Rural Housing Service’s Mission

Transfer Principles Overview Training
Presented by Martha Hanson Transfer Principles Overview Training

Rural Housing Service’s Mission
Our Mission is to provide decent, safe, sanitary and affordable rental housing to low- and moderate-income persons living in rural areas. Our transfer process is one way we accomplish this mission. Our role is to ensure there is a need for the property, that it is placed in the hands of effective owners/management and minimize the impact on the tenants. While transfers offer an opportunity to improve the quality of housing through improved maintenance, rehabilitation, or better management, it can also increase the risk of loan default or poorer housing conditions unless we carefully evaluate each transaction. We all have the common goal of preserving affordable rental housing – let’s work together as a team to accomplish this goal

Transfer Guidance Guiding Principles The community needs the housing
The property will be in the Hands of eligible owners The transaction addresses physical needs Post transaction rents don’t exceed market rents Equity identified by a market value appraisal Minimize tenant displacement

Transfer Guidance References 3560 Regulations, Subpart I
Section MFH Ownership Transfers or Sales Section Subordinations and – Consolidations Servicing Handbook #3, Chapter 7

Transfer Guidance Key Analytical Concepts Eligibility Feasibility
The new proposed owner must be determined eligible. Feasibility The proposed transaction must be determined feasible. Improve or Maintain Risk levels Due to the fact that a transfer involves existing tenants and an existing property, it is necessary to reduce the risk of tenant displacement and ensure the property’s physical condition will be enhanced.

MFH Transfer Types Three Transfer Types:
Type I: Assumption of Debt Only transferee is simply assuming the existing Rural Development loan and no third-party funding is involved. Type II: Transfers With Additional Rural Development Financing or Subsidy additional financial assistance from Rural Development (e.g., a subsequent loan or debt deferral) together with the assumption of the existing Rural Development loan(s). Type III: Transfers with Third-Party Funding transferee is bringing or seeking funding (i.e., financing or a subsidy) from a source other than Rural Development. The third-party funds do not have to be firmly committed at the time of the transfer request but will need to be committed before the transfer can be closed.

Transfer Application Documents
Attachment 7-B-1 of Handbook 3 To shorten Agency processing time Standard List of Transfer Application Requirements Require only items needed to make informed decision

Transfer Processing Effective Processing Strategy
Set up a meeting with all parties early in the transfer discussion Discuss proposal, Agency requirements for appraisals, CNA, application checklist, timeframes Before applicant proceeds with ordering appraisal, CNA, or filing an application - all parties need to agree on whether or not rehab is going to be done as part of the transaction If rehab is proposed, 2 CNA’s are needed: 1 to identify CNA/Scope of Work / Rehab; and 1 to size the reserve deposit “post rehab” for next 20 years For the appraisal, refer to Attachment 7-E of HB-1, Appraisal Information Sheet.

Transfer Processing Third Party Funding
Documentation for any requirements imposed as condition of 3rd party funding LIHTC –show set aside by income level & unit type as well as income levels and max rents Any loan, include proposed note, loan agreements, security instruction and regulatory agreement Any grant, include proposed grant agreement

Transfer Application Appraisals:
Market Value Appraisal “Prospective Market Value, Subject to Restricted Rents within 7 CFR (b) (1) (i)” to determine security value Market Value Appraisal - “Market Value, within 7 CFR (b) (1) (ii) with any current restrictions or prohibitions currently existing on the property taken into consideration”; or “Market Value within 7 CFR (b) (1) (ii) Premised upon a Hypothetical Condition As-If Unsubsidized Conventional Housing” to determine RD’s limitations on sale price and equity pay-out whenever an equity pay-out is proposed to the seller.

