Credit Underwriting Guide

FOR MULTI-FAMILY AFFORDABLE HOUSING

IN FLORIDA

SPONSORED BY: PRESENTED BY:

The Florida Housing The Florida Housing Coalition
Finance Corporation July 2019
PREAMBLE
This guidebook is intended to help nonprofit and newer affordable housing developers gain a
better understanding of the credit underwriting process that ensues after a development has been
selected for financing by the Florida Housing Finance Corporation. This guidebook may also be
useful to local housing providers in the public sector who evaluate the feasibility of housing projects
that have requested funding from local sources. Sound credit underwriting procedures are a form
of risk management and should be a priority in the evaluation of the feasibility of affordable housing
developments. In fashioning these guidelines to set standards for compliance with local, state
and federal housing finance programs, it is important to ensure that the guidelines advance local
housing objectives and that the selection of projects will serve the specific needs for housing within
the community.
Table of Contents
CREDIT UNDERWRITING: AN OVERVIEW ............................................................................1
What is Credit Underwriting in Affordable Housing?........................................................................................... 1
Why is Credit Underwriting Important?......................................................................................................... 2
Objectives of Credit Underwriting by Type of Lender....................................................................................... 2
The Credit Underwriting Process................................................................................................................. 4
What are the Steps of the Credit Underwriting Process?................................................................................... 4
Working with the Credit Underwriter............................................................................................................ 5

THE CREDIT UNDERWRITING CHECKLIST............................................................................6

Applicant/Borrower Information .................................................................................................................. 6
Property Information ................................................................................................................................... 8
Additional Information For Existing Projects ................................................................................................ 14
Financial Information ................................................................................................................................. 17
Property Management Agent Information ................................................................................................... 19
Construction Information........................................................................................................................... 21

APPENDICES................................................................................................................23
Appendix A Additional Information on Required 3rd Party Reports ................................................................... 23
Appendix B Guidelines for Local Governments ............................................................................................. 25
Appendix C Brief Guide to Financial Statements ........................................................................................... 27
Appendix D Brief Guide to Selected Terms ................................................................................................... 29
Appendix E Subsidy Layering ..................................................................................................................... 31
 FREQUENTLY USED ACRONYMS

Florida Housing Finance Corporation FHFC

Credit Underwriting Report CUR

Requests for Application RFA

INTERCHANGEABLE TERMS

“Projects” and “Developments”

“Applicant” and “Borrower”

“Developer” may refer to the applicant or borrower but at times the developer is a separate entity qualified to perform
the work the applicant or borrower is planning to undertake
Credit Underwriting: An Overview
What is Credit Underwriting in Affordable Housing?
Credit underwriting is the process of evaluating or analyzing the risk of financing a specific borrower for a specific proj-
ect. Credit underwriters are specialized firms whose financial analysts evaluate borrowers and projects prior to the award
of a loan or grant. Projects that have the ability to proceed and are selected for financing as a result of the FHFC RFA
process are invited to enter into credit underwriting. The phrase “ability to proceed” or “project readiness” addresses
the question: if the project received funding today, would it be able to proceed to construction tomorrow?
Credit underwriting takes place over a period of several months and must be completed within nine months from the
date of invitation. Once the resulting Credit Underwriting Report (CUR) is approved by the Board of FHFC, the project
goes to loan closing. Once loan closing is completed, construction may begin. This guide covers the credit underwrit-
ing process up to the loan closing.
During this period the borrower provides documentation sufficient for the underwriter to determine that the project is
feasible, the site is appropriate, and the borrower including the development team has the financial capacity and expe-
rience required to develop and operate the project for the duration of the compliance period. The underwriter must
determine that the project as proposed will be consistent with the terms of the request for application, the laws and
regulations governing the funding source, and the local jurisdiction’s planning, zoning and building construction laws
and regulations.

