Multifamily Underwriting Standards

Transcription

1 Multifamily Underwriting Standards April 2017

2 The Minnesta Husing Finance Agency des nt discriminate n the basis f race, clr, creed, natinal rigin, sex, religin, marital status, status with regard t public assistance, disability, familial status, gender identity, r sexual rientatin in the prvisin f services. An equal pprtunity emplyer. This infrmatin will be made available in alternative frmat upn request. The Minnesta Husing Finance Agency (Minnesta Husing) Multifamily Underwriting Standards are current as f the date n the cver page. These Standards reflect Minnesta Husing s general apprach t underwriting, but they are nt meant t be cmprehensive, nr are they meant t address every pssible situatin. If yu have a questin as t hw the standards will apply t a particular prject, it is best t cnsult Minnesta Husing early in the develpment prcess. Minnesta Husing will update the standards as apprpriate at the sle discretin f Minnesta Husing.

3 Table f Cntents Chapter 1 Terms Owner Brrwer Spnsr Guarantr Tribal Natin Guarantr Develper Credit Review Financial Respnsibility... 5 Chapter 2 Incme Rent Revenue Supprtive Husing Standards Lng Term Hmeless r Peple with Disabilities Other Incme Cmmercial Space Vacancy Factr... 7 Chapter 3 Expenses Management and Operating Expenses Prperty Taxes Cnstructin Cntingency Cnstructin Oversight Fee... 9 Chapter 4 Fee Limits General Cntracting Fee Limits Architect Fee Limits Develper Fee Limits Chapter 5 Reserves and Escrws Replacement Reserves Initial Depsit t Replacement Reserves All Reserves Operating Deficit Escrw Chapter 6 Prfrma Assumptins Incme and Expense Inflatin Factrs Debt Cverage Rati Chapter 7 Acquisitin Purchase Price Acquisitin-Related Csts Chapter 8 Appraisal Requirements... 16

4 8.01 Appraisal at the Time f Applicatin Prir t Clsing-Amrtizing Lans Prir t Clsing-Deferred Lans Appraisal Expiratin Perid % Husing Tax Credit (HTC) - Issuance f a Preliminary Determinatin Letter Chapter 9 Types f Surces Amrtizing Lans Deferred Lans Cash Flw Nte Refinancing Equity Bridge Lan Balln Mrtgages Deferred Debt n Mixed-Incme Develpments Sales Tax Rebate Energy Rebates Chapter 10 Invluntary Displacement Chapter 11 Clsing Clsing in Balance Minimum Tax Credit Equity Pay-in at Clsing Cst Savings at the End f Cnstructin Chapter 12 Cntract Cmpliance and Equal Opprtunity Plicy Purpse Gals Requirements Sanctins Chapter 13 - Fair Husing Plicy Appendix A Terms... 26

5 Chapter 1 Terms The Minnesta Husing Finance Agency (Minnesta Husing) incrprates the fllwing terms and definitins when wrking with external partners Owner An Owner is an entity r persn wh hlds title t the real prperty Brrwer A Brrwer is an entity wh has received an amrtizing first mrtgage r deferred lan frm Minnesta Husing. A Brrwer must be a single asset entity in rder t btain a nnrecurse amrtizing first mrtgage r nnrecurse deferred lan. In additin, Minnesta Husing s FHA Risk Share first mrtgage and deferred lan prgrams require that Brrwers be Eligible Mrtgagrs as defined in Minnesta Statute 462A.03, subdivisin 13. Fr the purpses f Minnesta Husing Multifamily Underwriting Standards, there are tw applicable entity types utlined in the statute: A nnprfit r cperative husing crpratin, r; A limited prfit entity needing t adhere t the fllwing requirements: The annual distributin must nt exceed 15 percent f the initial capital cntributin (r 1.5 percent f TDC absent an initial capital cntributin) Returns exceeding 15 percent are transferred t a residual receipts fund and may be used fr Minnesta Husing-apprved prject imprvements Lans t multiple asset entities will be limited t deferred lans and will be fully recurse t the Brrwer and Guarantr(s) Spnsr A Spnsr is an individual, legal entity, r nnprfit bard f directrs that exercises cntrl and decisin-making authrity ver the prject. All lans and funding awards require full Spnsr credit reviews, including submissin f the Minnesta Husing Qualificatin f Spnsr (Frm 203B) and all related requested materials. Spnsr(s) must cllectively demnstrate acceptable Multifamily husing experience and financial capacity t guarantee perfrmance as described in 1.04 belw Guarantr A Guarantr is the entity r individual wh signs the Guaranty. Guarantr(s) must cllectively demnstrate acceptable financial capacity t guarantee perfrmance as described belw. Cmpletin and Repayment Guaranty: Fr Brrwers receiving Husing Tax Credits (HTC) and fist mrtgages Guarantees: 3

6 Cnstructin cmpletin Debt service payments until the develpment has achieved 1.11 debt service cverage (assuming stabilized expenses) fr three cnsecutive mnths Operating cst shrtfalls fr the term f the lan Minnesta Husing reserves the right t request a guarantee f cnstructin cmpletin frm the Develper (Sectin 1.06 belw), regardless f its affiliatin with the Spnsr(s) Tribal Natin Guarantr Bth amrtizing and deferred lans t prjects lcated n tribal land are fully recurse r must be guaranteed by the tribal gvernment in the frm f a tribal cuncil reslutin addressing: Cnstructin cmpletin Operating cst shrtfalls Debt service payments 1.06 Develper The Develper is typically a separate legal entity frm the Brrwer r Guarantr(s) wh may cmplete any r all f the fllwing tasks fr a prject: Submits the tax credit r funding applicatin(s) n behalf f the Brrwer Submits the Minnesta Husing Qualificatin f Develper (Frm 203A) and all related requested materials Receives a Develper Fee, if any, frm the Owner May defer a prtin f the Develper Fee as a receivable frm the Owner t clse funding gaps as needed Is a party t a Develpment Services Agreement r cntract with the Owner Incurs pre-develpment csts n behalf f the Owner Develpers must demnstrate acceptable multifamily husing experience and financial capacity t guarantee perfrmance f their duties as described in the Develpment Services Agreement. NOTE: Minnesta Husing reserves the right t apprve the replacement f the Develper after being selected fr a tax credit reservatin Credit Review Minnesta Husing cnducts separate credit reviews at the fllwing times: During the applicatin and selectin prcess Prir t credit apprval fr lan clsings 4

