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good afternoon welcome to this our third of three training webcasts on the low income housing tax credit pilot program my name is Dan Sullivan I'm the deputy director of multifamily development here at FHA in HUD headquarters i'll be speaking this afternoon on mortgage credit requirements for the tax credit pilot but first we'll be starting with tom goad on my far right tom is the director of tech support and we'll be talking about valuation issues following tom hillary atkin in our environmental office will be speaking about environmental issues and particularly about Shippo notification requirements and then our last speaker today on my left David will derman also in our tech support division will be talking about architectural requirements and repair escrow administration requirements so what we'll do is each speaker will present the comments and then we'll have time for questions and answers if you have questions please send them by email to Carolyn Kalin at HUD gov that's Carolyn Kalin at HUD gov and i believe the show will have the the overhead has the web address for the spelling with that let's turn it over and Tom if you could begin our presentation sure well thank you Dan in terms of evaluation issues I think you're all aware that the question is how involved is the HUD appraiser in terms of the valuations an evaluation review and that question is now on the screen and if answer is we're not really involved in terms of the review process that is designated are given to the designated underwriter that's responsible for review in the the appraisal report however there may be circumstances where the designated underwriter may need some assistance and at that time the the HUD review of reader on staff can be brought in to help in the review of the rent comparability studies and and review of the operating expenses and as you notice that specifically where the operating expenses fall outside what would be considered the norm by at least ten percent then the assistance of the hood appraiser may be required also there are some challenges that that need to be met in terms of the review and but some of those need to occur before the application is submitted and and specifically among those I've highlighted here and and that is that with that need to be needs to be some correlation between the third-party appraiser report income and operating expenses and the performance-based contract this this all needs to happen prior to the submit of the middle of the appraisal to the program center another aspect is all Pollock projects should have rents at least ten percent below market for each type of unit and that that's particular criteria has can resulted in some confusion in the field to the point that on July tenth we did issue a if on our frequently asked questions in regards to the 202 program that some clarification on that and what exactly it meant but the the threshold for eligibility requirement is that the actual rents being achieved must be at least ten percent below market although tax credit ceiling may be slightly higher and we can go into that more if you like in the question and answer also if you have additional questions on that be happy to answer those if you do you mail me timing of the map application the section 8 contract renewal that's very important in that and obviously that we want at least a minimum of a 20-year contract on the section 8 HAP contract and make sure the under eye to the income expenses it's consistent with the hap hap contract before submitting the application so you can see all of those all of those bullet points are somewhat interrelated that that a lot of the legwork and a lot of the coordination between the hap contract the appraiser that submits the valuation estimate all has to be and the underwriter all has to be accomplished prior to the middle of the application to the program center a few of the qualifications the requirements of the the appraisal and essentially in terms it's a 223 F that it has to be compliant with section 7.17 of the map guide and in that section the the appraisal is consistent with evaluation in to two facets one for example it criterion 3 a hypothetical market value must be estimated which in which market rents market operating expenses are utilized however in that the cap contract or the section 8 will be used in support of the overall debt service payments that its criterion 5 must have also an independent section with schedules for the that are prepared to include the operating expenses income etc that are applicable to the the hap contract let me go back a second here ok and of course it at market value the appraiser must ignore the section 8 contract says tax credit exempt bonds are low-income housing tax credit rincewind determined the market of a well that's strictly of the market value that we're talking about in terms of criterion 23 also to be consistently at criterion 3 there should be a market derived capitalization rate used however if ninety percent of the more or more of the units at the complex have support from a project based section 8 or section 8 contract or low-income housing tax credits then we have made some exceptions in that regards and terminate in determining an overall capitalization rate to use in arriving at evaluate criterion 3 and one of those is that realizing that it's difficult to extract for those unusual properties that have unusual rent and operating expense characteristics that we have allowed under this program that the overall rate be built through the band of investments Tom if I could just reiterate your point on this so basically we want a market value pure market for criteria 3 and analysis and criteria 5 the debt service would be actually how the project would operate for those projects that have in the pilot that have ninety percent or greater project based section 8 we could consider a favorable impact by the band of in vet in the band of investment analysis recognizing the subsidy so that's the one exception and limited just to the pilot program and just for those that have greater than ninety percent project based section 8 thank you Dan and that it kind of moves into the the next slide which is on criterion five that that explains the difference between the the determination of evaluate criterion three and one at criterion five and essentially the difference is is dan was dan mentioned is that at criterion five we want the the rent that we used in terms of sizing the dead in pen repaying the debt and in terms of determining the play pool rents where the tax credits are involved we also need the twenty to sixty forty must be included within the application and again I just mentioned the 922 6040 and this is kind of an analysis that they're all for me with in terms of arriving at a veteran to utilizing the T a form where we have a combination of section 8 ranch and low-income housing tax credit rents and it provides an example there between where the the estimated market rent under Section 8 is at a level of eight hundred and fifty dollars where the tax credit rents is at three hundred and fifty dollars the maximum tax credit rent well that total eight hundred and fifty dollar rent could be achieved under this scenario by a combination of both the section eight rent payment and the obligation based on the tax credits at three hundred fifty dollars per month so again I'd like to reiterate