HIGHLIGHTS FROM FHA/HUD MAP LENDER CONFERENCE

COLUMBUS, OHIO | MAY 17-19TH

HUD is about to announce sweeping underwriting and program changes, as well as new lender and
borrower requirements. These changes are expected to be formally announced by the end of June,
with most changes implemented 60 days after the announcement (so August 2010). After spending a
few days at the Midwest HUD MAP Lender's Conference last week, I thought I would provide some
information to shed some additional light on the much anticipated and discussed changes.

The overall tone of the Conference was one of risk mitigation and process improvement. HUD is still
very much the high leverage lender for multifamily properties. HUD has seen both an increase in its
default rates (100% YOY increase) AND new applications (328% YOY increase for 223f and 400%
for 221d4). This has caused HUD to re-think underwriting guidelines and target ways to improve the
process.

Deals submitted to HUD prior to the implementation date (expected to be mid-late August) will be
underwritten and processed under the current guidelines. That means if you have any HUD deals on
your plate or maturing multi-family loans, call us asap!

Underwriting Changes – All MAP Programs:

1) Implementation of Loan Committees

2) Analysis of key principal's credit has been insufficient and will result in much more detailed analysis
going forward

3) Updated loan documents with non-recourse carve-outs

Underwriting Changes – FHA Section 223f:

1) Maximum LTV and Minimum DSCR

:: 90% rental assistance – 87%, 1.15x
:: LIHTC – 85%, 1.176x
:: Market rate – 83.3%, 1.20x

2) Minimum average occupancy of 85% physical and 80% economic occupancy for the 6 months
prior to closing. Rent roll to verify provided 30 days prior to closing.

3) Maximum underwritten physical occupancy reduced from 95% to 93% (rental assistance or LIHTC
remains at 95%)

4) Most recent year-end financial statement must be CPA-reviewed and need to provide last 3 years of
entity tax returns. Can be waived for acquisitions.

5) Minimum replacement reserve of $250/unit

6) New PCNA report in the 10th year of the loan. Reserves adjusted accordingly.

   
Underwriting changes – FHA Section 221d4:

1) Maximum LTC and Minimum DSCR

:: 90% rental assistance – 90%, 1.11x (no change)
:: LIHTC – 87% LTV, 1.15x
:: Market rate – 83.3%, 1.20x

2) Maximum underwritten physical occupancy reduced from 95% to 93% (rental assistance or LIHTC
remains at 95%)

3) Demonstrate stabilization within 18 months of completion. May cause larger projects to be phased.

4) Construction Escrow changes

:: Initial Operating Deficit – minimum IOD increased to 4 months for garden-style projects and 6
months for high-rise projects
:: Working Capital – increased to 4% of costs with extra 2% to be held for contingencies and
released if not used
:: Contingency – 10-15% of construction costs, 3% of mortgage amount or underwriter's opinion,
whichever is greatest. Unused contingency can be used to reduce mortgage amount or
upgrades.
:: Release of escrows to be 6 months after 1.0x DSCR is achieved and maintained
:: Cash out of any land value benefit to be held until after 6 months of 1.0x DSCR is achieved and
maintained
:: Retainage – 10% to 50% construction completion, 5% to 25% completion and 2.5% to 100%
completion.

5) FFE can be included in mortgageable costs

6) Minimum replacement reserve of $250/unit

7) New PCNA report in the 10th year of the loan. Reserves adjusted accordingly.

8) Market rate processing – requires 2-stage processing with 0.15% fee due at pre-application

9) Affordable processing – 1 or 2-stage processing with 0.30% due at firm application

LEAN Program Highlights and Changes – FHA Section 232:

1) 1 and 2-stage processes for new construction / sub rehab deals:
:: Option 1 – direct to firm commitment
:: Option 2 – 2-stage process with initial and final submissions
:: Initial Submission:
:: 0.3% fee with ½ refunded if HUD declines at this stage
:: Full 3rd party reports
:: Sized on FMV and DSCR
:: Qualify all parties
:: Limited plans and specs (similar to MAP pre-app)
:: Provides 120-day commitment and up to 120 days of 30-day extension options

   
 :: Final Submission:
:: Updated underwriting
:: Complete remaining reviews
:: Licensing requirements
:: Full plans and specs

2) Maximum LTV and Minimum DSCR

:: For Profit SNF/ILF – New Construction & Existing – 80% LTV, 1.45x DSCR
:: Non-Profit SNF/ILF – New Construction & Existing – 85% LTV, 1.45x DSCR
:: For Profit ALF – New Construction – 75% LTV, 1.45x DSCR
:: Non-Profit ALF – New Construction – 80% LTV, 1.45x DSCR
:: For Profit ALF – Existing – 80% LTV, 1.45x DSCR
:: Non-Profit ALF – Existing – 85% LTV, 1.45x DSCR

3) Larger IOD and Debt Service reserves (not specifically defined)

4) Prefer replacement facilities = less absorption risk

5) Closer analysis to strength of market

6) Sponsors must have 3 years of ownership and operating history with same type of facility. New
construction – must have experience in building and leasing up same type of facility.

7) Reduced loan term (20-25 years) on older SNF projects with 3-4 bed wards

Overall, HUD is open for business. They are making changes to protect the viability of their programs
going forward. They are not increasing mortgage insurance premium, nor are they reducing LTV's and
DSCR to limits below their competition. HUD remains the highest leverage financing for multi-family
and senior housing investors with assets in the Midwest.

For more information, please contact:

 
Jason Brown
Vice President
Debt & Equity Finance
CB Richard Ellis | Capital Markets
T 248.351.2089
jason.brown@cbre.com

CB Richard Ellis, Inc.

2000 Town Center
Suite 500
Southfield, MI 48075
T 248.353.5400
F 248.353.8134