7 1.08 Financial Respnsibility The Owner is respnsible fr all the csts incurred as a result f applying fr, r securing a lan r tax credits frm Minnesta Husing, whether r nt the prject is funded. These csts include, but are nt limited t, the appraisal, envirnmental reviews, market study, title insurance, clsing and legal fees, and publicatin fees. 5

8 Chapter 2 Incme Rent Revenue Rents shwn in the Multifamily Wrkbk (Wrkbk) and year ne f the cash flw will be the rents that will be in effect when the develpment is placed in service. Existing perating develpments will be underwritten at current rents unless there is sufficient evidence that a rent increase fr the develpment is feasible in the lcal market. Fr develpments with prject-based Sectin 8 rental assistance, Minnesta Husing will underwrite and size debt based upn the lwer f HUD-apprved rents under a Husing Assistance Payments (HAP) cntract r market rents. In the case f develpments pursuing renewal ptins that allw fr staged-in HUD-apprved after rehab rents, Minnesta Husing may allw the higher rent levels t be incrprated int the underwriting, but will underwrite a transitin reserve int the develpment budget Supprtive Husing Standards Lng Term Hmeless r Peple with Disabilities Develpments that have units set aside and rented t husehlds wh are Lng-Term Hmeless (LTH) r Peple with Disabilities are cnsidered supprtive husing units. Fr supprtive husing units with Grup Residential Husing (GRH) rental assistance, the grss rents shuld be underwritten at the fllwing levels: Efficiencies and ne bedrm units: Recmmended maximum grss rent level f $691 per unit. NOTE: Ttal available GRH is $891, but $200 may be used by the tenant fr ther husing expenses, and the administratr may als use a prtin fr administratin, which is the preferred GRH use. Larger units (mre than ne bedrm): GRH can als be used fr families, but the rent/incme payment structure is mre cmplex. Cnsult with the lcal cunty r the state Department f Human Services (DHS) fr assistance in develping the GRH rent structure. The ttal amunt f available assistance is $891. Justificatin shuld be submitted t supprt cases where higher grss GRH rent levels are needed. GRH grss rents cannt exceed the grss rents paid by nn-grh tenants fr cmparable units in the develpment. Fr supprtive husing units that d nt have access t a rental subsidy, t ensure lng term financial viability and affrdability t the tenants, the amunt f rent t be paid by the husehld shuld be affrdable t the ppulatin t be served. The fllwing infrmatin is based n data frm the Hmeless Management Infrmatin System (HMIS). If a rent subsidy, including GRH, is nt available t the develpment, r the rental subsidy is nt cmmitted fr at least 10 years, the grss rent (cntract rent + tenant- paid utilities) shuld be underwritten at the fllwing levels: 6

9 Target Ppulatin Mnthly Grss Rent Per Unit SRO and Efficiency/Singles (nly) $100 1 BR/Singles r Families with Children $130 2 BR r larger/families with Children (nly) $180 Visit the Minnesta Husing website fr Guidance n Rent Increase fr LTH Assisted Units with N Rent Subsidies. Husehlds shuld pay the greater f the develpment s current cntract rent, rents established at underwriting, r 30 percent f their incme. Develpments shuld nt exceed the rent limits established in the lan dcuments r ther use restrictins. T the extent pssible, Owners shuld have a written prcedure in place that describes hw 30 percent f husehld incme is calculated and hw that aligns with ther funding requirements Other Incme Minnesta Husing will evaluate ther incme (e.g., fees, laundry, parking), and it shuld be reasnable and cmparable t ther develpments within the regin. The amunts will be evaluated by Minnesta Husing s staff Cmmercial Space Incme frm cmmercial space will be underwritten n an exceptin basis nly. Five years f perating histry will be required, and Minnesta Husing will, at its sle discretin, determine an apprpriate vacancy rate Vacancy Factr Prperties will be underwritten at a 7 percent vacancy rate. A lwer vacancy rate f 5 percent may be used if the prperty has any f the fllwing: Rents at least 20 percent belw cmparable market rents; r Existing prperties are supprted by histric perfrmance; r Sectin 8 assisted prperties, if justified by histric peratins. The abve percentages are minimums, and if warranted by histric perfrmance r market cnditins, a higher vacancy rate will be used. Minnesta Husing will, at its sle discretin, determine the apprpriate vacancy rate. 7

10 Chapter 3 Expenses 3.01 Management and Operating Expenses The Owner/Develper will submit the Management and Operating (M&O) budget based n anticipated stabilized perating expenses ccurring after the develpment is placed in service r upn full ccupancy. Fr perating prperties, the histric M&O expenses will be used, with apprpriate adjustments fr prjected ecnmies attributable t the prpsed rehabilitatin and fr changes assciated with new prgram requirements. M&O expenses (net f real estate taxes and reserves) will be evaluated and analyzed in relatinship t cmparable prperties in Minnesta Husing s prtfli, expense cmparables in the appraisal, and ther infrmatin deemed relevant and apprpriate. M&O expense numbers are calculated n a per rm basis. The rental rms per unit are calculated as fllws: Unit Type Rental Rms Per Unit Bed/Shelter 2 EFF/SRO BR BR BR 6 4 BR 7 5 BR 8.5 The prpsed M&O expenses shuld be based n the Develper/management cmpany s current prtfli and supprted by: Actual perating data prvided by the Develper/management cmpany fr similar develpments Circumstances and/r significant changes t the ecnmics f the develpment s current marketplace, such as increased utility csts and prperty insurance Operating trends f the Develper/management cmpany The Owner supprting the prpsed M&O expenses shuld include: Fr new cnstructin: Cmpletin f Minnesta Husing s New Cnstructin Cmparable Prperty Prfile Frm Fr existing prperties: Cpies f audited financial perating expense statements fr at least three stabilized years In sizing its funding awards, Minnesta Husing reserves the right t adjust the prpsed M&O expense numbers based upn the infrmatin supplied, specified develpment type, circumstances and/r 8

