Connecticut Housing Finance Authority

Connecticut Housing Finance Authority Multifamily Rental Housing Program Guidelines 2015 Revised as of December 8, 2015

CHFA MULTIFAMILY UNDERWRITING STANDARDS SUMMARY Debt Service Coverage Ratio 1.15 standard for all amortizing and payable debt, but may be adjusted depending on market conditions, operations or public policy considerations Loan-To-Value 80% of the lesser of total cost or appraised market value, but may be increased under certain circumstances Vacancy Rates Income Type Underwriting Vacancy Assumptions Up to 25% Area Median Income (AMI) 2.5-5.0% > 25% up to 60% AMI 5.0-10.0% > 60 % up to 80% AMI 7.0-10.0 % > 80% AMI and Market Rate 10.0-15.0% Commercial Income 20.0-50.0% Proforma Trending Assumptions Income: 2%; Expenses and Taxes: 3% Per Unit Operating Expense Range Guidelines Proforma Stabilized Year The following amounts must be escalated by 3% compounded annually to derive expense range guidelines for future stabilized years and in all cases Excludes Replacement Reserves and Real Estate Taxes 101 units or more $5,500-$8,500 per unit per year 31-100 units $6,000-$9,000 per unit per year 30 units or less $6,000-$9,000 per unit per year Supportive Housing $9,000-$12,000 per unit per year It is expected that any applicant will ensure that the operating proforma included in its application will contain per unit expenses that fall within the guidelines provided above. Should there be compelling reasons to submit operating expenses that fall outside the range, the applicant is expected to provide complete written justification as part of its application Replacement Reserve New Construction Rehabilitation Elderly $325 per unit per year $350 per unit per year Assisted Living $400 per unit per year $425 per unit per year Family & Supportive Housing $400 per unit per year $425 per unit per year Working Capital Deposit Cash deposit or Letter of Credit equal to 1.0% Total Development Costs (TDC) [exclusive of costs relating to acquisition, reserves and syndication] + 6 mos. scheduled debt service posted at closing and released in stages post-completion Operating Deficit Reserve Present value amount necessary to maintain 1.15 debt service coverage ratio for a minimum of 15 years, or in an amount and term to be determined by CHFA Developer Allowance/Fee General Contractor Overhead & Profit and General Requirements Loan Term Interest Rates and Fees Market Study/Appraisal Application Fees Other Fees/Reimbursables Cost Certifications Financing: LIHTC: Up to 15.0% of TDC on a sliding scale; for more information please see the CHFA Procedures Overhead & Profit: up to 7.0% of construction costs (Divisions 2 through 16), General Requirements: 9.0% of construction costs (Divisions 2 through 16) Up to 40 years, fully amortizing Please see CHFA website for information on Multifamily Multifa Financing Program Parameters and Fees. Contracted by CHFA but paid for by the applicant in advance For-profit applicants: $2,500, not-for profit applicants $1,250. Non-refundable fee to be paid at submission of a CHFA financing application. This fee amount will not be credited against Loan Commitment Fee For-profit applicants: $1,000, for-profit applicants (less than 20-units): $500, and not-for profit applicants $250. Non-refundable fee to be paid at submission of either a 4% or 9% LIHTC application Appraisals, Market Study, Environmental Review, Field Observation, CHFA third-party Legal fees are all reimbursable in the Development Budget, but the responsibility of the mortgagor/applicant General Contractor and Mortgagor's Low-Income Housing Tax Credit (LIHTC) 1