that as I said at the outset that the responsibilities of the HUD reviewer in terms of the the appraiser is fairly limited unless some difficulties are encountered by the designated underwriter at at the local program center any questions I see no more questions so I'm gonna are no questions I'm going to move to Hillary and she's going to explain the environmental reviews all right thank you I could good afternoon everyone as Dan mentioned my name is Hillary atkin I'm an environmental specialist here at HUD and I'm here to explain how the environmental reviews will be conducted for the program basically there will not be too many differences and they let me move to my first slide here as side states the environmental review will still be conducted by the hub environmental reviewer which is usually the appraiser and it will follow the usual requirements for 223f projects however we did create a few twists to the process to help streamline hey our first test has to do with the phase 1 phase 2 contamination reviews phase 1 esa is augmented by the vapor and current screen must contain no environmental issues that would require a phase 2 or a remediation plan in other words the phase one must indicate that there are no wrecks and no vex at the site in addition the HUD environmental reviewer must concur with this determination so we just ask that you carefully review the phase one and make sure that their conclusions regarding rex and vex seem accurate the second twist that we have here is that a site visit by the environmental reviewer will not be required if two conditions are met the first is the condition we just discussed that the phase one identifies no wrecks or vex on the site and the HUD reviewer concurs with this determination and the second is that the site is in conformity with environmental laws and regulations as listed in the sample fields note field notes checklist and a section set 9.5 of the map guide and the HUD environmental reviewer must make sure that these laws and regulations are met and to our next twist and this is a more complicated twist that we've created for this program basically we're allowing lenders to initiate consultation under section 106 of the stork Preservation Act with their State Historic Preservation officer so HUD still remains legally responsible for any determinations that the lender makes with the ship oh but the lender gets to initiate this consultation process and what that involves is a ship o sending a letter or I'm sorry the lender sending a letter to the ship o describing the press the project what will be done on the site whether there are any store properties in the area or if the project itself is historic property and allowing the ship o the opportunity to comment on whether they think there will be an effect on historic property shippo's will have 30 days to respond to this letter if they do not respond within 30 days the lender must submit to HOD a document that certifies that the lender gave the ship o 30 days to respond and a response was not received then the HUD reviewer needs to take a look at the letter that was sent by the lender to the ship oh and just make sure that it was adequate so this letter that I'm referencing we do have an example letter that lenders can use that you can give to lenders I was included in the appendix of the training documents for the program and is also available on the SharePoint in Word form for you to download HUD will begin to participate in this consultation if there is an adverse effect determination there is disagreement between the ship oh and the lender there's an objection or there is potential for foreclosure or anticipate or e demolition and there is an example of the letter that we sent to the ship owes in the appendix of the guide if you want to see this language if you have any questions about what any of these things mean feel free to ask we have also included several appendix document to give guidance on the 106 consultation process in case you have questions including sample consultation letters which I referenced earlier a section 106 process checklist and section 106 info sheet i do want everyone to keep in mind that landers cannot initiate consultation with tribal historic preservation officers so this consultation is initiation process is only for State Historic Preservation officers not tribal historic preservation officers finally there is a another complication to this Shippo process for those hubs that were in the initial pilot program for this program the letters to the shippo's have been sent out however the rest of the ship Oh letters have not been sent out at this point we ask that you do not have lenders initiate consultation process until those schiphol letters have been sent when they are sent we will upload the letters to SharePoint and let everybody know that it's okay to let lenders initiate consultation with the State Historic Preservation officers one more twist to discuss today and this also has to do with Shippo consultation the FHA has determined that permanent financing processed under section 223 F of the low income housing tax credit pilot program for properties that were recently constructed and occupied with no associated rehabilitation our new construction has no potential to cause effects as described in 36 CFR 800 and thus have no further obligation to under section 106 basically what this means is if the project is a 223 F project it was recently constructed or occupied and there is no rehabilitation or new construction we have predetermined that this has no potential to affect a historic property and thus did not have to go through the 106 process one example of a project that this may apply to our three-year waiver projects carried out under the pilot program that do not involve building rehabilitation or new construction so if this is applicable we ask that you include the no potential to cause effects memo in the environmental file and that memo was applied uploaded to sharepoint I don't believe it's available in the appendix to the guide documents but it is available on SharePoint for you to download and put in your environmental file if it's applicable and my final slide here is just a listing of documents that I've referenced that are useful to the ship Oh process that we are using for this program these are all available on the SharePoint and most of them are available as appendices to the guy document that's all for me do we have any questions let's uh actually we were going to take a significant break here halfway through but since we're running ahead of time I'd like to go in at least start the mortgage credit session but i would like to pause and just give us a two minute timeout for people to send their questions and we do want to use this time to to get any questions answered or two for us to receive any that we don't have answers for so we can consider them and get timely answers out so let's just take a two-minute break and give people a chance to send their questions to Carolyn Kalin at hug of thanks well we haven't received any questions so we'll go ahead and continue on with our presentation and start on the mortgage credit portion first several sides particularly of my presentation will be fairly generic that we do this on any FHA application whether it's using tax credits or not then we'll talk a little bit about some of the specific distinctions about looking at who a principal is in a tax credit