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 Why is Credit Underwriting Important? Construction Lenders. Construction loans are consid-
Financing of affordable housing relies on a high level of ered a bridge loan that must be repaid when the project
investment of public funds. The award of public funding is completed. Construction lenders are primarily con-
necessitates a third-party underwriting process to make cerned that there is sufficient funding committed to repay
sure that program rules, setasides, affordability and long- their loan upon the issuance of a certification of occupan-
term compliance with regulations will be in place. cy. The construction lender will evaluate a project’s read-
iness to proceed, the capacity of the developer, and its
Therefore, the job of the credit underwriter is to evaluate general contractor and subcontractors. The underwriter
proposed projects to assess the risk of a proposed loan will carefully review feasibility of completing the stages
for the development of a project. The credit underwrit- of the project based on a draw schedule suitable to the
er performs due diligence on the project, the site, and lender. The disbursement of funds will be tailored to com-
the borrower. All projects financed by Florida Housing pletion stages and risk is minimized by avoiding disburse-
Finance Corporation through its Request for Application ments for work that has not been adequately completed.
process, must have a positive credit underwriting report
before the loan may be closed. This is in effect an assur- The financial capacity of the developer is critical as the
ance that the award of funding, whether a loan or low-in- construction lender will typically only finance 70-80% of
come housing tax credits, will meet its intended result. the cost of development. The borrower must be able to
show that the balance of funds is available to complete the
The underwriting process incudes a comprehensive re- project. Credit underwriters will often require a signature
view of all aspects of the project, site and borrower to guarantee for construction completion. This impacts the
ensure compliance with regulations for each funding ability of smaller organizations to enter the development
source. The underwriter evaluates each project that has arena as they may not have access to either guarantors or
been selected for financing under a specific Request for sufficient capital to complete a project on time.
Application for conformity to the criteria for the award.
The extensive review and evaluation of proposed projects Equity Investors. Investors in housing projects focus on
reduces the likelihood of default on loans. Finally, the un- the feasibility of the project over the period of compliance
derwriting process, in particular the appraisal and market (timeframe in which low income housing requirements
study, establish the insurable value of a project. must be in effect). They must be confident in the con-
struction lending and feasibility of completing the project
Objectives of Credit Underwriting by
on time but also the ongoing operation and management
Type of Lender
of the property. Investors often use brokers, called syndi-
The credit underwriting process depends on the type of
cators, to perform underwriting and compliance monitor-
entity that is financing the project. Lenders, investors and
ing functions on their behalf. As the investor has exposure
grant makers share in common the priority to award loans
from project construction through long term operations,
and grants to projects that are physically and financially
their review will be extensive. They will be concerned
feasible for the term of the financing.
with the capacity of the developer, contractor, and man-
Permanent Lenders. Private permanent mortgage lend- agement entities. Investors will continuously monitor
ers view credit underwriting through the lens of originat- risks to their investment from project closing through con-
ing loans that serve the requirements of bond holders and struction completion and stabilization and will adjust their
the secondary mortgage market including Fannie Mae investment accordingly to mitigate certain risks.
and Freddie Mac. The lender must identify the risk of
As mentioned, investors are just as concerned about on-
these loans and bring them into conformity with the un-
going operations as they are about construction comple-
derwriting standards of the secondary market. The lender
tion. Therefore, they may require that project replacement
will consider the capacity of the borrower, the collateral of
or operating reserves be funded up front. The confidence
the loan and the repayment assumptions.
of investors will be impacted by any potential delays in

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construction, or anticipated inability to meet lease-up, operating, and reserve
requirements in a timely manner.