Preface This guideline is to be used by developers/applicants or recipients of funding through the CHFA Multifamily Rental Housing Program. The guideline supplements the existing laws and rules prescribed by the Internal Revenue Service (the IRS ) in Section 42 of the Internal Revenue Code (the Code ) and related regulations. It is also to be used as a supplement to CHFA Procedures, Qualified Allocation Plan ( QAP ), CHFA/DOH Consolidated Application, and any other CHFA Guidelines referenced in this document. If any statements in these documents conflict with the laws governing the CHFA Multifamily Rental Housing Program those laws take precedence. These materials should not be relied upon solely or as a substitute for an applicant s own tax or legal counsel or interpretation of laws related to the CHFA Multifamily Rental Housing Program. Applicants are ultimately responsible for providing the information necessary for the determination of the projects eligibility and compliance under the Multifamily Rental Housing Program. Related or referenced documents can be found at CHFA s website www.chfa.org. I. Background The Connecticut Housing Finance Authority ( CHFA ) administers programs that assist developers of affordable rental housing in Connecticut in obtaining financing to develop affordable or mixed-income housing throughout the state. These programs offer mortgages at below market interest rates, as well as federal and state tax credits to developments that meet the state s affordable housing goals. CHFA also has the statutory authority to finance market rate units in urban areas. CHFA may also provide financing for related facilities such as commercial, office, health, welfare, administrative, recreational, community, and service facilities incidental and pertinent to multifamily rental housing. If any related facility is to be leased, then CHFA shall have the right to disapprove any proposed use, tenant, or provision of the lease. Notwithstanding these guidelines, CHFA staff may take any actions deemed necessary by CHFA to process applications in a manner that promotes CHFA s housing goals, specific market needs and/or program objectives. Furthermore, CHFA staff is specifically instructed and authorized to make de minimis adjustment to carry out the housing goals of CHFA. For these purposes, de minimis means any adjustment of approximately 5%. II. Pre-Application CHFA advises, but does not require, a pre-application meeting between CHFA, the Department of Housing ( DOH ) (if necessary) and any members of the development team who wish to be involved. The intention of this meeting is to discuss the overall structuring of the financing, including but not limited to; existing CHFA and/or DOH debt, prepayment, waivers, statutory requirements, etc. All requests to set up a pre-application meeting should be sent to multifamilydevelopment@chfa.org. 2

III. Applications and Fees The CHFA/DOH Consolidated Application found on the CHFA website shall be used to complete an application for financing by an applicant and shall be accompanied by the exhibits required by the application. Application deficiencies must be corrected to CHFA s satisfaction before a financing proposal may be considered for approval. Application due dates will be posted on CHFA s website as well as other media. All applications received, if accepted, will be evaluated based on Financial Feasibility, Development Team Capacity, Demonstration of Need, and Readiness to Proceed. The fees associated with an application and financing are listed on the website www.chfa.org. Other costs borne by an applicant may include the commissioning of appraisals, market study(ies) and environmental assessments as necessary. Prior to determining whether a mortgage loan should be recommended for consideration by CHFA s Board of Directors, CHFA requires an applicant to provide all of the items noted in the Consolidated Application under the applicable program. IV. Developer Fee Developer Allowance/Fee (DAF) Generally and to the extent economically feasible, the DAF comprising the paid fee plus the deferred fee shall not exceed 15% of Total Development Costs (TDC). The paid portion of the DAF shall be calculated based on a sliding scale as shown in the Procedures. V. Site Evaluation and Environmental Assessment CHFA will perform a site evaluation to determine whether the site is acceptable and meets goals with respect to land use, zoning, proximity to community facilities and services, transportation, utility services and topography. Applicants shall provide environmental assessments and hazardous materials reports prepared by a qualified independent environmental firm licensed in Connecticut. Environmental assessments provided shall be in conformance with the CHFA Construction Guidelines: Environmental & Hazardous Materials Review. In its discretion, CHFA may commission a qualified environmental professional, selected by CHFA from an approved list developed and maintained by CHFA, to evaluate an applicant-provided environmental assessment(s). An applicant shall make full payment, in advance, for each CHFA-commissioned environmental review/evaluation. Payment is nonrefundable should the applicant s financing proposal not be approved by CHFA. VI. Qualified Development Team Each applicant applying for a mortgage loan shall submit, for CHFA s review, its certificate of incorporation and bylaws, partnership agreement, operating agreement and/or other basic organizational documents, as applicable. Such documents shall comply with the provisions of Section 8-250(29) of the Connecticut General Statutes and other legal requirements. The Qualified Development Team requirements contained in each application shall identify all potential team members and set forth minimum standards and documentation necessary for CHFA to determine if team members are qualified. CHFA prefers to have the following members of the development team selected through an open and competitive process: housing consultants, general contractor, architect, syndicator, resident training consultant and property management 3

