FHA Financing for Affordable Housing

FHA Financing for Affordable Housing HUD Emerging Strategies in Affordable Housing Susan Monaco and Diana Rawls July 23, 2019

Agenda Brief Summary of FHA Financing FHA Affordable Production Definition of Affordable for HUD HUD s Commitment to Affordable New 221(d)(4) PILOT Critical Considerations FHA/RAD Financing Good Candidates for FHA Financing Bank of America s FHA Lending group Bank of America s FHA Process and Timing Questions? 2

Brief Summary of FHA Financing Long-term, fixed rate financing for multifamily properties Typically prepayment penalty through Year 10, then fully prepayable without penalty Very Competitive rates, especially considering loan terms. Loans funded through sale of Ginnie Mae securities Non-recourse to Borrower Underwriting terms are very favorable for affordable housing 3

FHA Affordable Production 2010 Then Cumbersome LIHTC equity pay-in requirements No recognition of developer fees Rehab on 223(f) limited to $17,550/unit in high cost areas % of Projects with LIHTC less than 10%* 2019 Now Only 20% of equity required at loan closing. MIP reduced 25-40 bps for affordable, broadly affordable and inclusionary properties Recognition of developer fees Rehab on 223(f) up to $43,019/unit in high cost areas (Heavy F ) % of Projects with LIHTC (FY 2018) 32%* * HUD data includes all Initial Endorsements under MAP programs. 4

Definition of Affordable for HUD (a) Projects with minimum of 20% of units at 50% of the Area Median Income (AMI) or 40% of units at 60% of AMI, (b) Projects with mixed income if they also meet criteria (a) above, or (c) Projects with a project-based Section 8 contract for at least 90% of the units Projects must be in compliance with a recorded Regulatory Agreement imposing the requirements in (a), above, and having term of at least 15 years after final endorsement. 5

HUDs Commitment to Affordable Housing Lower MIP Higher LTC/LTV Ratios Lower Vacancy Rates No Cost Certification if < 80% LTC/LTV Mortgagable Developer Fees 20% Initial Equity Pay-In Requirement EBLs for up to 80% of Equity 6

HUDs Commitment to Affordable Housing Allow Private debt of up to 100% of Total Project Costs Investor required reserves can be credited towards HUD s requirements 10% Assurance of Completion Escrows for 223f loans Passive Investor Certification only for Investor; no credit review Straight-to-Firm Application submissions for D4 loans Streamlined A&E/Cost Review for D4 loans 7

Reduced MIP for Affordable and Green Broadly Affordable (25 basis points annually and upfront) 90%+ affordable Rent restrictions for at least 15 years or Project-based rental assistance with at least 15 years remaining. *Achievable and underwritten restricted rents must be at least 10% below market rents Affordable (35 basis points annually and upfront) 90%+ affordable LIHTC or comparable use and rent restrictions for at least 15 years (no 10% rent advantage) 10%-90% affordable LIHTC or comparable use and rent restrictions for at least 15 years, or Project-based rental assistance with at least 15 years remaining Green (25 basis points on-going and upfront) Must meet very specific guidelines to qualify as Green. Market rate deals can be green and receive the reduced MIP. 8

New 221d4 Pilot Mortgagee Letter 2019-03 Released 2/21/19 changes the way HUD processes 221(d)(4)/220 LIHTC applications. Several changes since issuance of letter, for the better. 2 tracks For both, loan size can t exceed $25 million Concept meetings critical Items outside of multifamily start early! Eligible Projects Expedited Processing 9% LIHTC NC At least 90% LIHTC units with achievable rents at least 10% below market for each unit type. LTC < 65%. 4% LIHTC NC now if meets 9% requirements 4% or 9% LIHTC SR At least 90% units with project based 20-year Section 8 (HAP) contract (15 years if PBVs). LTC < 75% 9 Unit counts CAN T exceed 200 units

New 221d4 Pilot continued Eligible Projects Standard Processing 4% or 9% LIHTC SR - projects being re-syndicated with LIHTC/Tax Exempt Bonds w/o Section 8 rental assistance. 90% or more units must have LIHTC occupancy Achievable rents must be at least 10% below market DSC 1.0 and 85% or better occupancy for previous 6 months EGI can t be greater than 110% of previous calendar year Expenses can t be lower than 90% of previous year LTC < 75% Unit Count CAN exceed 200 10

