1. Closing the Equity Gap in Real Estate Development HUD/ FHA Financing, Economic Stimulus Funds and Tax Credits CBA – Real Estate Section Luncheon September 3, 2009 John K. Carson 303.634.2102 | jcarson@swlaw.com

2. 2 Closing the Equity Gap HUD/ FHA Financing  © All rights reserved. Notice: As part of our efforts to inform you of changes in the law, Snell & Wilmer L.L.P. provides legal updates and presentations regarding general legal issues. Please be aware that the following presentation is provided as a courtesy and will not establish or reestablish an attorney-client relationship or assumption of responsibility by Snell & Wilmer to take any action with respect to your legal matters. The purpose of the presentation is to provide seminar attendees general information about recent changes in the law that may impact their business. The presentation should not be considered legal advice or opinion because the content may not apply to the specific facts of a particular case.

3. 3 History of FHA  The National Housing Act of 1934 created the Federal Housing Administration (FHA).  10 percent of homes were in foreclosure.  Homeownership rate was around 46 percent, today it is 67 percent.  Section 203 of the National Housing Act created the single family mortgage program – one to four family homes.  Section 207 of the National Housing Act created the multifamily project program.

4. 4 History of FHA  During the early part of the 20 th Century and into the Great Depression home loans were typically less than 10 years in duration with a balloon payment at the end and down payments were 50 of the purchase price.  By the 1950s, largely due to FHA, 30 year fixed rate mortgages were the norm and down payments of 20 percent were standard.

5. 5 History of FHA  FHA mortgage insurance provides lenders with protection against losses as the result of defaults on mortgage loans.  The lenders bear less risk because FHA will pay a claim to the lender in the event of a default.  Loans must meet certain requirements established by FHA to qualify for insurance.* * www.hud.gov

6. 6 History of FHA The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.

7. 7 Closing the Equity Gap HUD/ FHA Financing  Denver Office of Multifamily Housing for HUD/FHA covers apartment new development and purchase/ refinances for Colorado – 221(d)(3) & (d)(4) and 223(f) & 220.  Developers/ Borrowers will typically work with an FHA approved MAP Lender (Multifamily Accelerated Processing).  Health Care and Long Term Care financings are directed through the Office of Insured Health Care Facilities in Washington DC, although processing will be assigned to certain local HUD offices such as Seattle and Portland.

8. 8 Closing the Equity Gap HUD/ FHA Financing  Section 221(d)(4) – Market Rate Multifamily New Construction/ Substantial Rehabilitation (for-profit) – 221(d)(3) for non-profits.  Combined construction & permanent financing  40 year mortgage term.  Loan up to 90% of project’s replacement cost (100% for non-profits).  Non-recourse.

9. 9 Closing the Equity Gap HUD/ FHA Financing  The substantial rehabilitation aspect of the program includes projects where the cost of repairs exceeds the greater of $6,500 per unit or 15% of the estimated replacement cost after all repairs and improvements.  Properties with improvements costing less than the above thresholds are eligible for the 223(f) purchase/ refinance program.

10. 10 HUD/ FHA Financing  Section 223 (f) – Acquisition/ Refinance.  Provides mortgage insurance for loans to purchase or refinance existing multifamily properties.  Construction or substantial rehabilitation of the property must have been completed at least 3 years prior.  Maximum mortgage term is typically 35 years.  Mortgage limit is up to 85% of the appraised value.

11. 11 Closing the Equity Gap HUD/ FHA Financing Section 220 – New Construction or Substantial Redevelopment in Urban Renewal Areas. Commercial space can be 20% of gross project area, and 30% of gross income. Maximum insurable mortgage for a new development may be up to 90% of the replacement cost, and up to 90% of the sum of the estimated cost of rehabilitation and “as is” value of the property for a substantial rehabilitation. Loan term may be up to 40 years. Can combine with New Markets Tax Credits.

12. 12 Closing the Equity Gap HUD/ FHA Financing Section 232 - Long Term Care – Nursing Homes, Assisted Living, Intermediate Care Facilities. Patients generally require skilled nursing care, or care by a licensed or trained professional. Maximum loan amount for new construction or substantial rehabilitation is 90 percent (95 percent for nonprofit sponsors) of the appraised value including major movable equipment. Under the purchase and refinance program the maximum loan is 85 percent (90 percent for nonprofit sponsors) of the appraised value including major movable equipment.

13. 13 Closing the Equity Gap HUD/ FHA Financing There can be no equity take out under the 232 refinance program. Mortgage term for new construction and substantial rehabilitation is up to 40 years, while the mortgage term for existing properties is up to 35 years. FHA has insured over 4,000 long term care facilities.

14. 14 Closing the Equity Gap HUD/ FHA Financing Section 242 – Hospital Mortgage Finance – Recent $756 million deal in Trenton, New Jersey – largest in FHA’s 75 year history. Public, proprietary, and non-profit acute care hospitals regulated by the state are eligible, as are Critical Access Hospitals (25 beds or less) that have received designation from the states and HHS. Program also includes Large Urban Teaching Hospitals.