agent. If any information was previously submitted in a prior application it may not be necessary to re-submit. An applicant should consult with its Underwriter for further information. For more information on Qualified Development Team requirements refer to the CHFA/DOH Consolidated Application on the CHFA website. VII. Credit Evaluation An applicant may be required to provide financial statements, prepared or audited by an independent certified public accountant, in a form and content acceptable to CHFA, upon request at the sole discretion of CHFA, along with appropriate support data such as a business credit report in order to assist CHFA in evaluating the applicant s past and current financial condition, liquidity and future financial capacity. VIII. Affirmative Action Each applicant/mortgagor and its contractors, subcontractors, and management agents shall agree to comply with federal and state executive orders, statutes, regulations, and other requirements of law relating to affirmative action and equal employment opportunity, including the requirements that Section 4a-60 and 4a-60a of the Connecticut General Statutes impose on those who enter into contracts to which the State of Connecticut is a party, and CHFA s guidelines and goals established for each multifamily rental housing development financed by CHFA. IX. Letter of Credit/Assurance of Completion A mortgagor or its general contractor shall provide a 100% Payment and 100% Performance Bond; or Letter(s) of Credit ( LOC ) acceptable to CHFA; or other security including, without limitation, escrow arrangements, satisfactory to CHFA to ensure completion of the multifamily rental housing development. The issuer's rating is subject to review by CHFA at any time during the term of the LOC. If at any time the issuer s rating is at a level determined by CHFA to be unacceptable, the mortgagor shall immediately replace the LOC with a new LOC from an issuer whose rating is acceptable to CHFA or with other escrow security acceptable to CHFA. Unless otherwise agreed by CHFA, an LOC must be automatically renewable unless at least 60 days prior to the expiration, CHFA is informed in writing by the issuer that the LOC shall not be renewed. Written notice of non-renewal of the LOC must be sent by certified mail, return receipt requested, to CHFA. Failure to renew an LOC at least 30 days prior to expiration shall be an event of default under the loan documents and the LOC may be called by CHFA. A mortgagor s failure to maintain an LOC in the amount required shall be an event of default under the loan documents. For more information on Letter of Credit/Assurance of Completion refer to the Construction Guidelines: Project Planning and Technical Services Review on the CHFA website. X. Return on Equity For any loan to a mortgagor, return on equity shall be available to the mortgagor subject to an agreement with CHFA. For non-hud transactions, non-cumulative cash return on equity shall be determined at CHFA s discretion or where economically feasible. An adjustment in the return on equity may be requested in writing by a mortgagor for consideration by CHFA no earlier than ten (10) years from the date of the permanent loan closing and thereafter no more frequently than once every five (5) years in CHFA s discretion. The initial adjustment may be implemented concurrent with the first annual budget and financial statement review after such tenth (10 th ) 4

anniversary. No such adjustment shall result in an adjustment of a mortgagor s equity greater than the rate of inflation, as indicated by the increase in the Consumer Price Index since the date of final closing or the last adjustment to the cumulative cash return on equity, as applicable, as determined by CHFA. CHFA may approve such adjustment(s) periodically in its sole determination that the development is in good standing measured by the following criteria: XI. a) the multifamily rental housing development is operated in compliance with CHFA s financing and property management documents; b) the mortgagor is meeting all its financial obligations including the funding of replacement reserves in accordance with an CHFA-approved Capital Needs Assessment ( CNA ), if applicable, and funding schedule acceptable to CHFA; c) the multifamily rental housing development is maintained in good physical condition based on CHFA s observation and management reviews; d) the multifamily rental housing development meets all low-income tenant profile requirements delineated in the regulatory agreement and the extended low-income housing commitment, if applicable; e) the mortgagor s annual audited financial statement and the multifamily rental housing development s current year operating budget reflect a projected net operating income and future cash flow which provides a minimum debt service coverage ratio of 1.15; and f) the mortgagor is not in default, financial or otherwise, under the terms and conditions of any other financing or assistance provided by CHFA or the State of Connecticut. Market Study and Appraisal CHFA requires independent, professional market study(ies) and appraisal(s) on all multifamily rental housing developments being considered for mortgage financing. CHFA commissions the market study and appraisal from an approved list maintained by CHFA. Applicants shall make full payment for the market study(ies) and appraisal(s), payment is non-refundable. If an applicant is a not-for-profit organization and the proposed development contains 15 units or less CHFA may accept market analysis and/or appraisal prepared by an alternate source. XII. Initial Closing CHFA provides developers (both not-for-profit and for-profit) a loan program that features an interest rate cap referred to as Rate Lock. Upon adoption of the Loan Resolution, CHFA will commit to a not-to-exceed interest rate, allowing developers to benefit from the potential shift in a rising interest rate market. The actual permanent interest rate (exclusive of any bond cost of issuance fee) will be locked in 30 days prior to Initial Closing, and will not be higher than this not-to-exceed rate. For further information on this program refer to CHFA s website. All documentation shall be reviewed and if approved an initial closing is scheduled and held at the offices of CHFA. Should CHFA elect to retain external, third party legal services to assist with the initial closing, the cost for such services may be included in the development budget. Prior to commencement of construction, CHFA shall conduct a preconstruction meeting with the applicant/mortgagor and other applicable members of the development team. For more information on the preconstruction meeting or the initial closing process refer to the Construction Guidelines: Project Planning & Technical Services Review and the Initial Closing List on CHFA s website. 5

