2. 2008 Real Estate Update: Affordable Housing in Todays Market Ritz Carlton, San Juan Hotel, Spa & Casino 6961 Avenue of the Governors Isla Verde Carolina, Puerto Rico 00979 December 10-12, 2008 WASHINGTON UPDATE Stephen J. Wallace, Esq. Monica Hilton Sussman, Esq. Nixon Peabody LLP

3. PRESERVATION LEGISLATION In March, a draft of an affordable housing preservation bill from the U.S. House of Representatives designed to prevent the loss of affordable housing dwelling units was circulated to a few stakeholders for comments. Many of this bills provisions relate to on-going issues that have been a source of frustration for preserving existing affordable housing. Congressman Frank held hearings in June – not likely to have legislation this year.

4. PRESERVATION LEGISLATION (continued) Key issues contained in the draft bill include: Conversion of Rental Assistance Payment and Rent Supplement contracts to project-based Section 8 contracts. Inclusion of new debt service in budget-based rent increases. Expansion of enhanced vouchers to cover termination events.

5. PRESERVATION LEGISLATION (continued) Provision for ELIHPA and LIHPRHA properties to utilize any rent adjustment process allowed under MAHRA (typically LIHPRHA is eligible only for OCAF adjustments and ELIHPA is eligible only for AAF or a budget-based rent increase). Mark-to- Market properties would also be eligible for MAHRA rent increases.

6. PRESERVATION LEGISLATION (continued) Allowance for owners to receive project-based vouchers in lieu of enhanced vouchers. Prohibition of HUDs practice of limiting sales proceeds to non-profit owners/sellers. Allowance for state agencies to limit Section 8 rents at LIHTC rents (but not HUD). Incorporation of proposed changes to the Mark to-Market program (i.e., allows below market properties to go through Mark to-Market even though rents are below market). And 5 yrs for Non Profit transfers.

7. PRESERVATION LEGISLATION (continued) Potential issues of concern may include: –Preference for non-profit owners to acquire a property when the seller is opting out of the Section 8 HAP contract or when other assistance programs terminate. –A 9-month notice to tenants, HUD, and the state/local government when the owner is opting out of the Section 8 HAP contract or when other assistance program terminates. –Creation of a HUD national data base on each HUD property.

8. PRESERVATION LEGISLATION (continued) –Tenant and non-profit access to certain correspondence/data of project owners. –Statutory recognition of tenants as 3rd party beneficiaries in Section 8 contracts. –Allowance for non-profits to assume flexible subsidy loans so that HUD never receives payments. –Funding to non-profit and tenant groups for various organizational and preservation efforts. –Various increased HUD enforcement authority provisions.

9. Whats Missing Using new equity to compute distributions Issues on replacement reserves for new reg HAPs when FHA paid off

10. Housing and Economic Recovery Act (HERA) HUD and LIHTC Program Coordination HUD given 6 months to implement the law Objective is to improve efficiency, simplify and establish time deadlines, and request additional funding for staff, if needed Required to consult with IRS as well as industry and provide a report to Congress within 9 months

11. FHA Mortgage Insurance and LIHTC Elimination of the subsidy layering process for projects with FHA insurance Exempt FHA projects with LIHTCs from HUD cost certification, if at the time of firm commitment the loan-to-cost ratio is below 80% HUD issued a memo in July addressing the need for escrowing LIHTC equity The law eliminates the requirement for escrow and/or letter of credit altogether.

12. FHA Mortgage Insurance and LIHTC (continued) Exempts FHA-insured projects if tax credit agency is doing inspections (presumably from REACS). As to other compliance monitoring, if HUD determines the HFA monitoring is sufficient to ensure compliance with HUDs requirements, then it too need not be performed (for MORS ?) Pilot for streamlined reviews for FHA loans where LIHTCS are being used (instructions to be issued within 180 days of enactment)

13. Project Based Vouchers (PBV) Increases the term of a PBV contract from 10 to 15 years and allows public housing agencies (PHAs) to commit to unlimited renewals The PBV per-building limitation (no more than 25% of the units unless it is elderly or there are family self-sufficiency services provided) is now calculated on a project-wide basis PBVs are permitted for elevator and coop buildings

14. Project Based Vouchers (PBV) (continued) Subsidy layering is not required for existing building or if the HFA has conducted SLR Environmental review is not required before PHA enters into a HAP for existing buildings, unless otherwise required by law or regulation

15. Project Based Vouchers (PBV) (continued) Rent floor is established Rents for units in LIHTC projects need not go through rent reasonableness test if the PBV rent does not exceed the LIHTC unit rents, but also is not in excess of the PHA payment standard for the unit size The law codifies HUD policy that for determining rent reasonableness voucher rents are to be compared with the private, unassisted market, up to the greater of the tax credit rents for comparable units or the housing authority – established payment standard. (Seems not to apply to PBVs)

16. Section 202 Provides for delegated processing to state or local agencies with underwriting experience (not limited to LIHTC mixed finance transactions) HUD retains approval on rents and development costs and will issue commitment within 60 days of receipt of commitment from delegated agency

17. SEVRA ( Voucher reform ) Passed House (HR 1851) now in Senate (S 2684) Reduce frequency of inspections Expand PBVs Renewals are based on actual recent costs House Bill would allow tenants of a non profit owned 236 to get EVs

18. 202 Legislation House Passed in Dec. Introduced in Senate (S 2736) Annual adjustment of PRAC Delegated underwriting to states Project based rental assistance for old 202 Unit reconfiguration National non profits can have local advisory Board in lieu local governing boards for each property Addresses non profit sales proceeds

19. HUD Policies Memo of the Month –January Defer Flex Subsidy Payoff January 9, 2008 John Garvin Memo addresses policies and procedures for the review of requests to defer repayment of flexible subsidy loans. HUD will not defer repayment of HELP loans, which were provided with flexible subsidy assistance in cases of earthquake damage. Significant justification for deferral will be to bring in new ownership with new capital to reposition and preserve the property, and to address non-compliance issues.

20. HUD Policies (continued) February Unit Reduction –Convert Studios to 1s (not 2s) –Rents equal combined 2 studios or the 1 BR rents –HAP rents not to exceed LIHTC rents –Agree to renew HAP IRPs reduce IRP prorate by # of units (not taking into account BR size) Not limited to elderly No 1 for 1 replacement Notice so can be waived?

21. HUD Policies (continued) March – Pass thru leases for NMTC and HTC and FHA

22. Whats Not Addressed NP sales proceeds (in draft legislation) 2530 regs Distributions

23. Opportunities Post mtm 202 prepay, preserve, reposition 318 now 215 Unknown LIHTC market appetite for HUD properties FHA may be of renewed interest because of credit crunch