15. 15 Closing the Equity Gap HUD/ FHA Financing The 242 maximum loan-to-value is 90%, the loan term is 25 years. Loan is non-recourse. A Certificate of Need (CON) must be issued or pending in those states with the CON process. Design/build construction is allowed up to $30 million. FHA has insured mortgages on nearly 400 hospitals.

16. 16 Closing the Equity Gap HUD/ FHA Financing Section 223(f) refinance in conjunction with Section 242 financing – program announced by HUD on July 1, 2009. Previously HUD had only insured financing for new construction, or rehabilitation of existing hospitals. Hospitals must show that due to the credit crisis they have experienced, or will soon experience an increase in their interest rate of 1 percent since January 1, 2008. Hospital must maintain an aggregate operating margin greater than 0.33 percent and an average debt service coverage ratio of at least 1.80 for the last 3 years. Maximum mortgage amount is limited to existing indebtedness plus reasonable fees.

17. 17 Closing the Equity Gap HUD/ FHA Financing  Section 234(d) – Mortgage Insurance for Construction or Substantial Rehabilitation of Condominium Developments.  Blanket mortgages to finance the development of multifamily projects that are to be sold as condominiums.  Mortgage can be up to 90% of the estimated replacement cost of the project, reduced to 80%if less than 80% of the total value of the condominium units has been purchased at the time of FHA endorsement.  Mortgage term up to 40 years.

18. 18 Closing the Equity Gap HUD Grant Programs  Community Development Block Grants (CDBG)  Affordable housing and community and economic development.  HOME - Affordable Housing  Access HOME and CDBG funds through state and local governments.  ARRA – Economic Stimulus, Neighborhood Stabilization Program (NSP), Public Housing Capital Funds, CDBG, Indian housing, Energy Conservation funds.  TCAP – Tax Credit Assistance Program – HUD appropriation directly to state housing finance agencies.

19. 19 American Recovery and Reinvestment Act of 2009  $ 787 billion federal recovery plan.  Objective is to accelerate the recovery through government spending, tax cuts and job retention/ creation.  Signed by President Obama on February 17, 2009.

20. 20 Energy Efficiency - Conservation  Energy Efficiency and Conservation Block Grants  To increase energy efficiency in transportation, buildings, and other sectors  $2.8 billion formula (principally population based)  $400 million competitive  28% States, 68% municipalities, 2% tribes  Weatherization Assistance Program  $5 billion by formula to States and Indian tribes  Up to $6,500 per housing unit  Eligible participants may have household income up to 200% of the poverty level  20,000 homes in Colorado alone

21. 21 Energy Efficiency - Conservation  Energy Efficiency and Conservation Block Grant.  Colorado expects to receive nearly $43 million.  Projects are to increase energy efficiency, reduce energy use and fossil fuel emissions.  Governor’s Energy Office submitting plan to DOE in June, approval expected by August 1, 2009 – funds to be spent by September 15, 2012.  Contact Ms. Angie Fyfe, Governor’s Energy Office, angie.fyfe@state.co.us, 303-866-2059. angie.fyfe@state.co.us

22. 22 Energy Efficiency - Conservation  State Energy Program.  Promote energy conservation.  $3.1 billion formula allocation to States.  Decision maker is the state energy office, eligibility for funds determined by the states under existing guidelines.

23. 23 Colorado State Energy Program  Colorado will receive $49.2 million for energy efficiency and conservation projects.  Must be obligated by September 30, 2010 and spent by March 2012.  Todd Hartman, Media Relations, Governor’s Energy Office, 303-866-2262, todd.hartman@state.co.ustodd.hartman@state.co.us  Barbara Alderson, U.S. DOE, 303-275- 4816,barbara.alderson@go.doe.gov.

24. 24 Colorado State Energy Program - $49 million

25. 25 HUD Programs – www.hud.gov/recovery  Neighborhood Stabilization Program (NSP) II  To purchase and rehabilitate foreclosed and abandoned housing, land banking and demolition permitted (demolition limited to 10% of funds and no demolition of public housing).  $2 billion in competitive funds (based on rates of foreclosure and levels of sub-prime lending etc.).

26. 26 HUD – Neighborhood Stabilization Program  Applications open to non-profits (which may include for profit entities in a consortia), as well as state and local government entities.  Paper application was due in to HUD headquarters by July 17, 2009.  Program builds on the $4 billion in NSP funds distributed to states and localities most impacted by foreclosures and sub-prime lending – 2008 legislation.