transaction and what differences there are so if we can get the first my slides the mortgage credit slides up and I don't know if those are up yet but I'll just go ahead and go through them first question really is what is the underwriter responsible for in conducting the mortgage credit review and really 56 sees things to think about first is evaluating the character and creditworthiness of the borrower in the development team fundamental mortgage credit question do we want to do business with these folks because it's the pilot program the ideas we'd like to see the easier transactions and the ones where it should be a yes there's no question about that from time to time there'll be problems in borrower's credit and for instance defaults or bankruptcies and those aren't out of hand disqualifiers but they certainly set the bar and the lender will need to do their thorough analysis on the character and creditworthiness of the borrower and development team one nuance with the tax credit pilot program since it's limited to 223 F we typically would not have a general contractor however in some cases they'll be significant repairs even though they don't go above the threshold limit where the architect requires a general contractor and so the processing guide available on our website gives some specific details about the scope of the general contractor review and it's a much more streamlined version of what we would do it for instance under a 221 d4 analysis second c is capital structure of the deal debt versus equity and is the capital structure within the program limits as far as loan ratios as well as risk tolerance part of that defining the capital structure would be describing the escrow requirements this can get complicated in a tax credit deal because FHA will have escrow requirements and then the tax credits indicator may have some tax credit requirements third c is cash sources and uses and two points under analyzing the cast structure of the deal 21 is to make sure the sources and uses balance and secondly to make sure there's cash available for the transaction to close and one of the things that's come up and we've had questions on is is the repair escrow required to be funded at closing and the answer is yes we will allow a deferral of twenty percent contingency requirement but we expect the cash to be funded at the time of closing we have seen questions come up and work will we will consider waivers where may or may not grant them so check on that at the concept meeting stage but if for instance the syndication procede timing is such that the pricing on the tax credits indication is significantly and materially impaired by requiring all of that to be funded upfront there's a lot of pressure and requests on the department to reconsider that our policy is really we want a hundred percent funded at the time a hundred percent of the loan proceeds are funded that is an initial final endorsement but we could consider a waiver if facts supported that next day and on my third slide and the slide stated today lions and so historically HUDs analysis has always been a processing and compliance approach and really we want to focus on risk management evaluation of the risk and underwriting but nevertheless we still expect the forms to be filled out correctly there to be a certification approving the release of banking information making sure that the 2530 or app system has been navigated successfully and the four magic questions on the 2013 sup certification and the those basic fundamental program requirements need to be met next one see is construction draw processing and tracking and so that of course is more true for the 221 d4 program but as well the and David will speak to the repair escrow so there are some mortgage credit underwriting functions in that process and then the last C is cost certification so we got two c's there plus certification is not required for 223 F transactions where the loan to value is less than eighty percent that's an FHA program role as well as consistent with here is exemption on tax credit deals from going through cause cert for those transactions that do exceed 80% loan-to-value there is a 2205 a supplement short form cause certification required and that should be analyzed as well at the end of the repair process to make sure that the value that the cost substantiates a value for the loan to value above eighty percent so some morsi's of underwriting complete so we want to make sure that the mortgage credit submission as well as the other application exhibits are complete a couple of things to comment here one is that the mortgage credit binder should be bound separately from rest of the application this is important because there's privacy sensitive information and financial information that should not be released and not only not released but it shouldn't be accessible other than the people that need to know so the lender certainly needs that and they need to submit that in a separate file separately bound from the rest of the application exhibits the related point and some lenders have been concerned that some borrowers are concerned well you know they don't want to disclose their financial condition and so such borrowers should actually think about equity transactions if we're loaning money and if the lenders loan it making a loan and Hut is being asked to ensure that loan we really do require complete disclosure for all principles it's a basic fundamental concept and if the lender is negligent in this that's a problem I mention it because we've seen some pressure questions from borrowers and lenders well we don't really want to disclose our credit and in that case well FHA doesn't want to ensure the loan and further if the lender tries to slide it in that would be a problem we would dial 1 800 911 lq md so we want to make sure we have complete disclosure but at the same time it needs to be bound separately and it's not a bad practice to market not subject to FOIA for instance so that we don't end up publishing their borrower's credit report to the local newspaper other completeness items organizational chart and identification of principles we'll take a break here in a minute and then we'll talk about principles and who is a principle but fundamentally we want to see an org chart of the structure of the ownership entity I would also note credit reports they need to be correct on for instance for individuals under the residential mortgage credit report form and for businesses a business credit report and current next see of mortgage credit review is consistency we want to make sure that the credit reports the financial statements the real estate own schedule are consistent with each other now in the past we've had problems where the lender has gone over a diligent in this or the HUD Office has been overly picky and there's been a debate over you know a minor discrepancy due to a reporting period of one document versus the other and and so we're not looking for that level of consistency but really these financial statements the REO schedule the credit report needs to tell a consistent and coherent picture that makes sense and again it's the underwriters job to tell that story the lenders underwriter needs to present that and then the HUD staff needs to make sure that those documents are internally consistent yet another sea of mortgage credit review is coherent the story needs to be coherent and that plays out in mortgage credit