1. FHA Underwriting & Opportunity Zones
Midwest Lenders Association
August 29, 2019
Swissotel
Chicago

2. Table of Contents
Underwriting the OZ QOF Transaction
Qualified Opportunity Funds
QOF Equity
Timing
Other Underwriting Considerations
Case Studies

3. I. Underwriting OZ QOF Transactions

4. Underwriting OZ QOF Transactions
Changes to HUD underwriting assumptions for OZ QOF transactions: None
Changes to underwriting process and procedures to be discussed separately (application fee, eligibility for Section 220)
Deals must still meet all MAP Guide requirements for the relevant Section of the Act.
DSCR, LTC, LTV, vacancy, escrows and reserves remain the same regardless of involvement of a QOF.
The presence of a QOF does not change the market risk profile of the transaction.

5. II. Qualified Opportunity Funds Considerations

6. QOF Considerations
Where does the QOF appear in the organizational structure?
What is the QOF’s ownership percentage or is the QOF the mortgagor?
Is a mortgage credit analysis needed on the QOF?
Is the QOF a passive investor, similar to an LIHTC investor? Is a 2530 needed or LLCI-type document?
Is the QOF a “friends and family” type “fund” or third-party equity fund?
Is the QOF a third party or related to the sponsor?
Who is the sponsor of the QOF?

7. III. QOF Equity Considerations

8. QOF Equity Considerations
What percentage of total equity needed does the QOF equity represent?
There should be a letter of intent (LOI), term sheet, or similar the QOF equity.
Does the QOF have the funds on hand at the time of underwriting or do the funds still need to be raised closer to closing?
Similar to LIHTC transactions, look to the QOF LOI for Cash to Close.
Similar to LITHC transactions, the QOF equity may comprise a majority of the equity needed.

9. QOF Equity Considerations
What is the timing of the pay in of the QOF equity for construction? Unlike LIHTC transactions, but similar to market rate transactions, expect 100% of the QOF equity to be available right away v. installments.
Is the developer providing any guaranties (e.g., completion, performance) to the QOF similar to those provided in LIHTC transactions?
Does the QOF want removal or transfer rights? These will be subject to TPA requirements.
QOF will need to understand distributions subject to Surplus Cash requirements.

10. IV. Timing Considerations

11. Timing Considerations
Is there an OZ-related closing deadline? Other closing deadlines not associated with OZ?
Is there a deadline for the QOF to identity the investment?
Is there a deadline for the investment to be made?
Does the investment in the property (rather than the fund) need to happen before closing?
Are there any ramifications of missing any of the above deadlines?
Properties will need to be substantially constructed/improved 30 months following initial QOF investment. How does the deal timeline compare to the 30-month deadline?

12. V. Other OZ Underwriting Considerations

13. Other OZ Underwriting Considerations
Does the development team have necessary like-kind experience – e.g., size, type (mixed use, urban in-fill)
Are there any additional risks related to the OZ that are outside of typical development risks?
Are there other state or local incentives related to the OZ that need to be factored in – e.g., TIF, tax abatement, other unique feature?
Are there any restrictions or requirements related to the other incentives that need to be factored into the underwriting?
Are there concerns over being the first development in an OZ?

14. Other OZ Underwriting Considerations
Was the deal going to happen anyway and the OZ investment is just a bonus?
Was land value impacted by OZ designation? Land comparables in or out of OZ?

15. VI. Case Studies

16. Case Studies
See handout.
Case Study #1 – Lakeland, FL
Case Study #2 – Gulf Shores, AL
Case Study #3 – Washington, DC