Transfer Application Appraisal Requirements:
Required for all transfers where the existing debt, plus any new debt, exceeds $100,000, or when equity payout is proposed Provide instructions to appraiser on values needed by RD; and If RUP in effect, inform appraiser so he can take into account any reduction in value attributable to remaining RUP

Transfer Processing Capital Needs Assessment (CNA)
All transfers require completion of CNA Properties 8 units or less can meet this requirement by: a 3rd party CNA, or the purchaser accepts Rural Development’s published average CNA needs Resize reserve to meet 20 year inflated needs Reference the CNA UL issued February 18, 2016

Transfer Processing Partnering Understand criteria of all lenders
Are there any restrictions, i.e. income, rent, DSCR, handling of reserves If different criteria, underwrite to most stringent, i.e. DSCR, reserve deposit Share RD underwriting with lenders RD’s Preliminary Assessment Tool (PAT) is available on the Multi-family Housing Website Provides customers with the ability to develop transfers that will comply with RD underwriting thresholds and guidelines. The tool is not a substitute for underwriting analysis by the underwriters; however it will assist developers to structure transactions that address the thresholds and guidance used by RD in its own underwriting. Underwrite with most current information, application, S&U, funding sources

Transfer Processing Cushions for Transfers
RD’s Operating Cushion is now built into the PAT. Requirement that GOA have 20% of the proposed O&M less Tax & Insurance escrow at time of closing; and Requirement to underwrite to 3 year average vacancy/bad debt plus 2%. Some 3rd Party Lenders may have a requirement for an operating cushion as well.

Transfer Processing Equity from Third Party
Equity amount limited to lesser of amount documented in appraisal accepted by RD, or Equity amount supported at rents within CRCU Any restrictions on property must be considered when concluding market value New 30 year Restrictive Use Period required RD has the ability to subordinate it’s position to a third party lender if determined secured by the Security Value determined through an acceptable appraisal to the agency

Transfer Processing Third Party Loan Requirements Equity Funded by RD
The debt must be fully amortizing; or The maturity date is after the maturity date of all Agency debt; or There is an agreement by the 3rd party lender, acceptable to MPDL, to extend the scheduled maturity on terms that do not require rents above CRCU. Equity Funded by RD Agency only finances equity payouts for properties in prepayment process (Chapter 15); or for the purchase of existing 515 properties by eligible nonprofits organized under state and local laws include

Transfer Processing Limitations on Sales Price
RD places no limitations on sales price if paid solely by assumption of the existing debt plus non Agency funds that have no affect on Basic Rents In other situations, 2 limitations: 1st limitation is total of appraised value of real estate, plus Reserve Account balance (transfers to purchaser) 2nd limitation is sales price that fits within CRCU rents If a loan is put on the property that affects the debt service, then no more than the appraised value can be paid for the property. No matter if tax credit equity is being use or not.

Transfer Processing Repair Agreement - if rehab proposed
Tenant relocation costs if relocation is necessary Identify up-front repair items, timeframes for completion, cost estimates, funding source, who will do the work and any IOI between the transferee and the party doing the work Division of responsibility for repairs between buyer & seller If equity is proposed, a guarantee acceptable to RD that any excess costs will be paid from non project funds. Signed by seller & buyer and agreed to by RD Must address all repairs needed to bring property into compliance If CNA prepared assuming certain work to be done RD concurs in the repairs and cost estimates Month by month estimate for disbursements How will repairs be funded

Capital Needs Assessment (CNA)
Overview What is a Capital Needs Assessments (CNA)? Reviewing the CNA Underwriting with a CNA Replacement Reserve Analysis From the CNA Provider’s Perspective From both the CNA Providers and MPDL’s Perspective

What is a CNA? A written report identifying the repair, replacement, and improvement needs of a single property over an extended period of time It is a snap shot based on property conditions at a specific time within the 20 year period as required by RD It is not a Scope of Work Discuss history only if necessary. We’ve gone over this many times but we are just hitting the high points and basics to reinforce the purpose and what we can accomplish with the information a CNA provides based on current regs, ULs and application in underwriting.

Why is a CNA Required? Assure a reasonable estimate of future capital reserves is available to meet anticipated project physical needs Opportunity to preserve and revitalize existing RD rental housing projects Serves as a guide for planning and budgeting Note that the CNA is a “guide” for planning and budgeting. Once the CNA is approved by all parties, it does not become something sacred. It’s a planning tool, and should be treated as such. Just because you “plan” something doesn’t mean it will always come out that way. It might. You hope it will, but things change over time. You will have to adapt the CNA to conditions as they change over time.

