1. Best Practices in Multifamily Asset Management Discussion Leader: Valeri Pate, Director, Asset Management and Compliance, Washington State Housing Finance Commission Participants: Regina Bender, Senior Vice President, Team Leader, Bank of America Merrill Lynch Cindy Fang, Senior Manager, CohnReznick LLP Allen Feliz, Managing Director, TCAM Shawn McKenna, President and Chief Executive Officer, ProLink Solutions, Inc.

2. Speaker: Cindy Fang, Tax Credit Investment Services

3. Agenda Study Background Operating Performance Close-up at Underperformance Key Takeaways

4. Origin of Our Performance Studies – So… You want to see the track record? – The first study was undertaken by CohnReznick professionals in 2000 when 6,250 properties were surveyed.

5. Acknowledgement Formerly known as Great Lakes Capital Fund

6. Portfolio Composition (% of net equity)

8. Portfolio Composition (by age)

9. Agenda Study Background Operating Performance Close-up at Underperformance Key Takeaways

10. Occupancy Performance – Occupancy levels in LIHTC properties have been remarkably consistent from one year to the next; stayed at 96%+ and reached a historical high of 97.5% in 2014. – The spread between physical and economic occupancy has decreased to just 90 basis points.

11. The Current Study – Over 20,000 properties surveyed in 2015; representing approximately 70% of “actively managed” LIHTC properties and $83 billion in total credits. – 50 U.S. states, Guam, Puerto Rico, and U.S. Virgin Islands – 92% of U.S. MSAs – Data contributed by 35 participants including every active LIHTC syndicator.

12. Cash Flow Performance – Improved cash flow performance sustained Debt Coverage Ratios (“DCRs”) hovered between 1.13 and 1.15 for a significant portion of the last decade, before rising to 1.21 in 2009. 2010 marked the first year when none of the states operated below 1.00 DCR. Strong financial performance was observed across every segment and nearly every participant’s portfolio.

13. 2014 Median DCR by State

14. What made the improved operating performance possible? Out of many possible explanations, key contributing factors included: – Unprecedented demand for affordable housing units – Reduced economic vacancy losses – More sophisticated expense underwriting o A data provider reported a portfolio-wide actual vs. projected operating expense variance of 9% in 2014, vs. 32% in 2004. – More favorable debt to equity mix o The average hard debt leverage ratio among 9% properties was 15% for those closed within the last five years vs. 33% for those closed in the late 1990s – Refinancing at lower interest rates Will favorable operating performance sustain?

15. Not “Risk Free” – Housing tax credit properties are, by design, underwritten with a narrow margin for error due primarily to – o rent restrictions o the financial feasibility consideration, as the state housing credit agencies are required to allocate just enough credits to make the project financially feasible. – So… housing credit properties can easily get into trouble when: o Operating expenses such as utilities and real estate taxes spike o When rents can’t be raised due to negative AMI growth o When developers over-leverage their projects o When replacement reserves aren’t funded and maintenance is deferred. – Beyond operational risks, housing tax credit properties must conform to statutory and compliance requirements.

16. Agenda Study Background Operating Performance Close-up at Underperformance Underwriting Trends and Mythbusters Key Takeaways

17. Operating Underperformance – Incidence of underperformance continues to decline o 2005 – roughly 35% operating below breakeven (less than 1.00 DCR) o 2014 – only 16.9% operating below breakeven and the majority of those only by relatively modest amounts

18. Distribution of Occupancy

19. Distribution of Cash Flow

20. Cumulative Foreclosure Rate

21. Foreclosure Rate by Credit Type

22. Key Takeaways Incredible strength in affordable housing demand exists in virtually every part of the country. LIHTC property performance is strong, with all basic metrics continuing to improve. The risk profile in housing tax credit investments has fallen to an historically low level. The industry has come a long way at improving underwriting and asset management practices. Due to the fact that housing tax credit properties are, by design, underwritten with a narrow margin for error, aggressive underwriting, unexpected market condition or improper management can still result in property failures.