review for instance if we say they have great credit but there's a lot of troubled history in terms of credit that negative credit history may be a problem with ballooning debt on the real estate own schedule and no plan to recapitalize the debt or that the loan to values are upside down there thinking about a short sale on many properties so that's not consistent and it's really not a coherent story for us in terms of a good credit review we really want to see the underwriting narrative demonstrate that the mortgage or and principles are creditworthy experienced well capitalized that they have sufficient liquidity net worth and are going to pose a minimal risk to the department make sure that the real estate of own value on the real estate own schedule and the real estate value on the balance sheet really demonstrate the experience and financial strength that is being presented next see is convincing our wrists fully mitigated and so every deal has risk just because we can't tell the future and part of why we charge mortgage insurance premiums are those risks explained and mitigated strengths and weaknesses risks and mitigate need to be stealth spelled out and then the last city is current is the information current and we have specified currency dates for different documents in our map guide and that needs to be updated sometimes that's a problem because things will change and then just a supplemental statement by the lender is adequate to explain those changes I'd like to take a break and before we go into the next segment where we'll talk about credit worthiness and mortgage credit review as it relates to who is a principal will have a spray org chart sample org chart of a sample transaction and then take more extended time for questions but at this point I'd like to take a two-minute two to three minute break and that will give you a chance as well if you have any questions on what's been presented to send those to us thank you welcome back to our session I'm out of seas on mortgage credit review so we're going to but we did get some questions and during the break which will answer at the end so you still have time to send in questions if you have any on mortgage credit for the second half of my presentation I wanted to spend some time specifically on things that are more focused instead of general mortgage credit on issues that have come up in the tax credit pilot first slide wanted to go through is just a quote from map gade a 3d to and if that could be on the screen i just wanted to read this for purposes of evaluating credit worthiness and acceptable counterparty risk of principles the underwriter must identify those individuals and entities which if they encountered significant financial or legal problems could undermine the success of the subject property I actually haven't ever come up with anything particularly original but that part i did and wrote that into the map guide and its really at the heart of who is a principal if they get in trouble will that undermine the success of the subject property having said that for purposes of HUD processing there's really three levels of of who can be classified as a principal historically we went to the regulatory definition in the 2530 as well we want to focus on the creditworthiness of who those principles are that really control the transaction and if they got in trouble would be undermined the transaction and then lastly with the publication of the new closing documents the regulatory agreement has a provision in number 50 that requires two signatories and those parties take responsibility if there's fraud or monies taken from the project that they weren't entitled to so those are the three levels of who is a principal and will go through those on the next slide with the Oort with a sample org chart for a tax credit deal so the first level of analysis is the borrower the single asset mortgage or entity and we'll call this new project limited partnership so the next entity will look at is the managing General Partner this in this case senior affordable project Housing Corporation which is a 501c3 nonprofit entity then working with that nonprofit as a development entity and administrative general partner also a principal then there'd be a 99.9 something investor partnership a limited partner and then sometimes we'll see a special limited partner that comes in and in certain circumstances and we'll talk about that in a minute in our sample we named our manager mr. Joe Harris he is the development entity and really controls this administrative general partner and then he would be acting on behalf of a family trust and trustees so who are the key principles well first one really is this general partner any time there's a general partner we would expect them to be a key principle and for purposes of the financial analysis we're going to want to see their REO schedule likewise in this case Joe Harris is clearly the key player because he is the developer and the one with the experience the organizational documents and their resumes will demonstrate this and in this case we're assuming that Joe Harris really is the driving person in putting the deal together the 2530 analysis would go first off certainly to the you single asset mortgage or entity secondly to the general partner and indeed to both general partners because Joe Harris is a key principle in the definitions that are in the regs he would be subject to the 25 30 s as well but the investor limiter partner could submit a certificate in lieu of a 25 30 the reason for that is that they're a passive investor and under hira the department was somewhere between directed to and given authority to to accept certificates in lieu of a 25-30 that this investor is purely investing as a passive investor if there was an identity of interest between the limited partner or any of its members and Joe Harris or the non-members of the nonprofit board that could be a case where we would actually require a 25 30 but in most cases that's a non identity of interest entity and we would not require 25 30 the form of that certificate is on our website and I believe in our session last Monday kathy's broke soroka spoke to the specifics of that form so as I mentioned Joe Harris he is going to have to fill out the 25 30 or go through the app system online the another word about the limited partner if they're approved have done GSE transactions and have experienced or if there are publicly rated entity by in their financial reports and credits or matter of public record that generally will suffice for the more thorough mortgage credit review the map guide tells us that if the tax credit syndication syndicator is identified we'll also if there's a syndicator in the deal the lenders underwriter will need to give us a brief overview and analysis of that entity typically the tax credits indicators and investor intermediary with only a limited on going creation to the tax credit rental property accordingly we wanted to expect to see an REO schedule for the syndicator investors and unless they had an identity of interest they too would be considered a passive entity and unable to submit the certification in lieu of the 2530 review however the syndicators liquidity track record their asset management and monitoring capability and their history of performing on its commitments to provide equity is a material issue for the mortgage credit analysis so those are some specific things that