What is the purpose of a CNA? Future planning Sizing the reserve Provide necessary data for underwriting Provide information for the Scope of Work Budgeting operations Revitalization to extend affordable use How do you use the CNA? To what degree should it be analyzed? Keep the purpose for requesting the CNA in mind. It’s not just something to be checked off of a processing list. Use the information to everyone’s advantage or the cost, time and effort have been wasted.

When are CNAs required? Transfer of ownership Revitalization under the MPR program Prepayment request Rehab MFH loans New MFH Construction Loan Servicing Reamortization Loan write-down Borrower’s request References found in today’s HBs and regs.

Incorporating a Property’s Rehabilitation into a CNA Rehabilitation repair list (aka “Scope of Work”) - developed outside the CNA Rehab list –provided to the CNA Provider Owner provides the cost information on the rehabilitation Don’t forget about updating the transition plan! Remember that the rehab/repair list, the scope of work and the cost estimates for the rehabilitation are NOT the CNA Provider’s job. Ultimately, it is the Owner (or management company representing the owner) who must get those items to the CNA Provider and RD.

Who is responsible for the CNA? Applicant – Selects CNA provider RD – CNA approval of contract Borrower/project management – existing replacement schedules/descriptions and maintenance plans/records CNA provider – inspection, reports and accurate estimates Other lenders/participants/consultants Lots of people have a role to play in the CNA process.

Who Provides the Costs? Between approval of the CNA and underwriting, the owner should provide more accurate rehabilitation cost estimates to RD Owner may use a project architect, cost estimator, or preferably from actual bids for the work. (NOTE: CNA Provider does NOT provide rehab cost information) We might sound like a broken record here, but note that it is the OWNER who provides the cost estimates for the rehab, not the CNA Provider. The owner may choose to use an architect, a cost estimator, or get bids for the work to determine those costs. RD would prefer actual bids, since they would be the most accurate.

Documents Use the latest published CNA UL published February 18, 2016. Attachment B, CNA Contract Addendum Attachment C/SOW Attachments E/Accessibility Laws and requirements. Provides help for CNA Providers and Reviewers) Accessibility Checklist Accessibility Q&A document Underwriter and CNA Reviewer sign final report (Attachment I) Refer to UL and HB requirements. Remember that there may also be additional limitations or requirements found in the respective NOFA/NOSA.

Owner selects CNA Provider RD provides Owner and CNA Provider copy of U.L., Contract Addendum, SOW, etc. HB , Chapter 4.17.B If owner (or new owner) pays, they pick If operating budget pays, they pick If reserves & under $3500, they pick If reserves & over $3500, 2 bids required If reserves & over $3500 & IOI, 3 bids required “Low bidder” not required, “reasonable” price required Not construction procurement, treat like professional services (hiring an architect, engineer, etc.) Consider qualifications / past experience with CNA Provider Multiple reviews / comments on a draft CNA uses your valuable time “Get what you pay for….” Owner makes the selection but the selection needs to produce a useful report. Since the owner (or management company, representing the owner) selects the CNA Provider, make sure they understand these points. This is not a construction procurement contract, so selecting the “low bidder” is not required. They must select a “reasonably priced” bid. Also, consider the qualifications of the bidders, and RD’s past experience with them. If you’ve had to make multiple reviews of draft CNAs in the past for this contractor, maybe a different, more cooperative, more knowledgeable contractor is the more appropriate choice. Your time (taken to re-review CNAs) is worth something! And, as usually is the case in life: “you get what you pay for….” Sometimes, the extra money is worth it…..

Using the CNA for Underwriting Establish starting point - Snap Shot of conditions agreed upon by Provider, RD Reviewer and Underwriter, and the Applicant / Borrower Build a Scope of Work - Identify what is actually going to be done –CNA does not equal the Scope of Work Coordinate Interests of all Participants - Find common ground to meet all participant requirements – LIHTC, lenders, management, owner, RD, involved third parties, etc. In coordinating the interests of all participants, include the Low Income Housing Tax Credits, other lenders, management company, owner, and RD. And, of course, don’t forget the property itself, and the tenants.