23. Thank you! Cindy Fang, CPA, MST Senior Manager Cindy.Fang@CohnReznick.com 617-603-4524

24. Speaker: Regina Bender, Senior Vice President, Team Leader

25. Speaker: Allen Feliz, Managing Director

26. 30 Years of Housing Credit Success  2.8 million units financed  Continued strong performance – In 2014, 97.5% occupancy across all geographies and sectors (per Reznick study)  Extremely low foreclosure rate  High rate of delivering investor benefits and leveraging private capital

27. Important Trend in AM  Many developer/owners planning ahead, really scrutinizing capital budgets and resources  Getting ready to refinance or redevelop before Year 15  Some state HFAs also focused on capital needs and resources

28. Growing Yr 15 Needs Throughout the Industry

29. Asset Management & Preservation at HFAs Today  TCAM State HFA AM best practices comp study (2015-2016)  AM at many state HFAs – heavily focused on compliance but many have adopted operational AM (albeit light on preservation)  Preservation often an important goal but none of the surveyed HFAs have created an explicit set of policies for AM  Some have taken steps to encourage action including incentives or set-asides in QAPs  Many rely on 4% LIHTC and the market to take care of properties “aging out”

30. Asset Management & Preservation at HFAs Today (Cont’d)  Other observations:  HFAs generally doing a good job making sure properties stay in responsible ownership  Transition to next stage – generally gone well but much of it due to favorable capital market environment conditions and demand for MF investments  HFAs and others – not always taking advantage of the Y15 transitions to get back money they have in deals (potential resource for future deals)

31. Asset Solutions  Different solutions for different situations  Three basic scenarios: 1) Property in a hot area and too expensive to keep affordable 2) Naturally affordable even without restrictions but is falling down 3) Most common – property’s unrestricted rents will be higher but not much higher than restricted rents  In all cases, introduce new incentives before Year 30  Develop policies and tools to help prioritize preservation needs and figure out how to use limited dollars

32. Organizational Solutions  Different areas require different skillsets and commitments Compliance Monitoring Operational AMTransactional AM -Tenant file reviews -Physical inspections -Financial reviews -Audit reviews -Budget reviews -Risk rating -Watchlist monitoring -Workouts -Refinancings -Recapitalizations -Dispositions -Preservation

33. Organizational Solutions (Cont’d) Asset Management Physical Inspections Compliance Special Transactions Loan Servicing Financial Reviews Underwriting /Production Asset managers or “information aggregators” who inform transaction specialists

34. Conclusions  Establish the right org structure, policies and tools to proactively address preservation  Maximize resources from existing portfolio where you can  Dearth of soft financing and rising levels of “hard” debt  Important to act while you can  recent low inflation has led to a false sense of security about operating expenses  In the face of real constraints, state HFAs can help convene key stakeholders

35. Best Practices in Multifamily Asset Management Allen Feliz TCAM 186 Lincoln Street Boston MA 02111 (617) 542-1200 2016 Housing Credit Connect Seattle, WA June 15, 2016

36. Speaker: Shawn McKenna, President

38. Asset Management vs. Compliance

39. The Lifecycle of Asset Management The Institute of Asset Management defines asset management as the “coordinated activity of an organization to realize value from assets.”

41. Evaluating your current processes What is the current state of asset management? How are you evaluating and managing assets?

42. Implementing an Effective Asset Management Program Step 1: QAP/Underwriting & Pricing Step 2: Define Obligations & Responsibilites Step 3: Streamline the Onboarding Process Tax Credit Allocation and Loan Origination

43. Implementing an Effective Asset Management Program Step 1: Periodic Process of Evaluation Step 2: Ability to Handle Problems Step 3: Regulatory & Investor Reporting Portfolio Management

45. Thank you! Shawn McKenna President, CEO smckenna@prolinksolutions.com (303) 663-5900