Commercial Mortgages Direct HUD 221 d(4) loan program guidelines are as follows

SECTION 221(d)(4) INSURED LOANS – SUMMARY SHEET

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Program Features:

· Purpose, to provide market rate, rental housing for moderate income families and individuals

· New construction or substantial rehabilitation of existing apartment or co-op projects. Rehabilitation must encompass at least 15% of the project’s value after completion of the rehab, $6,500 per unit, or the replacement of a minimum of two major building components.

· No personal liability on either construction or permanent loan.

· Higher loan-to-cost ratios (90% of total replacement cost for new construction).

· Low, fixed interest rates for both construction and permanent loans. Permanent loan rates are fixed prior to the closing of the construction loan.

· Interest only for up to 36 months during the construction period.

· Longer loan terms of up to 40 years, structured on a fully amortized/level annuity payment basis.

· Permanent loans can be prepaid.

· Permanent loans are fully assumable.

· HUD mortgage insurance can be used as credit enhancement for taxable or tax-exempt bond issues. Bond proceeds can be used to fund both the construction and permanent loan.

· A certain amount of commercial space/commercial income is eligible for inclusion in the loan.

· No lease-up or occupancy requirements prior to conversion to the permanent loan.

· No limit on number of loans to one borrower.

Eligibility Features/Project Criteria:

· Rental apartment housing, cooperative housing projects and rental housing for elderly (independent living) are eligible project types.

· The real estate must be held in Fee Simple or under a long term ground lease.

· Both for-profit and not-for-profit entities are eligible borrowers, to include individuals, corporations, general and limited partnerships, and limited liability corporations (LLC’s).

· Davis Bacon prevailing wage requirements and labor standards apply.

· Borrower must file annual, audited project financial statements.

· Underwriting requires a minimum 1.11 debt service coverage, using current rents and operating expenses. Trending of rents is not permitted.

· Full year escrows for real estate taxes, property insurance and special assessments, if any, are required to be funded at the loan closing and maintained for the life of the loan in non-interest bearing escrow accounts.

· A reserve for replacement escrow is required for the life of the loan, with monthly contributions. Funds may be used by the borrower for ongoing replacement of depreciable items. This escrow account may be interest bearing to the benefit of the borrower.

· A working capital escrow (or letter of credit) equal to 2% of the loan amount is required during the construction period.

· An initial operating deficit escrow (or letter of credit) is required to fund any operating losses until sustaining occupancy is achieved. Amount of escrow determined by an absorption analysis (part of the appraisal report).

· Phase I Environmental analysis required for all Section 221(d)(4) insured loans.

· Full narrative market feasibility study required for all Section 221(d)(4) insured loans.

SECTION 221(d)(4)

FACT SHEET

PURPOSE: Mortgage Insurance for non-assisted, market rate rental apartment developments. This program is meant to assist private industry in providing market rate rental housing for moderate income families. Elderly (62 years of age or older), physically handicapped and displaced single persons are considered “families” under this program.

DEFINITION: Under this section of the National Housing Act, HUD-FHA insures first mortgage loans made only by HUD-approved mortgagees such as Red Stone, for the new construction or the substantial rehabilitation of rental apartment developments. NOTE: projects for single room occupancy (SRO) are also eligible under this program.

ELIGIBLE PROJECTS:

a) Must be either new construction or substantial rehabilitation.

b) Must consist of five (5) or more dwelling units and be comprised of detached, semi-detached, row-type townhouses or multifamily structures (walk-up or elevator).

c) Must be situated on one site. However, the site may consist of two or more non-contiguous parcels (scattered sites) with HUD approval.

d) Must comply with all applicable zoning and/or deed restrictions.

e) Must be designed for residential use.

f) Must be free and clear of all liens other than the insured mortgage. NOTE: HUD may permit an inferior lien made or held by a Federal, State or Local government agency or instrumentality.

