2. Financial Integrity of a Rental Property Whose Responsibility? 2010 North Carolina Affordable Housing Conference September 17, 2010 Frankie W. Pendergraph, The Pendergraph Companies

3. What is Financial Integrity? Each of the following people have a different perspective: Contractor Fee Developer Developer/Owner Investor Lender Management Company

4. Financial Integrity to the Contractor Getting paid pursuant to the contract Getting paid for change orders Minimizing cost overruns Wants plans he can build by Wants the Notice to Proceed at an appropriate time of the year Wants a responsive Owner Wants a municipality he can work with

5. Consequences of Construction Is the contractor knowledgeable of the programs? Is the Construction Budget realistic? Bonding and obtaining a Letter of Credit How to pay for change orders and cost overruns Timing Penalties – Lease-up Adjusters Untimely Notice to Proceed, Time of Year 3 rd Party Professionals – Architect, Engineer etc. Delays caused by indecisions of Owner Difficulties dealing with municipalities and State permitting agencies Affiliated Contractor vs Non-Affiliated Contractor

6. Financial Integrity to the Fee Developer Maximizing tax credit pricing Receiving 100% of the development fee Receiving timely equity installments Completing the development on time And get out

7. Financial Integrity to the Developer/Owner All items under Fee Developer PLUS Putting together the right team Obtaining loans – new underwriting standards Maximizing cash flow Maintaining the property physically and for compliance Satisfying all governmental compliance Meeting occupancy and debt service requirements Per unit operating costs

8. Consequences related to the Developer and Owner Is the Developer/Owner knowledgeable of the programs? It might work on paper, but does not in reality Building a project not right for the market – Unit mix, location, site issues, unrealistic rent structures Not having a realistic budget - development and operations Point chasing Accepting the units before they are truly ready Promising an unrealistic lease-up schedule and rent structure Signing documents without reading them or understanding them Not communicating with management regarding equity and agency requirements Debarment issues, Recapture, Adjusters, Guarantees

9. Financial Integrity to the Investor Covered by Jill Odom

10. Consequences related to the Investor Is the Investor knowledgeable of the programs? Not contributing equity in a timely manner costs the deal Equity documents not matching up with loan documents First year compliance – who is looking at Forcing the developer to agree to unrealistic lease-up to get the necessary yield Originators vs Asset Managers Expectations vary “One more thing…”

11. Financial Integrity to the Lender Is the borrower/guarantor financially sound? Is the deal financially sound? Can the property operate within the proposed budget? Are the takeouts in place? Is management company capable of maintaining compliance?

12. Consequences related to the Lender Is the Lender knowledgeable of the programs? Reserve requirements Reporting Dealing with different divisions within a single bank Permanent Lender requirements may delay the closing of the permanent loan Equity timing also may delay closing of the permanent loan

13. Financial Integrity to the Management Company Can I get my management fee? Can I pay the bills? Cash Flow / Return to Owner Taxes and Insurance, Reserves Physical Condition Cash Calls from Owners Compliance, Keeping the Gov’t happy

14. Consequences related to Management Is the management agent knowledgeable of the programs? Not meeting the lease up schedule Vacancies and Delinquencies Not meeting debt service requirements Unable to pay bills and transfers to T&I and Reserves Out of compliance – agencies, loan and equity documents, program rules Poor physical condition, deferred maintenance Can’t pay asset management fee, cash flow to owner 8823’s, 2530, black marks, can’t do business

15. Poorly Developed Property = Poor Construction = Poor Management = YOU WILL BE POOR! Bad Construction = Cost Overruns = More Debt = Less Developer Fee = Less Cash Flow = More Deferred Maintenance = Troubled Property Failed Marketing = Failed Leasing = Failed Cash Flow = Troubled Property = Work-out Plan = Angry Owner who has to put in money, has to answer to the lenders, investors and government agencies, and their spouses! (Not Fun!) Just 4 vacant units at $400/month = $1,600/month = $19,200/year

16. Knowledge Clueless = Emptiness (empty units and empty wallet) If you do not know what you are doing, you should not be in this business - or get someone who has the knowledge to help you