HUD SECTION 221(d)(4) MORTGAGE INSURANCE PROGRAM

Program Purpose:
Provides mortgage insurance for the new construction and substantial rehabilitation of apartment projects, including independent living projects for seniors (age 62 years and older with no services). This program provides for both construction and permanent financing.

Eligible Borrowers:
Profit motivated single purpose entities (note: a non-profit can be the general partner of a profit motivated single purpose ownership entity).

Eligible Asset Type:
Market rate, affordable, or rental assisted properties,

Maximum Loan:
     The lesser of:
      1. 83.3%, 87%, or 90% of replacement cost for market rate,
         affordable, or rental assisted properties, respectively:
      2. The amount of debt that can be serviced by 83.3%, 87%, or
         90% of net operating income for market rate, affordable, or
           rental assisted properties, respectively;
      3. Statutory per unit limits;
      4. 100% of mortgageable transaction costs less grants, public
         loans and tax credits.

Maximum Term:
40 years plus a construction period.

Occupancy:
Maximum underwritten physical occupancy of 93% for market rate or affordable properties. Maximum underwritten physical occupancy of 95% for rental assisted properties, or properties where all units have rents at least 20% below comparable market rents.

Funding:
Qualifies for Government National Mortgage Association guaranteed mortgage-backed securities, direct placement or may be used to credit enhance tax-exempt bonds.

Interest Rate:
Subject to market conditions. The construction and permanent financing interest rate is set at initial closing.

Mortgage Insurance Premium:
The annual Mortgage Insurance Premium is currently 0.45% of the outstanding loan amount.

Prepayment:
Typically closed for 2 years then open to prepayment at 108% in year 3, declining I% per year. Other variations are possible based on market conditions and borrower preferences.

Application:
Market rate applications must be submitted under Multifamily Accelerated Processing (MAP) two-stage processing (pre-application/firm application). HUD may allow MAP one-stage processing for substantial rehabilitation of market rate properties that will not have (i) major unit reconfiguration, (ii) tenant displacement except for a short period of time, (iii) a reduction in current occupancy, (iv) negative cash flow, or (v) for properties in stable markets where an invitation letter recently expired. Affordable or rental assisted properties may utilize MAP one-stage processing. assisted properties may utilize MAP one-stage processing.

Timing:
Section 221(d)(4) processing usually takes about 5 to 7 months assuming a MAP one-stage application and about 8 to 10 months assuming a MAP two-stage application (subject to deal specifics), FHA Application Fees: 0.30% of the loan amount (non-refundable). Market rate transactions will require the payment of a non-refundable 0.15% review fee due at pre-application submittal. The review fee will be credited toward the 0.30% application fee due at firm application submittal.

FHA Inspection Fees:
0.50% of loan amount (new construction). 0.50% of costs associated with construction (substantial rehabilitation).

Replacement Reserves:
Annual deposits required equivalent to the greater of (i) 0.60% of total structure cost for new construction or 0.40% of the loan amount for substantial rehabilitation, or (ii) $250 per unit per annum. HUD may consider waivers where formula-based calculations exceed $500 per unit per annum.

Personal Liability:
None, The HUD loan is non-recourse.

Assumable:
Yes, subject to HUD and lender approval (0.05% of the original loan amount).

Secondary Financing:
Permitted in the form of a surplus cash note and only from a governmental source.

Builder/Developer's Profit:
A Builder's and Sponsor's Profit and Risk Allowance (BSPRA) equal to 10% of all costs other than land can be utilized for sponsors with an identity of interest general contractor.

Territory:
Nationwide.

The program has the following additional parameters:
All transactions must participate in a concept meeting with HUD prior to application submittal.

This program can be used in conjunction with Low Income Housing Tax Credits and is often used with properties that involve Section 202, Section 236 and Section 8 funding.

     Davis-Bacon prevailing wage requirements apply.

     A property generally qualifies as substantial rehabilitation when (i) the cost of repairs/improvements exceeds the greater of 15% of the estimated replacement cost after completion of all repairs or $6,500 per unit adjusted by the HUD high cost factor for the geographic region, or (ii) two or more building systems/components are being replaced along with any components with an estimated remaining life of less than 5 years.

     Properties must be able to demonstrate ability to achieve stabilized occupancy within 18 months of construction completion (special exception may be given to high rise buildings).

     An initial operating deficit escrow (cash or letter of credit) may be required to cover projected operating shortfalls incurred prior to project stabilization. Typically greater of (i) appraisal or underwriting conclusions, (ii) 3% of the loan amount, or (iii) 4 months of debt service for garden apartments or 6 months of debt service for elevator buildings subject to single Certificate of Occupancy issuance.

A working capital deposit (cash or letter of credit) equivalent to 4% of the loan amount is required by HUD on all new construction and substantial rehabilitation projects to cover various costs; 2% of whcih will be a construction contingency for cost overrunds and approved change orders.

A Project Capital Needs Assessment (PCNA) will be required every 10 years.

**Terms outlined above reflect Notice II 2010-11 (HUD Multifamily Risk Mitigation) issued on July 6, 2010**

⁽¹⁾ Affordable defined as: (a) properties that have a recorded regulatory agreement in affect for at least 15 years after final endorsement, (b) properties that meet at least the minimum Low Income Housing Tax Credit (LIHTC) restrictions of 20% of units at 50% of the Area Median Income (AMI), or 40% of units at 60% of AMI, with economic rents (i.e. - portion paid by tenants) on those units no greater than LIHTC rents, and (c) mixed income properties if the minimum low income unit rent and occupancy restrictions and regulatory agreement meet the above criteria (i.e. – properties need not use LIHTCs to be considered affordable so long as they comply with (a) and (b) ).

⁽²⁾Rental Assisted defined as: properties that have at least 90% of their units supported by a project based rental assistance contract.