Learning the Basics: Learning the Basics: Housing Tax Credits 101Housing Tax Credits 101

Permanent Lender Permanent Lender PerspectivePerspective

IPED | San Francisco | July 24, 2008IPED | San Francisco | July 24, 2008

Options for LIHTC PropertiesOptions for LIHTC Properties

9% Tax Credits9% Tax Credits1. Freddie Mac (FRE)1. Freddie Mac (FRE)2. Fannie Mae (FAN)2. Fannie Mae (FAN)3. Conduits 3. Conduits 4. FHA4. FHA

4% Tax Credits4% Tax Credits1. Credit Enhancement by FRE or FAN1. Credit Enhancement by FRE or FAN2. Direct Bond Purchase (unrated)2. Direct Bond Purchase (unrated)3. FHA3. FHA

Today’s EnvironmentToday’s Environment

Higher yields required by investors = lower credit prices Higher yields required by investors = lower credit prices = greater reliance on debt to cover costs.= greater reliance on debt to cover costs.

Fewer active syndicators mean that those active can be Fewer active syndicators mean that those active can be more selective.more selective.

““9%” = 9%9%” = 9% Tougher underwriting requirements, less waivers Tougher underwriting requirements, less waivers

provided in certain markets.provided in certain markets. Volatile treasury rates and swaps – 10 to 20 bps swing Volatile treasury rates and swaps – 10 to 20 bps swing

within a week. From July 15 to July 22within a week. From July 15 to July 22ndnd the 10-yr UST the 10-yr UST increased 20 bps. Decreased 13 bps on July 24increased 20 bps. Decreased 13 bps on July 24thth..

CMBS: Out until 2010?CMBS: Out until 2010? Other Sub-Prime fall out?Other Sub-Prime fall out?

Freddie & FannieFreddie & Fannie

From conference call with Freddie this week:From conference call with Freddie this week: Still very much in business.Still very much in business. Still dedicated to multifamily – and possibly even Still dedicated to multifamily – and possibly even

more so; new programs, revised ARM product.more so; new programs, revised ARM product. Multifamily uses overall less capital and meets Multifamily uses overall less capital and meets

housing goals.housing goals. MF volume through May 2008 is “roughly double from MF volume through May 2008 is “roughly double from

a year ago.”a year ago.”

Same expected to be said from Fannie next week at a Same expected to be said from Fannie next week at a DUS Lender conference. DUS Lender conference.

FHA & LIHTCFHA & LIHTC Historically LIHTC transactions have been very difficult to Historically LIHTC transactions have been very difficult to

do with HUD – time, 2530, HUD.do with HUD – time, 2530, HUD.

However, HUD issued Mortgagee Letter 2008-19 for However, HUD issued Mortgagee Letter 2008-19 for streamlined process for applications with LIHTC.streamlined process for applications with LIHTC.

Highlights:Highlights:• Reduction in the amount of equity that must be escrowed prior to Reduction in the amount of equity that must be escrowed prior to

initial endorsement from 100% to 20%.initial endorsement from 100% to 20%.• Delay in submitting final plans and specs until initial Delay in submitting final plans and specs until initial

endorsement.endorsement.• Commitments can be conditioned upon 2530 approval.Commitments can be conditioned upon 2530 approval.• Each hub must designate an LIHTC coordinator. Each hub must designate an LIHTC coordinator.

Types of LIHTC ExecutionTypes of LIHTC Execution

New Construction New Construction Acquisition/Substantial RehabilitationAcquisition/Substantial Rehabilitation Acquisition/Moderate Rehabilitation*Acquisition/Moderate Rehabilitation* Pay Off of Bonds with Cash Loan (LIHTC Pay Off of Bonds with Cash Loan (LIHTC

restrictions remain in place and restrictions remain in place and unchanged.)unchanged.)

* * Very popular program; less costly than forward commitments. Very popular program; less costly than forward commitments.

Loan TermsLoan Terms 9% LIHTC9% LIHTC 4% LIHTC4% LIHTC

DSCRDSCR 1.15x1.15x 1.20x; 1.15x in 1.20x; 1.15x in stronger markets.stronger markets.

LTVLTV 85%85% Lesser of 80% Lesser of 80% market value or market value or 85% of enhanced 85% of enhanced value.value.

AmortizationAmortization 30 years; 35 years 30 years; 35 years in stronger in stronger markets.markets.

30 years; 35 years 30 years; 35 years in stronger in stronger markets.markets.