11 significant changes t the ecnmics f the develpment s current marketplace. Minnesta Husing will als use its M&O database t cmpare prjected M&O expenses with audit data frm cmparable prperty types Prperty Taxes The Lw Incme Rental Classificatin (LIRC) tax rate was created by the Minnesta State Legislature in 2005 t prvide significant relief t certain husing develpments where a minimum f 20 percent f the units meet specific incme and rent restrictins. All prperties that are eligible fr LIRC r Payment in Lieu f Taxes (PILOT) must participate in the applicable prgrams. Refer t Lw Incme Rental Classificatin (LIRC) n Minnesta Husing s website Cnstructin Cntingency A cnstructin cntingency is required. Fr new cnstructin develpments, a 4 percent cnstructin cntingency, subject t Minnesta Husing review, is required. Fr rehabilitatin develpments, a 7 percent cnstructin cntingency, subject t Minnesta Husing review, is required Cnstructin Oversight Fee Histrically, Minnesta Husing has charged a cnstructin versight fee nly t develpments funded with an amrtizing mrtgage under the Lw and Mderate Incme Rental (LMIR) prgram. Effective in 2015, a cnstructin versight fee will be assessed t all develpments receiving Minnesta Husing amrtizing r deferred lans (HOME lans are exempt). The fee will be assessed at the lessr f 0.25 percent f the cnstructin cntract amunt r 1.0 percent f the ttal Minnesta Husing lans. 9

12 Chapter 4 Fee Limits 4.01 General Cntracting Fee Limits Cntractr s Prfit: The maximum cntractr prfit is 6 percent f Net Cnstructin Csts. Net Cnstructin Csts are defined as cnstructin csts and n-site wrk, nt including cntractr prfit, general requirements and verhead. General Requirements: The maximum general requirements allwed are 6 percent f the Net Cnstructin Csts. Csts t be cnsidered include: n-site supervisin, signs, field ffice expenses, temprary sheds and tilets, temprary utilities, equipment rental, clean-up csts, rubbish remval, permits, watchmen s wages, material inspectin and tests, all f the general cntractr s insurance (except builder s risk), temprary walkways, fences, rads and ther similar expenses. Cntractr s Overhead: The maximum allwance fr verhead is 2 percent f Net Cnstructin Csts. The cntractr fee limits may deviate frm the abve-nted maximum allwances s lng as they d nt exceed 14 percent f Net Cnstructin Csts in the aggregate. Develper r Owner as Cntractr: When there is an Identity f Interest between the Develper r Owner and the cntractr, in additin t the fee limits stated abve, the cmbined balance f Develper Fee, cntractr prfit, cntractr verhead, and general requirements may nt exceed 20 percent f the ttal develpment csts less the Develper Fee. Refer t Minnesta Husing s Cntractr's Guide fr mre detailed infrmatin Architect Fee Limits Separate allwances fr design and cnstructin administratin are calculated based n the grss cnstructin cst n the Wrkbk. The design allwance (75 percent) is prvided at cmpletin and acceptance f the wrking drawings and specificatins (i.e., at clsing). The cnstructin administratin allwance (25 percent) is prvided ver the curse f cnstructin Develper Fee Limits The Develper Fee is prvided t the develper f rental husing fr the time and energy expended n and risks assciated with putting a develpment tgether. Develper Fees include develper verhead, develper prcessing fee, if applicable, develper prfit, and any ther amunts received by the Develper as apprved by Minnesta Husing. The Develper Fee must be attributed nly t the develpment. In sme instances, the Develper may delegate sme f his r her respnsibilities t a third party, such as a prcessing agent r cnsultant. In such cases, the delegated respnsibilities must be thrughly understd by all parties invlved, and the fee paid t the third party must be included in the calculatin f the permitted maximum Develper Fee. A Develper Fee can be included in the ttal develpment cst f the prject. The maximum allwable Develper Fee is based n a percentage f the ttal develpment cst less the Develper Fee. The maximum amunt f the Develper Fee paid at clsing is 50 percent f the prtin f the Develper Fee being paid with prject financing surces. The remaining 50 percent f the Develper Fee must be 10

13 paid n sner than the final cnstructin draw. This excludes a deferred Develper Fee t be paid frm future prject cash flw. A develper incentive fee is nt allwable fr develpments awarded Minnesta Husing deferred funding. Minnesta Husing will require any reference in the Limited Partnership Agreement f a develper incentive fee t be remved frm the Limited Partnership Agreement. Specific use f any cst savings at the end f cnstructin requires apprval frm Minnesta Husing. Fr mre infrmatin abut cst savings at the end f cnstructin plicy, refer t Chapter 11 f this guide. Develpment Type Size Maximum Develper Fee New Cnstructin r Rehabilitatin First 50 Units 15% New Cnstructin r Rehabilitatin Units 51 and ver 8% 11