Public Sector Lenders and Grant Makers. The public sector can provide vital
financing, development incentives, real estate donations, and development
approvals to affordable housing projects. The public sector is often the shep- from the
herd of housing projects and the first stop in seeking support and financing.
The objectives of the public sector include long term financial feasibility, as
underwriters
well as policy objectives that are at the core of ensuring there is a public bene-
fit from affordable housing projects. Q: How much time
should an organization
Public sector objectives may include neighborhood improvement or increas- expect the underwriting
ing the supply of housing for vulnerable populations. The public sector, as process to take so they
well as private grant makers, prioritize the impact of the project on meeting can plan for this?
housing needs as well as the quality and sustainability of each project. Public
A: The Credit
sector and private sector funders may want to target funds to populations such Underwriting Report
as formerly homeless households, the elderly, and persons with disabling con- (CUR) will take
ditions or large families. approximately three
weeks to prepare once
Public sector objectives also include compliance with funding programs and all due diligence and
regulations. These compliance factors include: third-party reports have
been completed. The
• All costs are eligible underwriting report is
due a month prior to the
• The subject property is eligible
FHFC Board meeting.
• Property standards are met (existing projects) A good rule of thumb
is to identify the Board
• The borrower is eligible meeting target date then
subtract two months to
• Costs are reasonable obtain the date that all
due diligence should be
• Developer and contractor have not been suspended or debarred from provided to the credit
federally funded projects underwriter.
• Developer and principals have met all terms of prior projects, have no Most RFAs have CUR
defaults or tax liens deadlines identified
within them. It is good
• Labor standards will be enforced to keep those in mind
when planning as
• The project has an Affirmative Fair Housing Marketing Plan exceeding the deadline
• Maximum subsidy amount is not exceeded may have extension fees
associated with it.
• CHDO is qualified and certified for each project if using HOME/ Development is a long
CHDO funds (CHDO is a special type of nonprofit designated as a and arduous process
Community Housing Development Organization) with its own timeline that
is often under-estimated.
• Cross-Cutting Federal regulations are followed

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 The Credit Underwriting Process What are the steps of the Credit Underwriting
The underwriting process can actually begin informally Process?
when a project is first contemplated. The overall concept The credit underwriter is charged with conducting suffi-
can be considered in the context of eligibility. Each step of cient analyses necessary to provide a recommendation re-
the project should be designed with program compliance garding financing for a project using the sources that have
and credit underwriting process in mind. The Credit Un- been awarded. The project must be “ready to proceed”
derwriting Checklist, explained in detail below, can serve immediately upon loan closing. The credit underwriter
as a guide to decision-making on the site, target popula- summarizes their analyses and recommendation in a Credit
tion, selection of team members, and potential sources of Underwriting Report. This report describes the project and
funding. The Credit Underwriting Checklist can be a valu- site, the developer, and financial feasibility. The report indi-
able tool to plan the development steps and timeframe and cates if the project will meet the compliance requirements
determine if the project will have a positive cash flow. The of each funding source and makes a recommendation to
checklist can be used to identify and evaluate potential in- proceed (or not) towards closing. The report may further
sufficiencies that could delay or terminate a project, or to include conditions that must be met at or before closing
determine that the project should move forward. the financing. The three main areas of analysis include:

The credit underwriting process for affordable housing Project Financial Feasibility
projects is basically the same as that for market rate hous- • Market analysis
ing but has additional criteria that includes public benefit • Sources of funding are committed
tests (listed above). Projects that are underwritten for fi- • Project cost analysis
nancing from FHFC must meet basic feasibility criteria, re- • Loan terms can be met
quirements associated with each funding source and the • Project is in compliance with regulations
criteria from the specific Request for Application (RFA). • Cash flow analysis

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Site Suitability
• Site Control
• Appraisal
• Capital needs assessment (existing projects)
• Environmental suitability from the
• Permit readiness underwriters
• Proximity