Term of LoanTerm of Loan Min. of 15 yearsMin. of 15 years Min. of 18 years Min. of 18 years (for forwards)(for forwards)

Interest RateInterest Rate 10-yr UST + 10-yr UST + Spread + Spread + ServicingServicing

Bond Bond Rate/Hedged Rate Rate/Hedged Rate + Fee Stack+ Fee Stack

Interest Rate ComparisonInterest Rate Comparison

9% Unfunded Forward Commitment for New 9% Unfunded Forward Commitment for New Construction of Senior Property in TexasConstruction of Senior Property in Texas

10-year UST:10-year UST: 4.15%4.15%

FRE Spread:FRE Spread: 2.50%2.50%

Servicing:Servicing: 0.40%0.40%

Total Interest Rate:Total Interest Rate: 7.10%7.10%

Interest Rate ComparisonInterest Rate Comparison4% Funded Forward Commitment for Variable Rate Bonds 4% Funded Forward Commitment for Variable Rate Bonds

for New Construction of in Idahofor New Construction of in Idaho

24 mos. Fwd Swap Rate:24 mos. Fwd Swap Rate: 4.20% (as of 7/21/2008)4.20% (as of 7/21/2008)FRE Credit Enhancement:FRE Credit Enhancement: 0.82% (0.82% (FRE Liquidity:FRE Liquidity: 0.20%0.20%FRE Swap Enhancement:FRE Swap Enhancement: 0.12%0.12%Servicing:Servicing: 0.40%0.40%Issuer Fee:Issuer Fee: 0.15%0.15%Trustee Fee:Trustee Fee: 0.05%0.05%Remarketing Fee:Remarketing Fee: 0.10%0.10%Total Interest Rate:Total Interest Rate: 6.04%6.04%

Loan Sizing InterplayLoan Sizing Interplay Between Debt & EquityBetween Debt & Equity

Loan Amount – Loan Amount – Lender and Equity Lender and Equity Partner may have slightly different Partner may have slightly different underwriting criteria. The maximum loan underwriting criteria. The maximum loan allowed by the Lender may not be as allowed by the Lender may not be as high as the maximum loan amount high as the maximum loan amount supportable by your Equity Partner.supportable by your Equity Partner.

UW’ing Differences – UW’ing Differences – Vacancy, Other Vacancy, Other Income, Reserves for Replacement.Income, Reserves for Replacement.

Underwriting CriteriaUnderwriting Criteria

Rental IncomeRental Income – – UnderwrittenUnderwritten Rents must have a 10% advantage Rents must have a 10% advantage to market rents (rents charged by non-LIHTC properties.) The to market rents (rents charged by non-LIHTC properties.) The property may charge and receive rents that do not have a 10% property may charge and receive rents that do not have a 10% advantage, but both lenders and equity partners require this to be advantage, but both lenders and equity partners require this to be underwritten.underwritten.

VacancyVacancy – Greater of 5% or market (i.e., vacancy of other LIHTC – Greater of 5% or market (i.e., vacancy of other LIHTC properties with similar LIHTC restrictions.) Some equity partners properties with similar LIHTC restrictions.) Some equity partners may have a minimum vacancy to be used. may have a minimum vacancy to be used.

ExpensesExpenses – Generally, higher of appraisal or developer’s budget as – Generally, higher of appraisal or developer’s budget as long supported by Lender or Equity Partner’s own portfolio. long supported by Lender or Equity Partner’s own portfolio.

Note for Developers:Note for Developers: Expense comps from your own portfolio or Expense comps from your own portfolio or from your management company’s portfolio can be crucial in from your management company’s portfolio can be crucial in supporting your pro-forma expenses. supporting your pro-forma expenses.

Reserves for ReplacementsReserves for Replacements Reserves for Replacement – Reserves for Replacement – Floor of $200 per Floor of $200 per

unit for new construction and $250 per unit for unit for new construction and $250 per unit for renovations, renovations, as long as supported by as long as supported by construction consultantconstruction consultant. .

FRE and FAN do not require reserves to be FRE and FAN do not require reserves to be escalated annually. Equity Partner may require escalated annually. Equity Partner may require annual escalations, which the Lender can reflect annual escalations, which the Lender can reflect in its loan documents.in its loan documents.

Issuers may require reserves for replacements Issuers may require reserves for replacements that are higher than required by Lender or Equity that are higher than required by Lender or Equity Partner – e.g., Nevada, New Mexico. Partner – e.g., Nevada, New Mexico.

Real Estate TaxesReal Estate Taxes

FRE and FAN generally will give credit for partial FRE and FAN generally will give credit for partial or full real estate tax abatement/exemptions, as or full real estate tax abatement/exemptions, as long as they extend through or past the term of long as they extend through or past the term of the loan.the loan.

If the abatement is finite and ends within the If the abatement is finite and ends within the term of the loan, the financing can be bifurcated term of the loan, the financing can be bifurcated between a real estate loan and a tax abatement between a real estate loan and a tax abatement loan. loan.