14 Chapter 5 Reserves and Escrws 5.01 Replacement Reserves Reserves fr replacement must be budgeted at n less than $300 per unit per year fr senir husing and $450 per unit per year fr all ther husing. If the Capital Needs Assessment 20 Year Expenditure Template indicates a higher amunt necessary t address future capital needs, then higher annual depsits, annual escalatrs t the reserve depsit, and/r a Brrwer funded initial depsit will be required Initial Depsit t Replacement Reserves Minnesta Husing may require an initial depsit t the replacement reserve, depending upn the 20- year capital needs assessment and the level f n-ging cntributins t replacement reserves All Reserves All unexpended funds remaining in prject reserve accunts must remain fr prject use during the term f Minnesta Husing s lan r the prject Extended Use Perid, whichever is lnger. The limited partnership agreement must include a prvisin addressing the terms and cnditins fr disbursement frm the reserve accunts that specifically states that upn the transfer f any wnership interest r at the end f the cmpliance perid, whichever is earlier, any funds remaining in the reserve accunts must remain with the prject fr the term f Minnesta Husing s lan r the Extended Use Perid, whichever is lnger. Existing develpments applying fr tax credits and/r refinancing will be required t shw existing reserves as a surce Operating Deficit Escrw NOTE Effective March 24, 2015: Required fr all develpments funded with a LMIR amrtizing lan. This escrw cmbines and replaces the previusly required Wrking Capital Escrw and the Rent-Up Escrw. At the time f initial clsing f the LMIR lan, Brrwers are required t establish an Operating Deficit Escrw (ODE), funded with cash r an irrevcable and uncnditinal letter f credit. Cash t fund the ODE must nt be derived frm the prceeds f any develpment surces including equity. The ODE is nt included in the ttal develpment csts. Minnesta Husing may use the ODE at its sle discretin, n behalf f the Brrwer, t pay fr develpment rent-up and perating expenses during the initial lease-up perid. The ODE will be sized based n the greater f: 3 percent f the lan amunt, r The prjected perating deficit during the absrptin perid, as determined by Minnesta Husing s underwriting analysis The ODE will be maintained until the later f the fllwing tw scenaris: One year after permanent lan clsing, r 12

15 Achievement f a 1.11 t 1 debt cverage rati fr six cnsecutive mnths. The DCR will be calculated based n actual cllected revenue less the greater f actual r underwritten effective grss expenses After achievement f bth f these scenaris, the letter f credit r the remaining cash and interest earned theren is returned t the Brrwer. Based n Minnesta Husing s Mrtgage Credit Cmmittee review, bnd rating agency r marketing requirements, Minnesta Husing may require the Brrwer t extend the perid r require a larger ODE. 13

16 Chapter 6 Prfrma Assumptins 6.01 Incme and Expense Inflatin Factrs The prfrma cash flw will assume revenue increases f n mre than 2 percent per year and perating expenses increases f n less than 3 percent per year. NOTE: Develpments with expensebased rents can use incme and expense inflatin factrs that are equivalent. Develpments with prject-based Sectin 8 will assume revenue increases n greater than histric average r 1.5 percent per year. A partially assisted prject wuld have a pr rata inflatin factr. Minnesta Husing reserves the right t change the apprpriate inflatin factrs based n changes in the ecnmic utlk Debt Cverage Rati The level f risk presented by a develpment, including verall quality, current market cnditins and ther factrs, will be cnsidered when making the determinatin f what level f debt service cverage a particular mrtgage will require. The develpment must maintain a break-even cash flw fr a minimum f 15 years n a prfrma basis. The minimum debt cverage rati fr year ne f stabilized peratins is as fllws: Subsidized Prperties (90% Sectin 8) Affrdable Prperties Equity Cash Out* The develpment must reflect a cash flw, after all expenses and reserves, that reflects at least a 1.00 debt cverage rati, fr 15 years n a prfrma basis. The cash flw must include mandatry expenditures such as bnd fees. NOTE: Equity Cash Out is defined as any refinance r restructure prpsal that includes equity being taken ut, including Related Party Transactins and limited partner buy ut. 14

17 Chapter 7 Acquisitin 7.01 Purchase Price Minnesta Husing will underwrite the acquisitin cst based n the lesser f the ptin/purchase agreement purchase price r the appraised value f the prperty. Fr details n valuatin methdlgy, refer t the appraisal requirement sectin f this guide. Fr a Related Party Transactin that ccurs within three years f a previus arms-length thirdparty transactin, Minnesta Husing s underwritten acquisitin cst will be based upn the lesser f the previus third-party transactin s purchase price, with n adjustment fr appreciatin r depreciatin, r the appraised value f the prperty fllwing selectin fr funding. Fr a develpment acquired as part f a prtfli acquisitin, Minnesta Husing will use the value as identified n the Certificate f Real Estate Value t establish the initial purchase price. Fr a develpment acquired as part f a land and/r building subdivisin, Minnesta Husing will use a reasnable allcatin frm the Certificate f Real Estate Value t establish the initial purchase price. Fr a Related Party Transactin that ccurs at the time f clsing, Minnesta Husing will evaluate the amunt f equity take-ut and may resize its funding awards Acquisitin-Related Csts Minnesta Husing may include in its funding award certain acquisitin related csts incurred in the three years prir t Minnesta Husing s bard s selectin date. The fllwing csts may be included in the Acquisitin r Refinance Existing Debt Csts sectin f the Wrkbk as applicable: Relcatin Lender fees and three years r fewer f interest n an acquisitin lan up t a 6 percent interest rate Legal csts related t acquisitin Title insurance Capital imprvements made since acquisitin (if dcumented) Taxes, insurance, security, maintenance, utilities Including such csts in the Acquisitin r Refinance Existing Debt Csts sectin f the Wrkbk des nt change hw they are treated by Minnesta Husing fr the purpse f calculating the percentage f intermediary csts. During the pre-develpment hlding perid, all net cash flw frm peratins except fr a reasnable asset management fee must be directed tward hlding csts and imprvements if Minnesta Husing deferred funding is requested. 15

