of Exterior and Interior of the building, units, common areas, grounds, etc. • Summary of Physical Inspection will be included in the Annual Report

39. Preserving and Revitalizing Section 515 Properties with Section 538 Guaranteed Loans • Transfer or acquire ownership of property • Revitalize existing property • Must need at least $6,500/unit rehab • Longer Loan Terms • Add seasoned loans to portfolio • Promote goodwill in community • Secondary Market Opportunities

40. Preserving and Revitalizing Section 515 Properties with Section 538 Guaranteed Loans • Section 515 mortgage will Subordinate • Guaranteed Rural Rental Housing Section 538 in the first lien position • 538 provides Equity Pay Out • Borrower does not have to be single asset entity • Best case scenario, the 538 application should be submitted concurrently with the 515 MPR/Transfer application • Lender will hold the Replacement Reserves • Additional Information: Unnumbered Letter dated November 21, 2107 “The Matrix”

41. 538 GRRHP Tools Refinancing Unnumbered Letter, dated May 3, 2017 Only existing Section 538 Loans are eligible Section 515/538 transactions are not eligible Interest Credit - the Interest Credit will be terminated New NOSA will need to be submitted, followed by new application if Notice to Proceed is issued by State Office Program Fees will apply

42. 538 GRRHP Tools Loan Modifications • Interest Rate Reduction Only • Incumbent Lender must Submit Supporting Documentation to the Agency • Must be a Benefit to the Property • Loan must be current or an approved workout plan must be in place • Requires National Office Concurrence

44. ContactInformation: Tammy Daniels Rural Development Multi- Family Housing Guaranteed Loan Division Tammy.Daniels@wdc.usda.gov 202-720-0021 www.rd.usda.gov