The CNA Report Prepare the report using RD CNA Template (or similar but our template format is preferred) Project Summary - Identification of provider, owner, and project. Narrative Description of property: rehabilitated? Family or elderly? 1 or 2 story? Crawlspace or slab? Health and Safety issues? Site, Architectural and structural elements, Mechanical and Electrical systems, Dwelling Units. Compliance with Accessibility requirements (see next slide) Use the prescribed template and format. Strongly encourage it to save everyone’s time and make inserting the data in the UTW easier. If they don’t use the format, you will need to manually insert the information into the template!

The CNA Report Accessibility requirements (see Attachment F & G of U.L. on CNAs) If there is a current SE / TP, Owner to provide copy of Self Evaluation / Transition Plan to CNA Provider CNA Provider uses information from SE/TP, including ALL ITEMS in CNA (not just these 3 years of the SE/TE, but includes all items found) If there isn’t a current SE / TP, get a new SE / TP. In rare cases, the CNA Provider could use the Checklist in U.L. Attachment F The Transition Plan must be current – not just re-dated. If there is a current Self Evaluation / Transition Plan, make sure the owner knows to provide a copy to the CNA Provider. Verify with the field office that the SE/TP exists, and that ALL items, not just those in this 3 year cycle, are included in the CNA. If there is no current SE / TP, ideally GET A NEW SE / TP. This revitalization is the Federal government’s best (only?) opportunity to get all the accessibility issues on this property corrected. Take it. If necessary, spend the money on a new SE/TP. In some rare cases, it may be appropriate to use the checklist in the Unnumbered Letter, Attachment F. However, that should be the exception, not the norm. In too many cases, accessibility hasn’t been adequately addressed in the repairs to the property. And, it needs to be understood that the SE/TP is a separate tool from the CNA. And, not that if the old SE/TP has expired, merely “re-dating” it is not sufficient. (More on both these topics to come.)

The CNA Report Steps Select Provider Sign contract Provide data/information CNA Site Visit, draft report Review and accept CNA Report Establish development Scope of Work Import to UWT Underwriter adjusts data in UWT to reflect SOW Approved CNA loaded into MFIS You can’t do a CNA without visiting the site.

References Guidance on the Capital Needs Assessment Process – UL dated February 18, 2016 Guidance on the Rehabilitation of Properties in the MFH Section 515 Rural Rental Housing and Section 514/516 Farm Labor Housing Programs – UL 4/26/12 Guidance on Servicing Issues Related to Multi-Family Housing Preservation and Revitalization Program Transactions – UL 1/22/13

Multi-Family Preservation and Revitalization Program (MPR)
MPR Basics Intent is to restructure existing 514/516 and 515 properties to ensure sufficient resources are available to preserve the ability to provide safe and affordable housing. MPR Program available to existing 515 and 514/516 Off Farm Labor Housing borrowers MPR funds used to preserve and revitalize affordable, decent, safe and sanitary housing, not to build new units, community rooms, offices. One exception, can build a new unit(s) if needed to meet accessibility requirement No additional RA is available under this program. MPR funds cannot be used to build community rooms, add additional parking areas, playgrounds, laundry or additional new units unless the additional unit(s) are needed to meet the 5% fully accessible requirements per UFAS and the Agency concurs. However, other funding sources as outlined below can be used for such purposes as well as revitalizations/improvements.

MPR Basics, continued Applicants can access Section 515 repair/rehab loan dollars through the MPR Any selected property may receive one or more of the available MPR tools. RD determines what tools are offered based on available funds, impact on tenants, and physical needs of the property No tenant(s) will be displaced resulting from increased rents All selected properties must agree to a new Restrictive Use Covenants (RUC) NOTE: 515 may/may not be available, depending on amount used for non-profit transfers outside of the MPR program.

NOSA Process MPR applications requesting debt deferral only may be submitted on an on-going basis through established deadline. MPR debt deferral available to properties with Agency mortgages maturing by established date that apply for and are selected. Points assigned as outlined in NOSA.

MPR Transactions (Complex or Portfolio) may also include Transfers, subordinations and consolidations. If a transfer is part of the MPR transaction and the transfer includes a seller payment and/or increase in the allowable Return to Owner, the transfer must first be underwritten to meet the requirements of 7 CFR Transfer underwriting may assume the deferral of all eligible Section 514 or 515 loans. After the transfer has been underwritten and concurred with by MHPDL Division, the MPR transaction may be underwritten. Subordinations will not be allowed unless all proceeds of the new debt are for eligible uses. Liens against the property, except Agency Deferred debt, cannot exceed Agency-approved security value of the property. All Agency debt (regardless of position) must be secured by the project, except deferred debt, which is not included in the Agency’s total lien position for computation of Agency’s security value.