18 Chapter 8 Appraisal Requirements 8.01 Appraisal at the Time f Applicatin A Minnesta Husing rdered appraisal is required t supprt the acquisitin price and will be used by Minnesta Husing and its funding partners t size funding awards. Appraisals cmpleted fr ther lenders r rdered by the applicant will nt be accepted. Minnesta Husing will underwrite the acquisitin cst based n the lesser f the ptin/purchase agreement purchase price r the as-is appraised value f the prperty. The apprpriate value will be based n the type f prpsal: Land-nly (fr new cnstructin): Fee simple, market value f the land. The appraisal will cnsider the real prperty's zning as f the effective date f the appraiser's pinin f value. If the real prperty cnsists f mre than ne parcel, the parcels will be cmbined in ne appraisal with ne value cnclusin. Acquisitin/Rehab: Fee simple, in as-is cnditin Assuming market rate rents Assuming existing restricted rate rents Adaptive Re-Use: Fee simple market value f the prperty t be adapted fr an alternate use. The valuatin will assume the highest and best use permitted by law and ecnmically feasible in the current market. The fllwing types f prpsals are exempt frm the appraisal requirement at the time f selectin; hwever, Minnesta Husing, in its sle discretin, reserves the right t secure an appraisal at the Brrwer s expense at a later date: Acquisitin price under $100,000 Land nly where there is n Identity f Interest* Single family hmes (ne t fur family(ies)) that are aggregated under ne lan (Minnesta Husing will use the assessed value unless the Brrwer requests an appraisal fr determining acquisitin cst as defined herein.) Prperty n tribal lands *Identity f Interest is used bradly t include nn-arm s length transactins and Related Party Transactins Prir t Clsing-Amrtizing Lans Fr amrtizing lans, an appraisal rdered by Minnesta Husing, is required prir t btaining final Mrtgage Credit Cmmittee apprval. Tw hypthetical values are required and the lesser f the tw values will be used t determine the lan t value: As-cmpleted and stabilized, subject t restricted rents As-cmpleted and stabilized, assuming market rate rents 16

19 Maximum Lan t Cst/Lan t Value Subsidized Prperties (90% Sectin 8) 87% Affrdable Prperties 87% Generally, plans and specificatins must be at least 50 percent cmplete fr the appraiser t adequately establish the as-cmpleted value Prir t Clsing-Deferred Lans Fr nn-amrtizing lans, Minnesta Husing requires an appraisal prir t clsing similar t that required fr amrtizing lans (abve). Brrwers shuld discuss this requirement with their assigned underwriter and if apprpriate, a waiver t use anther lender s appraisal may be sught thrugh Minnesta Husing s Mrtgage Credit Cmmittee. Any waiver f this requirement will be determined at Minnesta Husing s sle discretin. Nn-amrtizing develpments exempt frm this requirement include: Single family hmes (ne t fur family(ies)) that are aggregated under ne lan (Minnesta Husing will use the assessed value unless the Brrwer requests an appraisal.) Prperty n tribal lands 8.04 Appraisal Expiratin Perid Fr appraisals at the time f applicatin, the appraisal will be valid fr funding awards made within 12 mnths frm the effective date f the reprt. Fr amrtizing lans, the effective date f the appraisal must be within six mnths f clsing r end lan cmmitment. Fr deferred lans, the effective date f the appraisal must be within 12 mnths f clsing r end lan cmmitment. All csts incurred fr the appraisal, including any revisins and updates, will be the respnsibility f the applicant % Husing Tax Credit (HTC) - Issuance f a Preliminary Determinatin Letter Develpments that are requesting a Preliminary Determinatin Letter and that are nt receiving Minnesta Husing deferred r first mrtgage lans can submit a lender apprved as-is appraisal in lieu f a Minnesta Husing rdered appraisal. The lender s appraisal must be apprved by Minnesta Husing, and Minnesta Husing reserves the right t request a Minnesta Husing rdered appraisal. 17

20 Chapter 9 Types f Surces 9.01 Amrtizing Lans HUD Risk-Sharing Insurance. HUD Risk-Sharing Insurance is required fr all LMIR amrtizing first mrtgage lans. Minnesta Husing generally insures at Level I (HUD insures 50 percent f the lan). If Minnesta Husing determines that HUD Level II (HUD insures up t 90 percent) insurance is apprpriate, mre stringent underwriting requirements may apply. Refer t the LMIR/FFCC Guide fr mre infrmatin n HUD Risk-Sharing Insurance. Minnesta Husing Eligible Mrtgage Csts (Mrtgageable Csts). The first year s mrtgage insurance premium may be financed with Minnesta Husing lan prceeds (LMIR r deferred). Minnesta Husing s required reserves may be funded with lan prceeds. They must be held by Minnesta Husing and used at Minnesta Husing s discretin Deferred Lans Deferred lans are generally structured with a 30-year term at 0-1 percent interest. Payment f principal and accrued interest is due n the date f lan maturity Cash Flw Nte Minnesta Husing s deferred lans may require an annual payment based n year end Surplus Cash as adjusted per the calculatin belw. Fr newly funded prjects, including thse receiving HTC, the annual payment is equal t 20 percent f the amunt by which eligible cash exceeds $50,000 per year. It has been agreed upn that cash flw payments will first be applied t subrdinate funding frm private funders until paid in full, and then t the remaining subrdinate lans cntaining cash flw prvisins n a pr rata basis. Annual Cash Flw Payment Calculatin Surplus Cash is defined in Sectin 13 f the HUD Regulatry Agreement fr Multifamily Prjects (Frm 92466M) Surplus Cash is calculated using HUD s Cmputatin f Surplus Cash, Distributins and Residual Receipts (Frm 93486), when there is a HUD first mrtgage, r it is calculated using Minnesta Husing s Cmputatin f Surplus Cash Frm. Eligible Cash is: Surplus Cash, plus any dividends r distributins made during the fiscal year Less any utstanding: Credit adjusters Limited partner asset management fees Operating reserve accunt replenishment First mrtgage required debt service reserve establishment r replenishment 18