Capacity and Credit Worthiness of the Borrower including developer, Q: How do you engage the
contractor, architect and property management entity applicant in developing a
• Experience working relationship?
• Financial capacity
A: Once the applicant is
• Credit worthiness invited to underwriting, the
credit underwriter will reach
As previously stated, once the project, site and borrower have been evalu- out with a due diligence
ated, the credit underwriter prepares the Credit Underwriting Report with checklist and applicable
recommendations and conditions. This report is provided to FHFC and the forms. It is helpful to have
borrower. Once FHFC staff and the borrower approve the report, it is consid- an opening conference call
to discuss the specifics of
ered by the Board of Directors of FHFC. If approved, the project may proceed
the deal, any initial ques-
to closing, construction, and long-term management.
tions concerning forms
and the checklist, and the
Working with the Credit Underwriter timeline the developer
Projects that have been successful in receiving an award from FHFC are invited is targeting. Throughout
into the underwriting process. The specific underwriter is assigned to the the underwriting process,
project by FHFC. The relationship between the borrower and the credit the communication with
underwriter should be professional, responsive and courteous. The credit the underwriter is open,
underwriter’s client is the financing entity - not the borrower. Project financ- and we are always avail-
ing cannot be approved without a positive credit underwriting report. If the able for questions. It is
underwriter is not provided with the information needed to make this recom- recommended that the
mendation, the project will not be financed. applicant touch base with
the credit underwriter at
Because there is an allotted timeframe in which the credit underwriter must least every four to six weeks
submit its report, time is of the essence. It is critical that the borrower assign to update on the timeline
a project manager to serve as the point person for the credit underwriter. It is and progression of the deal.
possible to be prepared for the evaluation if the directions in this guidebook Communication should be at
are followed and documents that are listed on the credit underwriting checklist least weekly once the deal is
are assembled in advance. moving forward (to closing)
and the majority of the due
Upon invitation to credit underwriting, the borrower will receive a Credit diligence is available.
Underwriting Checklist from the underwriter. This comprehensive list
is an excellent guide to ensure that the information and documentation Many times, the nonprofit
that will be required is available or obtainable. The underwriter may ask applicant is not in good
for more documentation if the information available is not sufficient for a communication with their
co-developer — they need
recommendation to be made.
to talk regularly.

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 The Credit Underwriting Checklist
A pivotal event in the affordable housing development process is when the borrower is invited to participate in the credit un-
derwriting process. This begins with a comprehensive checklist provided to the borrower. In this section a typical checklist is
explained in detail. There are several main sections of a checklist and these points are provided followed by annotations that
explain why this is required and what is expected to be provided.

Applicant/Borrower Information
The Credit Underwriting Checklist typically requests the following information. Each item is expanded upon below with
further explanations.

1. Identity of borrower entity and principals, and the ownership structure (i.e., identify principals and officers/
general partners, percentage of ownership and responsibilities in partnership/organization)

2. Copy of documentation creating the borrower entity (i.e., partnership agreement, certificate of limited
partnership, articles of incorporation, bylaws, certification of good standing, and any other corporate
documents for the borrower and any corporate general partner)

3. Resumes and trade references for each Principal of the borrower, including a description of experience
in the development, ownership and management of multifamily properties. References must include
addresses, contact names and telephone numbers.

4. Signed credit authorization forms completed by borrower entity and all principals (form provided by
credit underwriter).

5. Completion by borrower and Principals of the Certification of Previous Multifamily Housing Experience form
(provided by credit underwriter)

6. Completion of Deposit and Mortgage Verification forms by borrower entity and all Principals along with
banking references, including account-numbers, addresses, contact names and telephone number (forms
provided by credit underwriter)

Identity of borrower entity and principals, and the This form allows for the borrower to fully disclose the
ownership structure (i.e., identify principals and offi- type of principal, name, and organizational structure for
cers/general partners, percentage of ownership and each. Beyond this, the underwriter will require the per-
responsibilities in partnership/organization)
centage of ownership and their responsibility in the part-
The borrower must be either a limited partnership, limit- nership or organization.
ed liability company, for-profit corporation, or non-profit
corporation. “Principal” is defined in subsections 67- Copy of documentation creating the borrower entity (i.e.,
48.002(93) and 67-21.002(85) F.A.C. The structure of partnership agreement, certificate of limited partnership,
articles of incorporation, bylaws, certification of good
the organization may be identified on FHFC Form “Prin-
standing, and any other corporate documents for the
cipals of the borrower and developer’s disclosure form borrower and any corporate general partner)
08-16 rev”.