affect tax credit deals that don't affect other FHA transactions just to reiterate the comments about the certification in lieu of the 2530 it applies to any entity that has just limited liability it doesn't matter if it's an LLC or corporate investor or limited partnership it applies to investors and affiliates investing in the tax credit projects and thus indicators as well if that's indicator is not a General Partner and then one last point is about special limited partners if you remember on the organizational chart we head up in the upper right-hand column was a special limited partner we don't always see those but from time to time investors will want such an entity and basically that entity has the ability to come in in some tax credit transactions and take over a General Partner role in the events of non-compliance or default under the operating agreements for the tax credit partnership historically that's been a problem for HUD because we require at EPA approval approval for the transfer of physical assets through asset management because of the time required for that the arrangement has been made in tax credit deals to allow basically pre-approval at the time the deal the tax credit transaction closes to allow for a limited period of time the special limited partner to come in and then after 120 days HUD would either need to approve them is it through a TPA or require a different entity the thinking there is that the departments in no worse position because that special limited partner wouldn't come in unless there were problems with meeting the tax credit compliance requirements which could put the loan in jeopardy next slide I wanted to talk a little bit about the capital structure of the deal and specifically some thoughts on making FHA work with tax credits to two documents specifically the subordination agreements and then the repair escrow David will derman will talk in a few minutes about the repair escrow administration but a couple of thoughts about structuring the tax credit deal to be consistent with the FHA terms from time to time local authorities in fact it's typical will want a use agreement and in many localities will require that those use restrictions those covenants running with the land to survive foreclosure because FHA requires our mortgage to be in first lien position that creates a problem but we also have the ability to waive on a case-by-case basis to allow that an exception to the first lien position for the FHA mortgage and allow these use restrictions to prime the FHA first lien that can only be approved case-by-case and in cases where it's necessary to accommodate the requirements of the local entities providing tax credits or other affordability restrictions the hub directors have authority to waive that and the lender submitting the application needs to specify that as a point of a waiver and generally we will approve those on tax credit transactions for the public purpose of allowing those use restrictions to survive even if the FHA loan is foreclosed on or as sold in and notes any modifications to the subordination agreement need to be cleared by HUD headquarters before doing it in ogc but then the expectation is once that's revised for that jurisdiction that HUD field office that the same form would be used going forward and so then subsequent similar changes when it has to come to HUD headquarters ogc another point of that comes up on in the capital structure of the FHA loan in tax credit deals is often they'll be subordinate or secondary financing the terms of that secondary financing are limited in some cases by regulation in other cases by mapguide requirements and I wanted to go through a couple of them first one is no performing seconds 24 CFR 200 point 85 actually is in the regs that you can't have a performing second from time to time we will process a regulatory waiver we've granted a couple over the last two years but it is a regulatory waiver that the Commissioner FHA commissioner has to sign and so well we'll generally want to cooperate if there's significant public funds coming in to supplement the FHA loan that is a reg waiver to have it be a performing second that is payments due every month as opposed to just a surplus cash note another provision we sometimes see is a request for debt to have a balloon payment or a bullet payment prior to the full amortization period of the FHA loan well that's not a regulatory requirement it is something we would generally discourage and not want to do and would not want to grant a waiver for that the loan should be fully advertising with the consistent period of the first mortgage having said that the golden rule applies here that is whoever puts in the gold should make the rules now typically the FHA loan is the majority of sources of cash but if there's material amounts of other public funds and significant affordability we can have and we'll waive the balloon requirement and as long as the risk is mitigated that when it comes to first off it's in a subordinate position so they're not likely to foreclose over the first and then secondly the idea would be we would do this for other public entities that are not likely to have a motive to destabilize the property due to the maturity of a balloon payment and could reasonably be expected to cooperate in a workout other provisions we generally if their subordinate financing we do want to see that at least some cash flow goes to the owner and generally no more than 75 percent of the net cash flow should go to service the second mortgage the reason for that is we want to have the owner to have a financial incentive in the loan so cash flow is one of the Seas of mortgage credit underwriting another thing to consider in the capital structure is compliance with the program limits and in the 223f program which is the vehicle for doing FHA loans under the pilot we limit secondary financing combined with first mortgage financing to 92.5 percent of the loan to value if the source of the secondary financing is a private party in most tax credit deals at least most of the ones we've seen the typically it's a public entity and there is no loan to value limited in such deals there are other limits and more stringent in the 221 d4 program but that's outside of the scope of the tax credit pilot the last point I wanted to talk about is repair escrow administration and the an issue comes up on tax credit pilot deals because typically will we're seeing part of the repairs are funded through the mortgage proceeds and then part or funded through tax credits indication or other public sources and so the question arises is who controls those funds and here the Golden Rule really does apply FHA is in first position and really needs to control the release of those funds and make sure that the work is completed as well as we have control over workout situations if there are significant cost overruns change orders or problems in the repair process David will derman we'll talk in a minute about some of those details of repair escrow administration but general comment is that HUD would definitely want to cooperate in terms of reasonable consultation with the other sources as well as notice and opportunity to cure problems and then I would note that the underwriter really needs to have a detailed schedule construction progress schedule on what work is going to be completed so that it's thought through and that we would minimize the chance of