27. 27 HUD ARRA Programs  Green Retrofit Program for Federally-Assisted Multifamily Housing.  $250 million to be awarded nationally to private and non-profit owners of Section 8 multifamily housing, Section 202 senior housing, Section 811 housing for the disabled, and USDA Section 515 housing programs.  Up to $15,000 per unit, estimated 25,000 units nationwide will get an energy retrofit.  Applications accepted by HUD Office of Affordable Housing Preservation (OAHP) on a first come, first served basis beginning June 15, 2009.

28. 28 HUD ARRA Programs  Public Housing Capital Funds.  $3 billion has been distributed to PHAs by formula.  $1 billion to be awarded competitively.  Revised NOFA posted on June 3, expands eligibility to a larger number of PHAs.

29. 29 HUD ARRA Programs  Applications related to assistance for the elderly and disabled, public housing transformation, and gap financing for stalled projects were accepted from June 22 – August 18, 2009, although applications received by July 6, will have funding priority.  Capital fund applications related to the Creation of Energy Efficient, Green Communities (energy conservation) were due by July 21, 2009.

30. 30 HUD ARRA Programs  Homeless Prevention.  Colorado will receive $15.4 million in funds to help reduce homelessness.  $8 million being distributed to the Department of Local Affairs, balance to metropolitan cities and urban counties.  Contact Lynn Shine, Department of Local Affairs, 303-866-2046, lynn.shine@state.co.us

31. 31 HUD ARRA Programs  Community Development Block Grant.  Colorado is receiving $10.3 million, $7.5 million directly to entitlement jurisdictions (50,000 and above in population) and $2.8 million for small communities and rural areas.  Contact: Colorado Department of Local Affairs, Becky Murray, 303-866-2818, becky.murray@state.co.us

32. 32 HUD ARRA Programs  Native American Housing Block Grant.  $242 million in competitive grants for tribal housing programs.  Indian Community Development Block Grant (ICDBG).  $10 million in competitive funding.

33. 33 HUD ARRA Programs  Section 8 Multifamily Contract Renewals.  $2 billion in funding to provide for renewal of full 12 month contracts.  6,300 multifamily projects to be funded.  Avoid project payment disruptions that have occurred in prior years.

34. 34 HUD Programs  Making Home Affordable Program.  www.makinghomeaffordable.gov  Up to 3 to 4 million households could avoid foreclosure through a loan modification or mortgage refinancing.  Start the process with a HUD approved housing counseling agency – listed at hud.gov.  Information also at www.fanniemae.com and freddiemac.com.  Significant financial incentives for servicers and investors to participate in the program.

35. 35 ARRA Tax Provisions  Advanced Energy Credit - $2.3 billion.  New 30 percent investment tax credit, investment in a “qualifying advanced energy project.”  A project that re-equips, expands or establishes a manufacturing facility used for the production of energy from renewable sources.  Projects must be certified by a joint Treasury/ Energy Department program.

36. 36 ARRA Tax Provisions  Tax Credits for Energy-Efficient Improvements to Existing Homes.  Tax credit up to 30% of the amount paid for qualified energy efficiency improvements, up to $1,500 in a taxable year.

37. 37 ARRA Tax Provisions  Increase in the New Markets Tax Credit.  Increases the amount available for Community Development Entities (CDEs) by $1.5 billion in 2008 and 2009 – for a total allocation of $5 billion in each year.

38. 38 ARRA Tax Provisions  Tax Credit Assistance Program (TCAP) - $2.25 billion nationally.  Colorado Housing and Finance Agency will distribute $27.3 million through a competitive process for programs receiving a tax credit award in 2007-2009.  Funding to be available in July, Natasha Weaver at CHFA, tweaver@chfainfo.com

39. 39 ARRA Tax Provisions  Tax Credit Enhancement Program (TCEP)  Will allow CHFA to exchange eligible LIHTC for cash grants for sub awards to eligible projects  Cash from the Treasury Department at a rate of 85 cents on the dollar  www.chfainfo.com/documents/arrahandout.pdf

40. 40 LIHTC Update - Colorado  CHFA’s annual LIHTC allocation is $11.5 million, allocated in three rounds.  Demand remains high – CHFA received 17 applications totaling $16.3 million during the second round for this year.  1,800 units in Colorado are stalled due to lack of investors.  With Fannie and Freddie out of the market, the pool of investors has shrunk dramatically.  Credits are selling at about 70 cents on the dollar compared to 98 cents two years ago.

41. 41 Accountability  ARRA expenditures will be closely scrutinized.  The Federal Acquisition Regulation (FAR) applies to contracts entered into by the federal government using ARRA funds.  Contractors and grantees receiving ARRA funds from the federal government must file quarterly reports on fund expenditures – emphasis on transparency and public information.  Inspector General Offices received $295 million in new funds under ARRA.

42. Closing the Equity Gap in Real Estate Development HUD/ FHA Financing, Economic Stimulus Funds and Tax Credits CBA – Real Estate Section Luncheon September 3, 2009 John Carson 303-634-2102 - jcarson@swlaw.comjcarson@swlaw.com