Available Financing Tools MPR Debt Deferral –Deferral of existing 515/514 Agency loan(s) Maximum 20 year deferral If the term is less than 20 years, Agency will offer a re-amortization of the existing loans extending the term to a minimum of 20 years. Terms and conditions listed on MPR Debt Deferral Agreement Balloon Payment due at the end of deferral A balloon payment of principal and accrued interest will be due at the end of the deferral period. Interest will accrue at the promissory note rate and, if applicable, subsidy will be applied as set out on the , IC Agreement. Agency reserves the right to exercise all servicing authorities available at the end of the Deferral

Available Financing Tools MPR Grant Non profit borrowers only H&S issues only $5,000/unit maximum MPR Zero Percent Loan 30 year term/50 year amortization MPR Soft-Second Loan 1% interest Deferred for the longest remaining loan on the property at closing. Applicants may receive 1 or more of available MPR tools MPR Grant will be limited to the cost of correcting health & safety violations of property as identified in Agency accepted CNA. 0% Loan – Maximum term and amortization will be authorized by the respective program authority – 515 = 30 years amortized over max term of 50 years; 514/516 = amortized over max term of 33 years 1% Soft-Second Loan – Accrued interest and principal will be deferred to a balloon payment. Balloon payment will be due at the same time as the last maturing Section 514 or 515 loan already in place at the time of closing or the maturity date of any current loan being reamortized as part of the restructure. This loan is deferred for the longest remaining loan on the property at closing.

Available Financing Tools Other Sources Section 515 Rehabilitation Loan funds Section 514/516 Off-farm Rehabilitation loan/grant funds Owner provided capital contributions in the form of a cash infusion Owner provided cash infusion cannot be in the form of a loan. Applicants may receive 1 or more of available MPR tools MPR Grant will be limited to the cost of correcting health & safety violations of property as identified in Agency accepted CNA. 0% Loan – Maximum term and amortization will be authorized by the respective program authority – 515 = 30 years amortized over max term of 50 years; 514/516 = amortized over max term of 33 years 1% Soft-Second Loan – Accrued interest and principal will be deferred to a balloon payment. Balloon payment will be due at the same time as the last maturing Section 514 or 515 loan already in place at the time of closing or the maturity date of any current loan being reamortized as part of the restructure. This loan is deferred for the longest remaining loan on the property at closing.

Types of MPR Transactions Simple Stay-in owner. No change in ownership Complex May consist of project transfer to new owner with or without a consolidation or transaction requiring a subordination agreement as a result of third party funds. Portfolio Includes two or more projects (15 max) with one stay-in owner or Two or more projects with multiple project sale transactions to a common purchaser all located in one State Transactions within each category may utilize any or all MPR funding tools. For new people, they will be confused about difference between complex and portfolio. Complex assumes only 1 property remaining at closing. Portfolio, there must be at least 2 properties at closing. Complex – if a consolidation is proposed, applicant will submit one pre-application. Properties must be located in the same market area. To be considered in the same market area, properties must be in a neighborhood or similar area where the property competes for tenants; managed under one management plan/agreement and, in sufficiently close proximity to permit convenient and efficient management of the property. Applicants should discuss proposed consolidations with the Agency prior to filing application If Agency or owner chooses to remove one or more properties from proposal, it will not affect eligibility of the complex transaction. To be complex, Agency assumes only 1 project remains at the MPR closing. Portfolio – Stay-in-owner is defined as an existing 515/514/516 borrower who owns 2 or more properties either as a single ownership entity or as separate legal entities with at least 1 common GP/managing member. Each property included in the portfolio will be submitted on a separate pre-application form unless some properties are located in the same market area and are being consolidated. Properties proposed to be consolidated should be listed on the same pre-application form. Each pre-application must have the same portfolio name If the owner chooses to remove 1 or more properties, at least 2 projects must remain in order to be classified as a portfolio In the end, Agency assumes there will be 2 or more projects. Projects of stay-in owners or common purchaser must have at least 1 GP/managing member in common MPR tools available through the MPR demo program will be used to address preservation and rehab needs identified in the Agency accepted CNA Liens against the property, excepted Agency Deferred debt, cannot exceed Agency-approved security value of the property. All Agency debt (regardless of position) must be secured by the project, except deferred debt, which is not included in the Agency’s total lien position for computation of Agency’s security value.