New Pilot- Benefits Allows dedicated staff to focus on more complex deals Lets Lenders do what they do best - UW complex deals Faster processing times helps reduce interest rate risk Establishes Closing dates upfront Better Communication Allows additional lender oversight during construction phase (i.e. changes orders approved faster.) Encourages development in Opportunity Zones, which now have reduced application fees Creates & preserves affordable housing 11

New Pilot- Goals Expedited Approval Process track: 30 day review + 60 days to Close Standard Approval Process track: 60 day review + 60 days to Close 12

Critical Considerations for FHA Development Team Environmental Subordinate or Secondary Debt Rehab Repair Scope and Cost Existing or Proposed Age-Restrictions Existing LIHTC and some 202 projects that are 55+ restricted CAN still be financed with FHA under certain circumstances. Section 221(d)(4) MUST be 62+ HOH. Section 231 available for 62+ exclusively for NC and SR. HAP contract extension Proposed equity Pay-in schedule 13

FHA/Rental Assistance Demonstration Program (RAD) RAD Basics/Key points RAD allows public housing agencies to leverage public and private debt and equity Typically ground lease structure. Developer owns buildings Units move to a Section 8 platform with a long-term contract Residents continue to pay 30% of their income towards the rent and they maintain the same basic rights The RAD program is cost-neutral and does not increase HUD's budget. 14

FHA/Rental Assistance Demonstration Program (RAD) FHA/Affordable/RAD 1.11X DSC; 90% Cost; 97% occupancy underwriting for both 221d4 and 223f (HUD Maximums) Long-term Section 8 PBV or PBRA contract allows use of Section 8 rents Lower MIP for Affordable (25 bps for most affordable (90+% of property) Developer Fee permissible for LIHTC and non-LIHTC RAD deals HUD open to scattered sites in RAD transactions. Must still meet criteria Equity requirements same as other LIHTC deals 15

FHA/Rental Assistance Demonstration Program (RAD) PROCESS Coordination of processes essential between Housing and RAD teams. Identify and address environmental issues as early as possible Concept meeting required. After concept, FHA processing to commitment is 120 days from when plans and specs are at least 80%. Includes 60 days HUD processing timeline RCC approval required prior to FHA Commitment Closing generally within 30-45 days assuming RAD processing is tracking FHA. Both closings must be simultaneous. Typical Timing: 6 months for refinance; 8-10 months NC 16

FHA/Rental Assistance Demonstration Program (RAD) Bank of America FHA/RAD experience all 4% deals Experience with PHA s in Baltimore, MD, El Paso, TX and North Little Rock, AR To date, BofA underwritten over $63 million in RAD business $30.2 million closed to date $12.1 million anticipated closing by end of July Remaining $24.3 million closing end of 3rd quarter Scattered sites of nine properties in 4 deals including: 3 property deal included two sub-rehab and one demo/new construction property Deal with two properties: one RAD, one Section 18 17

Whats a good candidate for FHA? New Construction/Substantial Rehabilitation Expired/expiring LIHTC properties Properties with Section 8 contracts Properties with above-market interest rates Stabilized Property Refinance/Acquisition or Repositioning with moderate rehab Cash-out with LTV of 80% of less Workforce Housing/Mixed-Income PHAs are great candidates! 18

Bank of Americas FHA Lending Group Affordable Housing is primary focus of our FHA business Community Development Banking - Bank of America is a top affordable housing lender and investor - FHA group works closely with CDB Relationship Managers/clients Ability to offer LIHTC equity and other bank products used with FHA (subject to Bank credit, availability, etc.) - Equity Bridge Loans - Acquisition Loans - Predevelopment (under development) National Presence 19

Bank of Americas FHA Lending Process/Timing Relationship Manager identifies FHA opportunity Issue Term Sheet/Engagement Letter after internal Risk approval Borrower signs term sheet and submits application fees FHA underwriting team prepares Concept package for HUD (~30 days) Order reports, collect documents and complete underwriting (60 days) Submit Firm Application to HUD HUD review 45 (223f) -60 days (D4) HUD issues Firm Commitment to Bank of America Borrower and Lender accept HUD Commitment Borrower signs rate lock agreement and wires funds for rate lock Rate Lock Closing - typically within 30-60 days of rate lock 20

Questions/Contact Information Susan Monaco Diana Rawls FHA Chief Underwriter/Senior VP Bank of America, N.A. 1800 K Street, NW Washington, DC 20006 Susan.monaco@baml.com (202) 442-7436 FHA Senior Underwriter/Senior VP Bank of America, N.A 600 Peachtree St, NE Atlanta, GA 30308 Diana.rawls@baml.com (678) 802-4116 21