COMMERICAL AREAS:

Developments may include commercial space. However, any commercial activity must be compatible with the use of the project and be primarily for the benefit of the tenants. In general, up to ten percent (10%) of the gross floor area of the project may be commercial space, and up to fifteen percent (15%) of the total gross project income may come from commercial activities.

SUBSTANTIAL REHABILITATION:

For the mortgage on an existing property to be insured under the Section 221(d)(4) program, the property must require substantial rehabilitation (sub-rehab), which is defined as:

a) The cost of repairs, replacements and improvements exceeds the greater of:

(i) fifteen percent (15%) of the property’s value after completion of the improvements, (ii) $6,500 per unit, adjusted by the applicable high-cost factor for the area as published by HUD, or

b) More than one major building component is being replaced. “Major building component” includes: roof structures, ceiling, wall or floor structures, foundations, and plumbing, heating, air conditioning or electrical systems.

c) Additions to properties are permitted. However,

(i) the costs of any additions may not be included in the 15% test under a)(i) above,

(ii) the addition can not be considered as a “major building component,”

(iii) the existing property must require substantial rehabilitation as defined in a) and b) above, without consideration of the addition.

REAL ESTATE REQUIREMENTS:

All new developments or sub-rehab properties must be on real estate held, or to be held:

a) in fee simple, or

b) under a renewable lease for a period of not less than 99 years, or

c) under a lease having a period of not less than 10 years to run beyond the maturity date of the insured mortgage.

TENANT SELECTION:

Occupancy is not restricted on the basis of tenant income. All families and individuals subject to normal tenant selection procedures are eligible for occupancy. There are no income restrictions unless:

a) the project is subsidized by HUD i.e. via Section 8 Rent Subsidies, or

b) the mortgage is financed through tax-exempt bonds, or

c) the borrower receives Low Income Housing Tax Credits (LIHTC), Historic Preservation Tax Credits, or HOME Funds.

ELIGIBLE BORROWERS:

The following types of borrowers are eligible for participation in the Section 221(d)(4) program:

a) General – any borrower/borrowing entity approved by HUD, which may include for-profit entities, individuals, corporations, general or limited partnerships, and limited liability corporations (LLC’s).

b) Non-Profit – an entity organized for reasons other than financial gain and not controlled or directed by persons or firms seeking financial gain. The non-profit entity must be regulated under Federal or State law, i.e. 501(c)(3).

c) Builder-Seller – an entity organized to build or rehabilitate a project and which, by written agreement with a non-profit, will sell the project to the non-profit for no more than the HUD-approved certified cost.

NOTE: all entities created to be the borrower under a HUD-insured mortgage transaction must be single asset entities.

CONSTRUCTION, HIRING AND WAGES:

This program requires that payment of no less than the wages prevailing in the locality, as predetermined by the Secretary of Labor, pursuant to the Davis-Bacon Act, be paid to all laborers and mechanics employed in the development of the project.

Additionally, all borrowers and general contractors must comply with HUD’s Equal Employment Opportunity regulations, in that discrimination because of race, color, religion, sex or national origin is prohibited.

MORTGAGE LIMITS:

New Construction & Substantial Rehabilitation – the maximum loan amount is the lesser of:

a) Amount requested by mortgagor

b) 90% of loan to total replacement cost, less grants (if any)

c) Maximum loan supportable by Net Operating Income (NOI) at a 1.11 debt service coverage

d) Statutory Limits adjusted by HUD’s High Cost Factor for geographical location

UNDERWRITING CONSIDERATIONS/FEATURES:

a) 40-year, level annuity payment, fully amortized permanent loan term.

b) Fixed rate of interest during both construction and permanent loan terms. Permanent loan rate fixed at closing of construction loan.

c) Up to 36-months interest only during construction.

d) Minimum of five percent (5%) vacancy factor.

e) No personal liability on construction or permanent loan.

f) Permanent loans are prepayable.

g) Permanent loans are assumable.

h) No lease-up or other occupancy requirements prior to conversation to the permanent loan.

i) No limit on number of loans to one borrower