21 Apprved general r limited partner lans r advances Deferred Develper Fees, including interest nt exceeding the applicable federal rate The annual cash flw payment is equal t 20 percent f the amunt by which eligible cash exceeds $50,000 per year. Seller lans, whether frm related- r third-parties, will be reviewed n a case by case basis. Minnesta Husing will determine, at its sle discretin, what items in the prpsed cash flw distributin are allwable in the calculatin f eligible cash. Items intended t prvide additinal funds t the general partner r that substantially divide ut all remaining cash flw frm peratins, including but nt limited t abve market rate partner lans, general partner fees such as partnership management r incentive fees, etc., are intentinally excluded. Brrwer s submissin, n an annual basis fr each fiscal year, will include: Audited financial statements, including a schedule f distributins HUD Cmputatin f Surplus Cash, Distributins and Residual Receipts (Frm 93486) r Minnesta Husing s Surplus Cash Cmputatin Frm Minnesta Husing will review and cnfirm the annual payment calculatin and will invice the prject, allwing fr repayment t ccur up t the end f the current calendar year t crrespnd with general HUD distributin guidelines. NOTE: Develpments with mre than 75 percent supprtive husing r lng-term hmeless units are exempt frm cash flw nte prvisins. Ttal payments due must never exceed 75 percent f available Surplus Cash Refinancing Fr any mrtgage refinancing, existing Guarantrs are expected t remain in place. Refinance lans d nt invlve a cnstructin perid and the cst f rehabilitatin may be funded int escrws and disbursed within 12 mnths. The scpe f any prpsed rehabilitatin will nt be cnsidered substantial rehabilitatin as defined in Minnesta Husing s Rental Husing Design/Cnstructin Standards if it meets the fllwing: Adequate upfrnt and nging reserves are budgeted t fund the capital needs identified in a Prperty Needs Assessment/Capital Needs Assessment and apprved by a Minnesta Husing architect, and; The cst f repairs des nt exceed $40,500/unit. 19

22 9.05 Equity Bridge Lan The fllwing requirements apply t equity bridge lans when Minnesta Husing s amrtizing lan (LMIR) and/r Minnesta Husing s deferred lans are used t finance the develpment. If Minnesta Husing s LMIR funding is t be used during the cnstructin perid and the equity bridge lender des nt have a security interest in the prperty: The Minnesta Husing LMIR lan will be in first psitin. The bridge lender will be secured with an assignment f the capital cntributins frm the investr. The Brrwer will guarantee the principle and interest payments and perating expenses until the develpment has reached stabilizatin. After the initial 20 percent equity installment, Minnesta Husing LMIR prceeds will be advanced at n greater than an equal prprtin (pari passu) with the equity and/r equity bridge funding. If Minnesta Husing s LMIR funding is used during the cnstructin perid and the equity investr/bridge lender des have a security interest in the prperty: The Minnesta Husing LMIR lan will be in first psitin. The equity bridge lan will be in secnd psitin. Minnesta Husing s LMIR funding is always released last after all bridge funding is fully expended, regardless f the cst f ther funds. The bridge lan mrtgage must cntain a release clause which allws the mrtgage t be terminated t ensure Minnesta Husing s ability t have HUD endrse the LMIR nte in a timely manner. If Minnesta Husing r funding partners are prviding nly deferred lan(s), then a minimum f 20 percent equity investment r 30 percent equity bridge lan prceeds must be paid up frnt, prir t Minnesta Husing and/r funding partner deferred lan prceeds being released. A higher percentage may be required fr new syndicatin entrants t the Minnesta HTC market r n small prjects where 20 percent equity is nt deemed adequate by Minnesta Husing. If the prject is Minnesta Husing bnd financed (with 4 percent HTC) and Minnesta Husing prvides an equity bridge lan t meet the 50 percent test: Minnesta Husing s equity bridge lan cannt exceed 70 percent f the ttal anticipated equity pay-in as described in the limited partner agreement. Minnesta Husing will require an assignment f the general partner s interest in the limited partnership. Minnesta Husing will require the equity bridge lan t be fully guaranteed by ne r mre individuals r crpratins apprved by Minnesta Husing. Minnesta Husing s mrtgages must be fully cllateralized per Minnesta Husing standards. If Minnesta Husing s amrtizing lan (LMIR) is an end lan, then pay-ff and release f the bridge lan/cnstructin mrtgage is a cnditin f the Minnesta Husing end lan clsing. 20

23 9.06 Balln Mrtgages T achieve lng-term viability in prjects where Minnesta Husing has invested subrdinate funds, Minnesta Husing strngly encurages lng term, fully-amrtizing, first mrtgages. Hwever, Minnesta Husing mrtgages may be underwritten with a 17 year term and year amrtizatin, subject t mitigating factrs (e.g., verall prject surces and uses, prjected lan-t-value at refinancing, and ther risk factrs) at the sle discretin f Minnesta Husing Deferred Debt n Mixed-Incme Develpments Minnesta Husing deferred debt will nly be used fr and based upn the financing gap n affrdable (rent restricted) units Sales Tax Rebate All develpments eligible fr a sales tax rebate must participate. The sales tax rebate will be cnsidered a surce used t size tax credit and deferred lan awards. The sales tax rebate estimate is nt basis eligible and will be remved frm basis n a tax credit develpment. The sales tax rebate must be bridged. The sales tax rebate will be used first t pay back the surce used t bridge the rebate. Shuld the develpment have an excess sales tax rebate, the funds may be used t pay the deferred Develper Fee and/r may be required t be depsited int a develpment reserve Energy Rebates All develpments receiving tax credits r deferred funding frm Minnesta Husing must prvide an Energy Rebate Analysis. The estimated energy rebate will be cnsidered a surce used t size tax credit and deferred lan awards. The energy rebate may r may nt be basis eligible; cnsult yur certified public accuntant fr basis eligibility. The energy rebate must be bridged. The energy rebate will be used first t pay back the surce used t bridge the rebate. Shuld the develpment have excess energy rebate funds, they may be used t pay the deferred Develper Fee and/r be required t be depsited int a develpment reserve. Requirements and guidelines fr the Energy Rebate Analysis can be fund in Minnesta Husing s Rental Husing Design/Cnstructin Standards (Chapter 8 Sustainable Husing). 21

24 Chapter 10 Invluntary Displacement Minnesta Husing prhibits invluntary displacement f residents frm develpments receiving Minnesta Husing funding; hwever, if a develpment receives US Department f Husing and Urban Develpment s (HUD) Hme Investment Partnerships HOME r Natinal Husing Trust Fund (NHTF) funds, the Owner must take all reasnable steps t minimize displacement. If displacement is necessary, as apprved by Minnesta Husing, the Owner must cmply with the Unifrm Relcatin Act (URA) and any ther applicable federal laws regarding displacement. 22