cost overruns or problems during the repair repair process so those are my notes I couldn't think of any more seas and I didn't want to wanted to cover though at least some of the basic issues that come up in wall mortgage credit underwriting and then as well cover some of the specifics about who is a principal and who is not a principal for Tax Credit pilots and what the exceptions are to the 2530 requirements as well as we've covered some of the boundaries around secondary financing I believe there were some questions and so we'll take a minute to get those on the screen and then we'll turn it over to David will durban so are there questions on the stream from the emails how do you work so I'm not seeing any questions on the screen so maybe we can just take another two minutes to see if those questions come up and maybe take a break here for two minutes before David then goes into his presentation welcome back we did receive a couple of questions we receive two environmental questions and then one question that David will durman's going to cover on the next segment Hillary etkin could you answer the two environmental questions for us sure so the first question we have is you discuss the role of lenders and hub staff with respect to state historic preservation reviews what is the role of hub staff with respect to tribal historic preservation reviews so basically the role that HUD staff will have with respect to the tribal story preservation consultation is the same as it's been all along the HUD staff needs to initiate consultation with tribal Historic Preservation officers so while we were providing a streamlined process for consultation with State Historic Preservation officers we still need that government to government consultation with tribal Historic Preservation officers if their interest may be affected and HUD actually has a great tool on it's a tech website which is through the CPD page that can tell you if there are tribes which may have an interest in your project location but as I said before this process with consultation with tribal Historic Preservation officers will remain the same our second question is how would the environmental review be completed for projects not located in Pilot hub offices so this the proud of the program has extended to all HUD offices is that correct so all jurisdictions are covered by the pilot however there's nine of the 17 hubs are actually processing hubs and so the designated underwriter would need to make arrangements for the environmental review it's literally noted in some cases no environmental renault site inspection is required in cases where the project is located outside of the geographic jurisdiction of the designated under I hub office they would either need to arrange for themselves to travel to the project or contact the local originating hub and ask them to provide that service and we do anticipate that coming up from time to time that's how we would handle it really a case-by-case basis ok well with that the next question we did receive a third question but David will derman in his section has a slide on that so we're going to turn it over and ask David will derman to talk to us about architectural requirements and Rehab administrate rehab escrow administration well thank you Dan I think as most of you know when we're talking about construction in this context we're going to be talking about 223 apps and what I think have been dubbed 223f heavies so we're going to in terms of construction and architectural exhibits we're going to be looking in all the usual 223f exhibits and they still remain but there are going to be some key differences one of the key differences will be that the review of the a any documents will be by the designated underwriter and not by the Hutt architect except in some selected cases where there may be a particular issue of where the designated underwriter requires some some assistance in addition we're going to be able to spend more money that's what makes it a heavy up to 40,000 gallons per unit will be allowed and in those cases where repairs are in excess of $15,000 a unit we will be requiring a licensed architect to manage the job there may be some nuances there will come back to those in a moment in addition we we want to pay attention to accessibility issues not only in with respect to the Fair Housing Act design and construction requirements but also since we may be seeing a lot of section transactions here we're going to be talking about us section 504 and you fast and that's a bit more complicated than the Fair Housing Act and also since we're talking about tax credits we're going to be talking about a DA because tax credits are considered a state program and state programs are subject to a DA under a different title not the not as of public accommodation but because it's a state program so that that that means that a DA will be a larger consideration than we often find it to be in ordinary underwriting of F transactions another key difference is that the construction time that we will allow for repairs which is ordinarily only twelve months for non critical repairs will and well in many cases be extended because of the larger scale of the work that may be in some transactions so let's let's talk about the project capital needs assessment for a moment but you know the purpose of a cna is to identify the condition in the property its recent repairs and the cost of those and to identify immediate repairs or critical repairs that may be required right away as well as a laundry list of repairs that may be required within the next 12 to 24 months other repairs that may be of the nature of property improvements that ownership wants to see may and then of course there may be remedies for accessibility deficiencies that have to be undertaken for the most part the there's no real change in our guidance for how a cna will be will be done we do have a new mortgagee letter coming out on this topic which in fact was signed this morning dan so it will be published shortly and we will be using that guidance in this in this pilot and the qualifications of the person doing the needs assessment are important you will need to have either a licensed architect or one of our normal means assassins who have still and expertise in this in this field in addition we want to make sure that we have covered our accessibility issues and this is emphasized in the new mortgagee letter if there are remedies that are required these will need to be described in a corrective action plan and these will have to be a portion of the work required for the project this next bullet here is actually an error I believe it's supposed to be housing notice 2012 dash 12 which is in fact a reference to the three-year waiver and the role of PCA pcna reports in three-year waiver deals which of course are newly built and shouldn't have much in the way of repairs required but they may have latent defects and we want to make sure that that we are protecting from latent defects and so reference should be should be made to section 13 of that housing notice 2012 12 so let's talk about the limits on rehabilitation as we noted it the cross limit is 40 thousand dollars and that is not a number that is subject to any cost adjustment or high cost factor it is an absolute limit applies all across the country and when we say work so we're we may spend up to that that that some but we also want to make sure that we're not