XIII. Working Capital Deposit At the initial closing, a mortgagor shall fund a Working Capital Deposit held by CHFA in an amount equal to one percent (1%) of the TDC as defined by CHFA plus an amount equal to six (6) months of all scheduled debt service. The deposit shall be in cash or in the form of an irrevocable and unconditional Line of Credit (LOC) in a form and content acceptable to CHFA. For applicants with for-profit sponsors, the funding of the Working Capital Deposit may not be included in the development budget; however, for applicants with not-for-profit sponsors, this deposit may be included in the development budget and funded from CHFA-approved sources of funds. 1) Proceeds of this deposit may be applied to meet the cost of items such as: a) purchasing equipment and rent-up; b) reducing the mortgage loan, if required by the terms of the loan; c) correcting latent construction defects discovered or developed subsequent to the normal latent defect period for discovery; d) replacing any building component or appliance in the event that the Reserves for Replacement are insufficient, and correcting any loss not otherwise covered by insurance; e) making capital improvements as deemed necessary by CHFA; f) providing additional amenities as well as assisting or improving marketing of the apartments; g) paying principal, interest, real estate taxes, assessments, liens, legal expenses, property insurance premiums, operating expenses, and any other charges on the mortgage loan; and h) for any other reason CHFA deems appropriate to complete, cure a problem with, or provide a benefit to, the multifamily housing development. 2) The Working Capital Deposit shall not be used if the net income of the multifamily rental housing development is sufficient to cover such costs and expenses and, in any case, shall not be used without the prior written approval of CHFA. 3) The Working Capital Deposit shall remain in place for two (2) consecutive years of deficitfree operation and not less than one (1) year after final closing. Reduction of the Working Capital Deposit may take place in three (3) annual increments as approved by CHFA. In the event the multifamily rental housing development returns to a deficit operation, reductions of the Working Capital Deposit shall cease and will resume only after two (2) consecutive subsequent years of deficit-free operation. The initial reduction of the Working Capital Deposit is contingent upon receipt of an acceptable supplemental cost certification by both the mortgagor and general contractor. If the Working Capital Deposit is included in the development budget, then any applicable scheduled reductions shall remain in escrow with CHFA for the benefit of the multifamily rental housing development and shall be released in accordance with terms and conditions of an escrow and disbursement agreement executed between the mortgagor and CHFA. 4) If the funding into the Working Capital Deposit is in the form of cash, then the mortgagor will not be entitled to receive any distribution of interest on the deposit while held in escrow by CHFA, but shall be entitled to the accrued interest and any unused portion of the deposit at the end of the escrow period. Escrow funds shall at all times remain under the sole control of CHFA, and disbursement of escrow funds shall be at the discretion of CHFA. 6

