Investor Sentiment

Industry Landscape – an Investor’s View Two major factors created angst in the tax credit industry: the threat of tax reform/reduction in the corporate tax rate proposed budget cuts by the administration.  The result was a 10% decrease in the approximately $14 billion invested annually in the LIHTC program. Based on skepticism over the timing of and prospect for major corporate tax reform, pricing has leveled out.  Tax credit pricing assumes corporate tax reform to a 25% tax rate.  Cohn Reznick’s July 2017 Housing Credit Pricing Update reported median housing credit price in the last 60 days of $0.94 across 150 deals.  No longer language in commitment letters for guarantees or cash developer fee holdback language for rates less than 25%. Trump’s proposed budget cuts to HUD, CDBG, Choice Neighborhoods and HOME have not been realized.  The House Appropriations Committee proposal scaled back CDBG slightly, from $3 billion to $2.9 billion, and cut HOME from $950 million to $850 million. Grants for Homeless Assistance were funded at $2.4 billion, which is equal to the level provided in fiscal year 2017.   Senate Committee on Appropriations unanimously approved the 2018 THUD Appropriations Act at $60.06 billion in discretionary budget authority, $2.41 billion more than in 2017 and $12.130 billion more than Trump’s budget. Encouraged by an 8/1 Senate Finance Committee meeting entitled “Increasing Access to Affordable Housing” and recognition by Chairman Orrin Hatch of the efficacy of the Low Income Housing Tax Credit (LIHTC) program for addressing the affordable housing crisis. 4/15/2015 PRE-DECISIONAL, PROPRIETARY, and CONFIDENTIAL

Investor Underwriting Increased tolerance for Sec. 8 overhang (Sec. 8 rents greater than achievable LIHTC rents); No longer substantial cash re-tenanting reserves. No geographic markets deemed off limits. Typical operating deficit reserve requirement: 6 months expenses and debt service held for 60 months (with last six months prior to release at a 1.15 DSCR).  Operating reserves held for 36 to 48 months in some instances, but not norm.  “Stabilization” used to be defined as a 1.15 DSCR using the higher of actual or underwritten expenses on a line by line basis.  Now defined as the higher of actual or underwritten in the aggregate.  4/15/2015 PRE-DECISIONAL, PROPRIETARY, and CONFIDENTIAL

Investor Underwriting (continued) Investors dislike sharing reserves; however, will sometimes rely on a portion of the HUD controlled operating reserve released 12 months following completion (and 6 months of break-even) to count toward the 6 months.  Contingency- for new construction, will count the 2% of the working capital reserve toward their minimum 5%.  On a substantial rehabilitation, control is shared.  On a 223(f), investors have ceded (perhaps unknowingly) control of the contingency/repair assurance.  Vacancy- If Section 8, automatic 5% vacancy, unless in a rural market where vacancy is higher.  If 100% LIHTC, no matter the rent advantage, 7% vacancy.  There may be the rare instance in LA or NYC but not typical. 4/15/2015 PRE-DECISIONAL, PROPRIETARY, and CONFIDENTIAL

Investor Underwriting (continued) DSCR 1.15 through compliance periodB Before only required at closing.  Now being imposed at stabilization based on actual operations (for release of cash developer fee, as HUD loans automatically convert).  In the last two years, returning to 2% income escalation being applied to stress test.  In the three years before that, lower escalation due to declining or stagnant AMI levels.  20% equity contribution at close widely accepted. Requirements for bridge loan to be repaid at closing for 223(f) and Final Endorsement for 221(d)4, even though no mortgage is allowed, is causing confusion at closing and later.  Investors do not think it makes sense and are passing on the pricing risk to the project sponsor.  Still applying the later of performance benchmarks or a date to equity installments, but inserting adjuster language to pass the yield hit to the owner if HUD forces the equity contribution. 4/15/2015 PRE-DECISIONAL, PROPRIETARY, and CONFIDENTIAL