25 Chapter 11 Clsing Clsing in Balance Except as nted belw, all surces f funds must be available at clsing r bridge funding must be prvided t pay develpment csts thrugh cnstructin cmpletin. Equity (including syndicatin prceeds nt bridged) will be held by a title insurance cmpany. Fr tax credit prjects with equity payins t be made during cnstructin, Minnesta Husing will, at its sle discretin, determine the need t bridge these funds based n a review f the prject, the pay-in schedule, the investr, general partner, Develper and general cntractr. In additin t syndicatin prceeds, ther surces cmmnly required t be bridged are tax increment financing, grants frm cities, interim incme (existing prperties) and sales tax rebates Minimum Tax Credit Equity Pay-in at Clsing Fr all prjects funded by HTC equity, the equity investr must pay ut at least 20% f the ttal tax credit equity at the initial r cnstructin lan clsing befre any f Minnesta Husing s funds will be advanced. A higher percentage may be required fr new syndicatin entrants t the Minnesta HTC market r n small prjects where 20 percent equity is nt deemed adequate by Minnesta Husing Cst Savings at the End f Cnstructin Cst savings remaining at the end f the cnstructin r rehabilitatin, if any, may be depsited in the replacement reserve accunt, may be used t reduce Minnesta Husing funding, r may be put t anther apprpriate use fr the benefit f the develpment, apprved by Minnesta Husing. Cst savings cannt be used t fund a develper incentive fee if awarded Minnesta Husing deferred funding. Develpments funded with federal funding, such as HOME and NHTF, are nt allwed t depsit any cst savings in the replacement reserve accunt. 23

26 Chapter 12 Cntract Cmpliance and Equal Opprtunity Plicy It is the plicy f Minnesta Husing t practice affirmative actin t prvide equal pprtunity in all f ur prjects, prgrams, and ther endeavrs. Minnesta Husing s gal is t achieve a client and recipient mix that is representative f the peple wh live in ur state and ur cmmunities s that all emplyment and cntractual benefits that develp as a result f ur prgrams will be shared by all Minnestans. This plicy applies t all Minnesta Husing emplyees and Minnesta Husing s external partners Purpse The purpse f this plicy is t make Minnesta Husing s cmmitment t act affirmatively t achieve equal pprtunity in all facets f its peratin, clear t bth internal staff and utside parties with whm we d business Gals Our gal is t ensure minrity and female cntractrs and subcntractrs equal access t business pprtunities n Minnesta Husing financed prjects and t encurage the presence f minrities and wmen at all levels, including n the staffs f the prgram participants having cntractual agreements with Minnesta Husing. Minnesta Husing s gal is t ensure that the wrkfrces n the prjects and prgrams we finance reflect demgraphically the area in which they are lcated. These gals will apply fr the length f the cntract r the life f the mrtgage. Minnesta Husing, at its discretin, may set numerical r percentage gals dependent n the lcatin and size f a given prject. Current gals will be determined by staff based n the lcatin f the prject Requirements Minnesta Husing is required t cmply with all applicable lcal, state, and federal laws. These requirements are passed n t everyne that Minnesta Husing des business with, either by cntractual agreement r as a Minnesta Husing plicy Sanctins Minnesta Husing has the cntractual authrity t demand full payment f any lan r grant, stp prceeding with any prject at any stage, and cease t d business with any entity r individual that fails t fllw its affirmative actin plicies r fails t meet its/his/her cntractual equal pprtunity bligatins. 24

27 Chapter 13 - Fair Husing Plicy It is the plicy f Minnesta Husing t affirmatively further fair husing in all its prgrams s that individuals f similar incme levels have equal access t Minnesta Husing prgrams, regardless f race, clr, creed, religin, natinal rigin, sex, marital status, status with regard t public assistance, disability, familial status, gender identity r sexual rientatin. Minnesta Husing's fair husing plicy incrprates the requirements f the Fair Husing Act, Title VIII f the Civil Rights Act f 1968, as amended by the Fair Husing Amendment Act f 1988, as well as the Minnesta Human Rights Act. Husing prviders are expected t cmply with the applicable statutes, regulatins, and related plicy guidance. Husing prviders shuld ensure that admissins, ccupancy, marketing and perating prcedures cmply with nn-discriminatin requirements. In part, the Fair Husing Act and the Minnesta Human Rights Act make it unlawful t, because f prtected class status: discriminate in the selectin/acceptance f applicants in the rental f husing units; discriminate in terms, cnditins r privileges f the rental f a dwelling unit r services r facilities; engage in any cnduct relating t the prvisin f husing that therwise make unavailable r denies the rental f a dwelling unit; make, print r publish (r cause t make, print r publish) ntices, statements r advertisements that indicate preferences r limitatins based n prtected class status; represent a dwelling is nt available when it is in fact available; deny access t, r membership r participatin in, assciatins r ther services rganizatins r facilities relating t the business f renting a dwelling r discriminate in the terms r cnditins f membership r participatin; r engage in harassment r quid pr qu negtiatins related t the rental f a dwelling unit. Minnesta Husing has a cmmitment t affirmatively further fair husing fr individuals with disabilities by prmting the accessibility requirements set ut in the Fair Husing Act, which establish design and cnstructin mandates fr cvered multifamily dwellings and requires husing prviders t make reasnable accmmdatins and t allw persns with disabilities t make reasnable mdificatins. Applicants will be required t submit an Affirmative Fair Husing Marketing Plan at the time f applicatin, t update the plan regularly and t use affirmative fair husing marketing practices in sliciting renters, determining eligibility and cncluding all transactins. As a cnditin f funding thrugh Minnesta Husing, husing prviders are nt permitted t refuse t lease a unit t, r discriminate against, a prspective resident slely because the prspective resident has a Husing Chice Vucher r ther frm f tenant-based rental assistance. 25