5) CHFA may enter into an agreement with a development's syndicator or other party to post a Working Capital LOC. The amounts and terms of release of said escrow shall be no less than those stated above. CHFA may exempt applicant/mortgagors with not-for-profit developer/sponsors, regardless of the number of apartments in the multifamily rental housing development, from and/or modify the requirements of this subsection. XIV. Construction Period For more information on the construction period please refer to the Construction Guidelines: Project Planning and Technical Services Review. XV. Substantial Completion/Permission to Occupy For more information on substantial completion/permission to occupy, please refer to the Construction Guidelines: Project Planning and Technical Services Review on the CHFA website. XVI. Cost Certification 1) Cost Certification - The mortgagor s and general contractor s cost certifications are required to be submitted to CHFA within ninety (90) days of the multifamily rental housing development s substantial completion date. The mortgagor shall submit a cost certification which complies with guidelines prescribed in CHFA s cost certification agreement signed at the initial closing to comply with Section 8-253a(6) of the Connecticut General Statutes. Construction costs actually paid and costs to be paid within the next forty-five (45) days after final closing by the general contractor will be documented by Construction Standards Institute line item indicating the payee and the amount paid and the amount to be paid, signed and dated by the general contractor and certified to by an independent certified public accountant. CHFA shall reconcile certified costs to the multifamily rental housing development s adjusted costs; unwarranted certified costs, as determined by CHFA, shall be disallowed. If payables are noted on the cost certifications, then the contractor and mortgagor shall submit supplemental cost certifications. 2) Savings Allocation - A balanced development budget setting forth hard and soft costs shall be provided by the applicant/mortgagor, approved by CHFA and accepted by the applicant/mortgagor prior to the initial closing. The development budget approved as of initial closing may be modified during the development process with the prior written consent of CHFA. The most recent development budget approved by CHFA shall serve as the basis for CHFA s review and acceptance of required cost certifications. a) Any net overall savings recognized by CHFA from the cost certification review process, as compared with costs in the most recent development budget approved by CHFA, shall be applied in the order set forth below to the extent permitted by applicable federal and/or state law. b) Net overall savings, if applicable, shall consist of total savings in the mortgagor s certification of costs recognized by CHFA, exclusive of any construction cost savings, i.e., mortgagor costs including mortgagor s soft costs, construction and soft cost contingencies, the DAF, site acquisition and capitalized reserves plus other costs 7

including, but not limited to, approved syndication/entity expenses and tax creditrelated costs. 3) Early Completion Savings - First, to the extent that such savings are directly attributable to early completion, fifty percent (50%) of such savings in interest, insurance and real estate taxes shall inure to the mortgagor provided such savings do not exceed two percent (2%) of the originally approved construction contract total amount or the same total as adjusted for construction change orders approved by CHFA. Any early completion savings which may not benefit the mortgagor due to the above limitations shall be added to the balance of savings. 4) Balance of Savings - The balance of net overall savings shall be applied as follows: a) unless previously accepted by CHFA, to fund lease up and marketing expenses in excess of the amount shown on the latest approved development budget, provided that such expenses are acceptable to CHFA and incurred for a period not exceeding one hundred and twenty (120) days following substantial completion; then b) to fund the amount of any pledged back/deferred developer allowance fee ( DAF ) approved by CHFA, provided that the total DAF shall not exceed the product of (A) the applicable DAF percentage approved by CHFA at initial closing, multiplied by (B) the final CHFA-recognized TDC; then c) if applicable, fifty percent (50%) of the balance shall be applied to reduce the final amount of Low-Income Housing Tax Credits allocated to the multifamily rental housing development; and d) finally, of the remaining balance, fifty percent (50%) shall inure to the mortgagor to increase the DAF by an additional two and one-half percent (2.5%) of the final CHFA-recognized TDC and the balance shall be applied, as determined by CHFA, to benefit the multifamily rental housing development or to benefit CHFA and/or any governmental agency to reduce the principal amount of their mortgage loans as their interests may appear. 5) Excess Syndication Proceeds - Any excess syndication proceeds to the multifamily rental housing development above the amount reflected in the development budget approved at the time of initial closing shall be applied, as determined by CHFA, one hundred percent (100%) to benefit the multifamily rental housing development or to CHFA and/or any governmental agency to reduce the principal amounts of their respective mortgage loans as their interests may appear. XVII. Final Closing For more information on final closing, please refer to the Final Loan Closing List on the CHFA website. - - - Any questions related to this document can be sent to: multifamilydevelopment@chfa.org 8