Eligibility Information Applicants (and principals) must meet the following requirements: Eligibility included in 7 CFR or Provide required equity contribution as outlined in (c) for any new Section 515 loan offered as part of the MPR Continued ability to provide acceptable management The NOSA this year to allow any contribution from the applicant to be used towards the equity contribution. Also, you may want to remind people this is the equity contribution % as required at the time the initial loan was approved. (c): Loan applicants receiving LIHTC – equity contribution in the amount of 5% of the Agency loan. Loan applicants not receiving LIHTC and are not nonprofit organizations, consumer cooperatives or state/local public agencies – equity contribution in the amount of 3% of the Agency loan Funds Committed under Section I may be used to fund all or a portion of the required equity contribution Increased equity value of the property since the initial loan was made will not be given consideration.

Pre-application Requirements Review the NOFA/NOSA each year for the Pre-application requirements The MPR is a Demonstration Program Requirements may change from year to year The pre-application process is designed to lessen the cost burden on all applicants, including those who may not be eligible or whose proposals may not be feasible. The 2016 NOSA is currently being drafted. Since the MPR is a demonstration program, it does not have instructions, regulations or a handbook. MPR requirements are published in the NOFA/NOSA each year. MPR applications requesting debt deferral plus other MPR funding tools, must be received no later than 5:00 P.M. Eastern Time,120 calendar days after the publication of the notice in the Federal Register MPR applications requesting debt deferral only may be submitted on an on-going basis through COB (5:00 PM Eastern Time) December 31, 2015.

Pre-application Requirements Vacancy Rate - Section 515 RRH projects Average physical vacancy rate for the 12 months preceding the Notice’s publication date: no more than 10 percent for projects consisting of 16 or more revenue units no more than 15 percent for projects less than 16 revenue units Properties not meeting the occupancy standards, must submit current market data (defined as no more than 6 months old at time of filing) demonstrating need for the project. Survey of existing or proposed rental or labor housing Must include complex name, location, number of units, bedroom mix, family or elderly type, year built, rent charges, existing vacancy rate, their waiting list, amenities, and the availability of RA or other subsidies Any costs associated with the completion of the market data is NOT an eligible program project expense. For Section 515 RRH projects, the average physical vacancy rate for the 12 months preceding this Notice’s publication date can be no more than 10 percent for projects consisting of 16 or more revenue units and no more than 15 percent for projects less than 16 revenue units unless current market data is submitted with pre-application. We do not round down. If the average vacancy was 10.1 still need market study, if there are uninhabitable units we don’t take that into consideration either. Whenever the avg vacancy for the property is not met, provide a market survey. States are required to review the market survey and document their decision and discuss with your TL. The Agency will determine whether or not the proposal has market feasibility based on the data provided by the applicant.

Pre-application Requirements Pre-applications that did not include evidence of site control for transfer proposals or current market data for projects that did not meet the occupancy standards were considered incomplete and returned to the applicant. Complete pre-applications were scored and ranked for the selection process as outlined in the NOSA. Pre-applications that were selected for further processing were required to submit a formal application request (including a CNA) within 45 calendar days from the date the Agency’s notification/selection letter.

Appraisal An appraisal is needed when: Any new hard debt, regardless of source, greater than the eligible 515/514 loan being deferred. Soft loans are not considered. No appraisal is needed, even if greater than amount of deferral. Appraisal fees are purchase/seller expenses and may not be paid from project funds. Applicants are strongly encouraged to consult with RD before ordering appraisals to verify that the correct instructions are being provided to the appraiser and that the correct values are being obtained. An appraisal is NOT needed when: Debt deferral only, or Debt deferral with MPR tools only (Soft-Second, grant), or New hard dollars being offered (515 and/or 0% loan) are less than the amount of 515 loan(s) that can be deferred (soft seconds are excluded from appraisal requirements)

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