dealing with substantial rehabilitation and one of the the possible ways that we might trigger a substantial rehabilitation would be by the replacement more than one system now this word system has had a long story in the FHA experience and we've had varying definitions of other applications of us on the same definition over time I think we can credit Dan with this list of bullets here that we are now using to as the description of systems there are five of them there's that there's the building envelope and I believe that's actually spelled with noe so that must be the Dan Quayle Dictionary of the English language there I apologize David but the idea is the building envelope is the combination of the citing the doors windows and the roof so that's one building envelope right then and so so that's an essentially the entire exterior of a structure then there's the structural system which of course is the bones of each building and then the mechanical of divisions plumbing electrical and heating ventilating and air-conditioning and so what does it mean to replace one of these systems well it means that you replace more than fifty percent of any one of these and that fifty percent is of cost as opposed to a list of items so let's say let's take built in the building envelope as an example if you replace more than half of the roof or after the cost of replacing all roofs and perhaps half the cost of replacing all windows and then you threw in all new siding you would probably come close to a point where you were replacing that one system it's highly unlikely that you would ever come close to replacing half the structural system and it's pretty unlikely that you would find that circumstance to be true of plumbing or wiring it's possible that you might do that with with hvac so this is a very broad definition of systems it means i think in as a practical matter that we will rarely if ever encounter the sub rehab threshold on the two systems bases and David before you go on to the next slide did you wanna address the issue of what's included in the 40,000 yes sir that is on the next slide actually so let's talk about cost for a moment the cross include or may including I think the operative word here is may certainly all the hard costs we can also include general conditions and overhead for a contractor and profit that's particularly true if we're talking about an unaffiliated third party general contractor but here's the question what happens if it's an affiliated general contractor are we still going to allow a profit and I think in this case we are not laying down a hard and fast rule but certainly the designated underwriter needs to be aware that it's it would be possible to have excessive compensation to the sponsor if we permit permitted say a ten or fifteen percent profit on the rehab costs as well as a 15-percent development fee on total depreciable cost David before you go on to the next one let me just address this issue of me and I would say must so it's not a may the rehab costs do include overhead and profit as well as general conditions it's really at what's in the contract is what defines that 40,000 we have seen a number of inquiries come up and go right to the 40,000 limit and if that repair cost does not include general conditions and overhead that does need to be put in to that rehab costs threshold and if that including those items caused the repair per unit amount to go over 40,000 then the project is not eligible for the pilot and needs to go as a section 221 d4 sub rehab or other financing and beyond that rehab costs or our mortgage ville but only to the extent that they fall within the normal sixty five hundred dollar limit for 223 F repairs adjusted by the appropriate high cost factor in addition developer fees of up to fifteen percent of depreciable cost may be permitted when you have an 85 to eighty-seven percent loan-to-value limited lung if the if the operative limit on the loan amount is eighty percent loan to value then the proceeds can be used for any purpose and the the distinction between multiple cross non-mortgage will cost soft costs and so forth will be laid out on the wheelbarrow now what exhibits are we going to be asking for related to the general contractor we have a threshold of fifteen thousand dollars per unit as a point at which we would like to see an architect engaged by the owner to supervise a construction I want to pause here for a couple minutes and talk about how this may actually work and also about the next bullet which is that we're looking to the architect to provide us with advice or a recommendation about whether or not a general contractor may be required so what exactly will be the documents that that the architect would be agreeing to and for his participation in this job well it's going to be this thing we call an AI a b-1b 108 contract this is an owner and architect agreement and while a lot of the construction what our construction and ane people are pretty familiar with this others may not be and I want to suggest that article one it's probably the crucial portion in this document because it's the one where it's the article where you will the owner and the architect will actually describe the parameters of the job and I'm even I would even suggest that the designated underwriter might want to make sure that the language that would go in article 1 here 1 point 1 would be something that would be discussed at an early date in the process probably at a concept meeting or concept telephone conference and so what would we what would we want inscribed here well we want to know whether or not drawings will be used and so what kind of you know what level of drawings clearly since you're talking about what amounts to moderate rehab in many cases we may not we may not want the usual scale of drawings or order a scope of drawings it's conceivable that you could have a job where you might be slightly over the fifteen thousand dollar limit that's sixteen or seventeen thousand something and not actually need an architect what kind of a circumstance might that be I would I would suggest that we look at the our trust estimate form and you'll see the list of various trades and what's true about the trades listed is that for the most part each of these items are represents a separate subcontractor that's not always true but it frequently is and so what we ought to be able to do at an early stage is identify how many of these trades are involved and if we find that there are numerous trades then we're more likely to be interested in seeing a general contractor on the site to manage and coordinate all of these people on the job in addition one of with respect to drawings you know how do we decide whether we want drawings or and which drawings might be desirable I would suggest that what's one of the key indicators here is whether or not dimensions are important you could you can you can envision a job for example where we only check a few of these items on on the project cost estimate such as may be dry maybe appliances carpet and HVAC and we might have no all of these things might be replaced as they are that is it the same size in same locations and so forth so there's really no change in dimensions and you can envision the possibility that the cost here might minus C $15,000 and in that event it's it would be reasonable to me not to require an architect that not to require a general contractor well perhaps not an