28 Appendix A Terms Term Brrwer Develper Develper Fee Develpment Services Agreement DHS Eligible Mrtgagr Energy Rebate Analysis Equity Cash Out Extended Use Perid GRH Guarantr Guaranty HAP HMIS Definitin A Brrwer is an entity wh has received an amrtizing first mrtgage r deferred lan frm Minnesta Husing. Typically a separate legal entity frm the Brrwer r Guarantr(s) wh may cmplete the financing and develpment f a prject fr a fee. Is paid t the develper as part f the prject sft csts t cver verhead, labr and ther prject related peratinal expenses brn by the develper during the prject. A cntract between the Owner f a develpment and a third-party Develper. State f Minnesta Department f Human Services. "Eligible mrtgagr" means a nnprfit r cperative husing crpratin r a limited prfit entity. A reprt f energy rebates being cnsidered/pursued fr a develpment. Equity Cash Out is defined as any refinance r restructure prpsal that includes equity being taken ut, including transactins that are related party acquisitins and limited partner buy ut. The term f the Declaratin f Land Use Restrictive Cvenants under the Husing Tax Credit prgram. Grup Residential Husing (GRH) is a state-funded rental assistance prgram that prvides cash assistance, including rm and bard fr unrelated peple wh live in certain licensed r registered grup living arrangements. The prgram is administered thrugh Minnesta Department f Human Services (DHS). A Guarantr is the entity r individual wh signs the Guaranty. Available upn request frm Minnesta Husing staff. Husing Assistance Payment is a HUD rental assistance under the Sectin 8 Prject Based Husing Assistance Prgram. A Hmeless Management Infrmatin System (HMIS) is a type f internet-based, lcally-administered database used t recrd and analyze client, service and husing data fr individuals and families wh are hmeless r at risk f hmelessness. 26

29 HOME HTC HUD Identity f Interest HUD Risk-Sharing Mrtgage Insurance LIRC LMIR The HOME Investment Partnerships Prgram is federal prgram administered by Minnesta Husing (as well as thers). Minnesta Husing awards its HOME funds as 30 year lans fr rehabilitatin r acquisitin and rehabilitatin f federally assisted multifamily rental husing. The Federal Tax Refrm Act f 1986 created the Husing Tax Credit (HTC) Prgram (see Sectin 42 f the Internal Revenue Cde) fr qualified residential rental prperties. The HTC Prgram ffers a reductin in tax liability t wners and investrs in eligible lwincme rental husing prjects invlving new cnstructin, rehabilitatin r acquisitin with rehabilitatin. United States Department f Husing and Urban Develpment. An Identity f Interest exists when tw parties t an agreement have a cmmn r related party entity with wnership interest in bth parties. In rder t minimize Minnesta Husing s risks, all permanent LMIR lans will btain mrtgage insurance thrugh HUD s Risk-Sharing prgram. Under Minnesta Husing s Risk-Sharing Agreement with HUD, HUD cntracts t reimburse Minnesta Husing fr a prtin f the lss frm any defaults that ccur while the insurance is in frce. In this way, Minnesta Husing is able t effectively increase its financing capacity. In additin, Minnesta Husing utilizes the prgram as an incentive t partner with HUD t preserve and renew expiring Sectin 8 cntracts. Level I: HUD s insured prtin is 50 percent Level II: HUD s insured prtin is up t 90 percent. Lw Incme Rental Classificatin (LIRC) is the tax bill adpted by the Minnesta Legislature in the 2005 legislative sessin and signed by the Gvernr n Wednesday, July 13, 2005 which made significant changes t the prperty tax classificatin rate fr qualifying lw-incme rental prperties. This results in a class rate reductin f up t 40% fr qualifying units in sme rent and incme-restricted prperties. Only thse rental prperties subsidized under a federal r state gvernment prgram r meeting certain rent and incme restrictins are eligible fr the lwer class rate. The Lw and Mderate Incme Rental (LMIR) prgram is t prvide lng-term amrtizing mrtgage debt fr multifamily rental husing affrdable t lw- and 27

30 LTH M&O Mrtgage Credit Cmmittee Net Cnstructin Csts NHTF ODE Owner Peple with Disabilities mderate-incme Minnestans. Lng-term, fixed-rate mrtgage lans are available fr financing new cnstructin, stabilizatin f existing prperties and fr the preservatin f existing federally assisted rental husing. Lng Term Hmelessness is defined as persns including "individuals, unaccmpanied yuth, and families with children lacking a permanent place t live cntinuusly fr a year r mre r at least fur times in the past three years. Any perid f institutinalizatin r incarceratin shall be excluded when determining the length f time the husehld has been hmeless." The Management and Operating budget is the perating budget fr a multifamily rental prperty net f real estate taxes and reserves. A crss-divisinal management grup which apprves credit analysis, wnership structures and financing f prjects selected fr Multifamily lans and related matters. Net cnstructin csts are cnstructin csts nt including cntractr prfit, general requirements and verhead. Natinal Husing Trust Fund (NHTF) is a federal affrdable husing prductin prgram t increase and preserve the supply f decent, safe, and sanitary affrdable husing fr extremely lw- and very lwincme husehlds, including hmeless families. Operating Deficit Escrw, a reserve required fr all develpments funded with a LMIR amrtizing lan. An Owner is an entity r persn wh hlds title t the real prperty. Minnesta Husing s Amended 2018 Husing Tax Credit Prgram Self-Scring Wrksheet defines as: A serius and persistent mental illness as defined in Minn. Stat , subdivisin 20, paragraph (c); r A develpmental disability as defined in United States Cde, Title 42, Sectin 6001, paragraph (5), as amended; r Assessed as drug dependent as defined in Minn. Stat. 254A.02, subdivisin 5, and are receiving r will receive care and treatment services prvided by an apprved treatment prgram as defined in Minn. Stat. 254A.02, Subdivisin 2; r A brain injury as defined in Minn. Stat. 256B.093, Subdivisin 4, paragraph (a); r 28