Learning the Basics: Housing Tax Credits 101 Permanent Lender Perspective IPED | San Francisco | July 24, 2008

Options for LIHTC Properties 9% Tax Credits 9% Tax Credits 1. Freddie Mac (FRE) 2. Fannie Mae (FAN) 3. Conduits 4. FHA 4% Tax Credits 4% Tax Credits 1. Credit Enhancement by FRE or FAN 2. Direct Bond Purchase (unrated) 3. FHA

Todays Environment Higher yields required by investors = lower credit prices = greater reliance on debt to cover costs. Higher yields required by investors = lower credit prices = greater reliance on debt to cover costs. Fewer active syndicators mean that those active can be more selective. Fewer active syndicators mean that those active can be more selective. 9% = 9% 9% = 9% Tougher underwriting requirements, less waivers provided in certain markets. Tougher underwriting requirements, less waivers provided in certain markets. Volatile treasury rates and swaps – 10 to 20 bps swing within a week. From July 15 to July 22 nd the 10-yr UST increased 20 bps. Decreased 13 bps on July 24 th. Volatile treasury rates and swaps – 10 to 20 bps swing within a week. From July 15 to July 22 nd the 10-yr UST increased 20 bps. Decreased 13 bps on July 24 th. CMBS: Out until 2010? CMBS: Out until 2010? Other Sub-Prime fall out? Other Sub-Prime fall out?

Freddie & Fannie From conference call with Freddie this week: From conference call with Freddie this week: Still very much in business. Still very much in business. Still dedicated to multifamily – and possibly even more so; new programs, revised ARM product. Still dedicated to multifamily – and possibly even more so; new programs, revised ARM product. Multifamily uses overall less capital and meets housing goals. Multifamily uses overall less capital and meets housing goals. MF volume through May 2008 is roughly double from a year ago. MF volume through May 2008 is roughly double from a year ago. Same expected to be said from Fannie next week at a DUS Lender conference. Same expected to be said from Fannie next week at a DUS Lender conference.

FHA & LIHTC Historically LIHTC transactions have been very difficult to do with HUD – time, 2530, HUD. Historically LIHTC transactions have been very difficult to do with HUD – time, 2530, HUD. However, HUD issued Mortgagee Letter for streamlined process for applications with LIHTC. However, HUD issued Mortgagee Letter for streamlined process for applications with LIHTC. Highlights: Highlights: Reduction in the amount of equity that must be escrowed prior to initial endorsement from 100% to 20%.Reduction in the amount of equity that must be escrowed prior to initial endorsement from 100% to 20%. Delay in submitting final plans and specs until initial endorsement.Delay in submitting final plans and specs until initial endorsement. Commitments can be conditioned upon 2530 approval.Commitments can be conditioned upon 2530 approval. Each hub must designate an LIHTC coordinator.Each hub must designate an LIHTC coordinator.

Types of LIHTC Execution New Construction New Construction Acquisition/Substantial Rehabilitation Acquisition/Substantial Rehabilitation Acquisition/Moderate Rehabilitation* Acquisition/Moderate Rehabilitation* Pay Off of Bonds with Cash Loan (LIHTC restrictions remain in place and unchanged.) Pay Off of Bonds with Cash Loan (LIHTC restrictions remain in place and unchanged.) * Very popular program; less costly than forward commitments.

Loan Terms 9% LIHTC 4% LIHTC DSCR1.15x 1.20x; 1.15x in stronger markets. LTV85% Lesser of 80% market value or 85% of enhanced value. Amortization 30 years; 35 years in stronger markets. Term of Loan Min. of 15 years Min. of 18 years (for forwards) Interest Rate 10-yr UST + Spread + Servicing Bond Rate/Hedged Rate + Fee Stack

Interest Rate Comparison 9% Unfunded Forward Commitment for New Construction of Senior Property in Texas 10-year UST:4.15% FRE Spread:2.50% Servicing:0.40% Total Interest Rate:7.10%

Interest Rate Comparison 4% Funded Forward Commitment for Variable Rate Bonds for New Construction of in Idaho 24 mos. Fwd Swap Rate:4.20% (as of 7/21/2008) FRE Credit Enhancement:0.82% ( FRE Liquidity:0.20% FRE Swap Enhancement:0.12% Servicing:0.40% Issuer Fee:0.15% Trustee Fee:0.05% Remarketing Fee:0.10% Total Interest Rate:6.04%

Loan Sizing Interplay Between Debt & Equity Loan Amount – Lender and Equity Partner may have slightly different underwriting criteria. The maximum loan allowed by the Lender may not be as high as the maximum loan amount supportable by your Equity Partner. Loan Amount – Lender and Equity Partner may have slightly different underwriting criteria. The maximum loan allowed by the Lender may not be as high as the maximum loan amount supportable by your Equity Partner. UWing Differences – Vacancy, Other Income, Reserves for Replacement. UWing Differences – Vacancy, Other Income, Reserves for Replacement.

Underwriting Criteria Rental Income – Underwritten Rents must have a 10% advantage to market rents (rents charged by non-LIHTC properties.) The property may charge and receive rents that do not have a 10% advantage, but both lenders and equity partners require this to be underwritten. Rental Income – Underwritten Rents must have a 10% advantage to market rents (rents charged by non-LIHTC properties.) The property may charge and receive rents that do not have a 10% advantage, but both lenders and equity partners require this to be underwritten. Vacancy – Greater of 5% or market (i.e., vacancy of other LIHTC properties with similar LIHTC restrictions.) Some equity partners may have a minimum vacancy to be used. Vacancy – Greater of 5% or market (i.e., vacancy of other LIHTC properties with similar LIHTC restrictions.) Some equity partners may have a minimum vacancy to be used. Expenses – Generally, higher of appraisal or developers budget as long supported by Lender or Equity Partners own portfolio. Expenses – Generally, higher of appraisal or developers budget as long supported by Lender or Equity Partners own portfolio. Note for Developers: Expense comps from your own portfolio or from your management companys portfolio can be crucial in supporting your pro-forma expenses.