architect if you're not making any changes in in there's no drawings right so so the program requirement is for repairs above 15,000 a unit the bar must engage a licensed architect and David is suggesting some conditions under a waiver in addition to the dimension issue for instance if a lot of the work is merely replacing appliances for instance that could be a circumstance generally speaking any time there's repairs greater than 15,000 we expect an architect be engaged and that architect may or may not decide to have a general contractor required well since the we we don't expect that the these construction documents are going to be reviewed extensively by our staff in fact the designated underwriter is is expected to undertake this so the question of whether or not a general contractor is is engaged is is something that we would like to hear about from the architect but in terms of our review of that we need to be aware of some of the factors that might influence that and I in my in my judgment the primary factor would be the number of trades involved and then with with respect to drawings in which you know whether or not we have any sketches or and how extensive those are that's primarily a function of of dimensions and whether or not we are moving things we might have a kitchen remodel for example as a standard item for most of the units in a project and if that remodeling if that remodeling involved relocating the appliances the sink and installing an island where there wasn't one before then clearly dimensions are important and they would be important to to review to the review the incessant of the accessibility requirements as well so so there are other requirements and plans and specifications I think we pretty well dealt with that clearly the more complex the job the more likely you're going to want to see plans relocation this is also related to the extent of the work and whether or not you're you're moving things if you if you're taking a the housewives kitchen out of out of duty for a week then you're going to have to have a relocation plan and that's going to need to be very specific and is and all the people that will be managing it will have to be identified the owner architect agreement we've we've talked about that the key part is article one the property insurance schedule the 23 29 this is a standard item with with a HUD transaction and we will need we will need replacement cost for the buildings identified on the 23 29 lead-based paint and asbestos and other specialty reports our issues that the designated underwriter may ask for assistance with from other you know from the architectural and engineering staff repair escrows we will be using some of the controls of the type that we normally see in Inadi for but here i want to point something out and that is that in a tax credit field we really have a strong ally in the tax credit investor and the and thus indicator because we're in the same boat essentially and the reason for that is that the the cost of repairs is an important part of the depreciable basis which of course is and it is a material consideration and the value of the credits so if you're in this if you're you know if you're going to canoe with with a partner you want to make sure that you're paddling together so we want to communicate with with the syndicator or the tax credit investor and make sure that we are cooperating on managing construction and inspections and and not not working against each other again we're going to rely upon the the architect to be signing certificates of completion and request for disbursements so the architect may depending upon the scale of the job be looking for an independent inspection firm to be to back him up and in that case that would be something we would want to require the lender will do there will bring up bring the title work up to date with respect to lien waivers on each draw and will require will obtain the written certification that the work has been completed as shown on the 20 24 64 I think we've covered a good bit of this of this these items as well Hut inspections will will be taking place as as you as they usually do on an F at 35 65 and one hundred percent completion or it will be the lenders job to approve in to disburse funds and our HUD sign-off inspection and sign-off is required before the final disbursement dan mentioned earlier that there would be that all of the cost of construction should be escrowed there there's the twenty percent and a completion assurance that should be escrowed as well but we are flexible about that because we do have the tax credit investor involved and that's some additional security and it's also true that their provision of funds may be later than than the initial closing so what makes our any analysis successful well the deal we agreed to do and closed on stays closed the work is completed it comes in a door under cost and the and the quality of the work assures long-term physical integrity at the project so Dan that's that's my section okay thank you David now if there are questions beyond the questions that we've received to today and there are a couple more please contact Lynn warily her address email address is posted or her direct line is 20 to 40 to five to 10 we do have several questions that have come in and we'll wait for a few more minutes if you want to send those to Carolyn a kalyan at gov it looks like the first question from Seattle Hillary atkin gets to answer this one another question about tribal notification okay the question is we have just confirmed with our regional environmental specialist the tribal notification is not required under 223 F why did the environmental specialists discuss this under the pilot all I really have to say about that is that it is required if there are effects under a 223 F project I'm not sure what the regional environmental specialist is referencing when they said that there is not and perhaps I should speak with somebody offline regarding this question maybe the commenter could contact Hilary is a follow up and if there is some change to the policy will issue that on a Q&A next one is a David question about or maybe me if the general contractor is an entity affiliated with the borrower is it acceptable to eliminate the builders profit from the mortgage mortgage about rehab costs and the 40,000 program limitation but still pay the profit from the syndication proceeds after completion of the rehab and i would say that one needs a follow up in some discussion i have an answer here but it may not be the right one so we'll put that on a Q&A as a follow-up if there are no more questions we'll just give another 30 seconds to see if there are any and as we just give another minute just wanted to say thank you to Tom go to and to Hillary akan David will derman for stepping in and doing the training today I hope this series has been helpful I'm told that's available on the HUD webcast archives and we'll see if there are any other questions ok well thank you so much for tuning in today and again do let Lin warily know if you have any follow-up we will send out on a subsequent QA and conversation with the field lenders on our next Reggie reg literally scheduled by weekly conference calls the answer to be a question about if there's an affiliated relationship between the general contractor the developer how the Prophet would be treated within that forty thousand dollar limit thank you and good afternoon