Third Party ReportsThird Party Reports AppraisalAppraisal Market Study – A new lender/equity-engaged Market Study – A new lender/equity-engaged

report is necessary.report is necessary. Environmental or ReviewEnvironmental or Review Seismic/Probable Maximum LossSeismic/Probable Maximum Loss Pre-Construction Plan & Cost ReviewPre-Construction Plan & Cost Review Construction Monitoring ReportsConstruction Monitoring Reports

- Same for both 4% and 9%.- Same for both 4% and 9%.- Co-engagement between permanent lender, - Co-engagement between permanent lender,

construction lender and equity partner will save construction lender and equity partner will save time and money for the borrower. time and money for the borrower.

Section 8Section 8 Properties with Section 8 HAP contracts are okay. PNC Properties with Section 8 HAP contracts are okay. PNC

has closed numerous transactions with Section 8 HAP has closed numerous transactions with Section 8 HAP Contracts on all or a majority of the units. Contracts on all or a majority of the units.

Underwritten rent must be lowest of: HAP rent, LIHTC rent Underwritten rent must be lowest of: HAP rent, LIHTC rent or achievable market rent.or achievable market rent.

However, you can underwrite the “HAP Overhang” (FRE) However, you can underwrite the “HAP Overhang” (FRE) or “HAP Overage” (difference between the greater HAP or “HAP Overage” (difference between the greater HAP rent and the LIHTC rent.) if the DSCR using the LITHC rent and the LIHTC rent.) if the DSCR using the LITHC rents is at least 1.10x. The “HAP Stress Test”.rents is at least 1.10x. The “HAP Stress Test”.

Both FRE and FAN require a HAP Transition Reserve Both FRE and FAN require a HAP Transition Reserve (FRE) and Restabilization Reserve (FAN) of six months of (FRE) and Restabilization Reserve (FAN) of six months of debt service for use in the event of that the HAP contract debt service for use in the event of that the HAP contract does not receive its annual appropriations. does not receive its annual appropriations.

Section 8 (cont’d)Section 8 (cont’d) Retenanting/Restabilization Reserve must stay in place Retenanting/Restabilization Reserve must stay in place

until a) the HAP contract expires or is not renewed or b) until a) the HAP contract expires or is not renewed or b) the property has transitions to market or LIHTC rents the property has transitions to market or LIHTC rents and has reached 90% occupancy for at least 90 days. and has reached 90% occupancy for at least 90 days.

During the compliance period, FRE will allow the pre-During the compliance period, FRE will allow the pre-funded, equity-required Operating Reserve to act as the funded, equity-required Operating Reserve to act as the HAP Transition Reserve as long the Transition Reserve HAP Transition Reserve as long the Transition Reserve is fully funded and held by the Servicer at the end of the is fully funded and held by the Servicer at the end of the compliance period.compliance period.

Short-Term Non-Renewal Contracts: A bifurcated loan Short-Term Non-Renewal Contracts: A bifurcated loan structure can accommodate these types of contracts. structure can accommodate these types of contracts. HAP piece will be fully amortizing.HAP piece will be fully amortizing.

Subordinate DebtSubordinate Debt Hard DebtHard Debt

FRE: DSCR cannot be less than 1.10x & LTV cannot exceed FRE: DSCR cannot be less than 1.10x & LTV cannot exceed 90%90%

FAN: DSCR cannot be less than 1.05x & LTV cannot exceed FAN: DSCR cannot be less than 1.05x & LTV cannot exceed 95%95%

Soft Debt (FRE & FAN)Soft Debt (FRE & FAN) DSCR: Debt Service cannot exceed more than 75% of cash flow DSCR: Debt Service cannot exceed more than 75% of cash flow

after payment of operating expenses, reserves/escrows and after payment of operating expenses, reserves/escrows and senior debt.senior debt.

LTV: Can exceed 100% LTV (e.g., HUD Restructuring Notes LTV: Can exceed 100% LTV (e.g., HUD Restructuring Notes and Contingent Repayment Notes.)and Contingent Repayment Notes.)

OtherOther Term: Subordinate debt cannot balloon during the term of the Term: Subordinate debt cannot balloon during the term of the

senior debt/CE. senior debt/CE. Subordinate Lenders must execute FRE/FAN’s Subordination Subordinate Lenders must execute FRE/FAN’s Subordination

AgreementAgreement Restrictions on interest accrual for non-governmental sub. Restrictions on interest accrual for non-governmental sub.

lenders.lenders.

Questions or More Information?Questions or More Information?

Terry WellmanTerry Wellman

Ph. 949-333-3897Ph. 949-333-3897

terry.wellman@pnc.comterry.wellman@pnc.com