Reserves for Replacements Reserves for Replacement – Floor of $200 per unit for new construction and $250 per unit for renovations, as long as supported by construction consultant. Reserves for Replacement – Floor of $200 per unit for new construction and $250 per unit for renovations, as long as supported by construction consultant. FRE and FAN do not require reserves to be escalated annually. Equity Partner may require annual escalations, which the Lender can reflect in its loan documents. FRE and FAN do not require reserves to be escalated annually. Equity Partner may require annual escalations, which the Lender can reflect in its loan documents. Issuers may require reserves for replacements that are higher than required by Lender or Equity Partner – e.g., Nevada, New Mexico. Issuers may require reserves for replacements that are higher than required by Lender or Equity Partner – e.g., Nevada, New Mexico.

Real Estate Taxes FRE and FAN generally will give credit for partial or full real estate tax abatement/exemptions, as long as they extend through or past the term of the loan. FRE and FAN generally will give credit for partial or full real estate tax abatement/exemptions, as long as they extend through or past the term of the loan. If the abatement is finite and ends within the term of the loan, the financing can be bifurcated between a real estate loan and a tax abatement loan. If the abatement is finite and ends within the term of the loan, the financing can be bifurcated between a real estate loan and a tax abatement loan.

Third Party Reports Appraisal Appraisal Market Study – A new lender/equity-engaged report is necessary. Market Study – A new lender/equity-engaged report is necessary. Environmental or Review Environmental or Review Seismic/Probable Maximum Loss Seismic/Probable Maximum Loss Pre-Construction Plan & Cost Review Pre-Construction Plan & Cost Review Construction Monitoring Reports Construction Monitoring Reports - Same for both 4% and 9%. - Co-engagement between permanent lender, construction lender and equity partner will save time and money for the borrower.

Section 8 Properties with Section 8 HAP contracts are okay. PNC has closed numerous transactions with Section 8 HAP Contracts on all or a majority of the units. Properties with Section 8 HAP contracts are okay. PNC has closed numerous transactions with Section 8 HAP Contracts on all or a majority of the units. Underwritten rent must be lowest of: HAP rent, LIHTC rent or achievable market rent. Underwritten rent must be lowest of: HAP rent, LIHTC rent or achievable market rent. However, you can underwrite the HAP Overhang (FRE) or HAP Overage (difference between the greater HAP rent and the LIHTC rent.) if the DSCR using the LITHC rents is at least 1.10x. The HAP Stress Test. However, you can underwrite the HAP Overhang (FRE) or HAP Overage (difference between the greater HAP rent and the LIHTC rent.) if the DSCR using the LITHC rents is at least 1.10x. The HAP Stress Test. Both FRE and FAN require a HAP Transition Reserve (FRE) and Restabilization Reserve (FAN) of six months of debt service for use in the event of that the HAP contract does not receive its annual appropriations. Both FRE and FAN require a HAP Transition Reserve (FRE) and Restabilization Reserve (FAN) of six months of debt service for use in the event of that the HAP contract does not receive its annual appropriations.

Section 8 (contd) Retenanting/Restabilization Reserve must stay in place until a) the HAP contract expires or is not renewed or b) the property has transitions to market or LIHTC rents and has reached 90% occupancy for at least 90 days. Retenanting/Restabilization Reserve must stay in place until a) the HAP contract expires or is not renewed or b) the property has transitions to market or LIHTC rents and has reached 90% occupancy for at least 90 days. During the compliance period, FRE will allow the pre- funded, equity-required Operating Reserve to act as the HAP Transition Reserve as long the Transition Reserve is fully funded and held by the Servicer at the end of the compliance period. During the compliance period, FRE will allow the pre- funded, equity-required Operating Reserve to act as the HAP Transition Reserve as long the Transition Reserve is fully funded and held by the Servicer at the end of the compliance period. Short-Term Non-Renewal Contracts: A bifurcated loan structure can accommodate these types of contracts. HAP piece will be fully amortizing. Short-Term Non-Renewal Contracts: A bifurcated loan structure can accommodate these types of contracts. HAP piece will be fully amortizing.

Subordinate Debt Hard Debt Hard Debt FRE: DSCR cannot be less than 1.10x & LTV cannot exceed 90% FRE: DSCR cannot be less than 1.10x & LTV cannot exceed 90% FAN: DSCR cannot be less than 1.05x & LTV cannot exceed 95% FAN: DSCR cannot be less than 1.05x & LTV cannot exceed 95% Soft Debt (FRE & FAN) Soft Debt (FRE & FAN) DSCR: Debt Service cannot exceed more than 75% of cash flow after payment of operating expenses, reserves/escrows and senior debt. DSCR: Debt Service cannot exceed more than 75% of cash flow after payment of operating expenses, reserves/escrows and senior debt. LTV: Can exceed 100% LTV (e.g., HUD Restructuring Notes and Contingent Repayment Notes.) LTV: Can exceed 100% LTV (e.g., HUD Restructuring Notes and Contingent Repayment Notes.) Other Other Term: Subordinate debt cannot balloon during the term of the senior debt/CE. Term: Subordinate debt cannot balloon during the term of the senior debt/CE. Subordinate Lenders must execute FRE/FANs Subordination Agreement Subordinate Lenders must execute FRE/FANs Subordination Agreement Restrictions on interest accrual for non-governmental sub. lenders. Restrictions on interest accrual for non-governmental sub. lenders.

Questions or More Information? Terry Wellman Ph