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Legible copies must be provided to document the agree- Completion by borrower and Principals of the Certi-
ments and foundational documentation of the borrower fication of Previous Multifamily Housing Experience
and partners. Agreements should be provided for the de- form (provided by credit underwriter)
veloper, architect and property management company. The form provided by the underwriter includes the follow-
ing sections to be completed:
Resumes and trade references for each Principal of the
• Project name and number
borrower, including a description of experience in the
development, ownership and management of multi- • Project address
family properties. References must include addresses, • Number of units and type of project if other than
contact names and telephone numbers.
multifamily
Resumes should provide detailed timeframes for en- • Role and interest of the borrower or principal in
gagements or periods of employment. The contact in- the project (General Partner, Limited Partner, and
formation for trade references should be provided in list ownership percentage)
format. The underwriter will contact the trade reference
• Type and source of permanent financing and
contact to obtain the information needed to verify the
Subsidy (if any)
relationship and status. Generally, five trade references
• Disclosure of any defaults, assignments,
will be required. References from accountants, archi-
bankruptcies or foreclosures (explanations should
tects and banking are not accepted.
be attached)
Experience in ownership and management of affordable Completion of Deposit and Mortgage Verification
housing should be provided and include the name, loca- forms by borrower entity and all Principals along
tion, and description of each property. with banking references including account-numbers,
addresses, contact names and telephone number
Signed credit authorization forms completed by (forms provided by credit underwriter)
borrower entity and all Principals (form provided by
The form provided by the underwriter is to be complet-
credit underwriter)
ed with banking references and contact information and
The underwriter will provide release forms that must be
returned to the underwriter for further processing.
signed by the borrower and all Principals. This release
will be used to run credit reports.

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 Property Information
The Credit Underwriting Checklist typically requires the following:

1. Detailed property description

2. Legible location map, showing the property and surrounding area, including commercial/shopping
facilities, schools, competitive projects, and its proximity to the area’s central business district

3. Survey indicating the exact boundaries of the property, any flood hazard area(s), all ingress and egress
to the Property, all utilities, and the property’s legal description

4. Site plan

5. Zoning compliance

6. Copy of the most recent Title Report for the property

7. Evidence of site control (i.e., copy of ground lease analysis, sales or purchase agreement and most recent
deed to the property, or ground lease to include all attachments and addendum. Closing statement if
purchase has occurred within past 24 months)

8. Color photographs of the subject property

9. Aerial photograph of the property and immediate surrounding area, if available

10. Evidence of availability of utilities

11. Building plans and specifications for the rehab of site and buildings

12. Soil test report

13. Building permits, if available. Loan closing is contingent on building permits in hand

14. Feasibility study /market study

15. Appraisal with resume and references of appraiser

16. A plan and cost review, or engineering and property condition report (to be ordered by the credit
underwriter at the borrower’s expense)

17. Capital needs assessment (for existing projects)

18. Phase I environmental review, including history of title to the property, with resume and references of
environmental auditor

19. Evidence of insurance including, but not limited to, general liability, worker’s comp., builder’s risk, auto
liability

20. Utility allowances

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Detailed Property Description
The address, legal description and parcel identification number must be provid-
ed. Many projects involve the assemblage of multiple parcels of land. It is im-
portant to plan early to have the site surveyed with a legal description prepared.
If the site is to be a part of another project, such as a subsequent phase, the legal
from the
description should include information clarifying the separate parcels. underwriters
Legible location map, showing the property and surrounding area, including Q: What are the most
commercial/shopping facilities, schools, competitive projects, and its
frequent deficiencies
proximity to the area’s central business district
in an organization that
The location map should be legible and clearly depict the components re-
must be addressed
quested. The distance to any required proximity features should be noted in the underwriting
along with a methodology if applicable. This will allow the underwriter to process?
verify the proximity requirements from the RFA. Competitive projects may
be partly identified on the FHFC Limited Development Area list. This list pro- A: One (preceding)
vides the location of projects financed by FHFC in the past several years. comment: There is often
confusion regarding the
Survey indicating the exact boundaries of the property, any flood hazard forms and information
area(s), all ingress and egress to the property, all utilities, and the property’s as to whether they apply
legal description to the individual board
Surveys that were obtained prior to purchase or purchase contract may need members or the entity. If
to be updated to include the specific information required during underwrit- the applicant is unsure who
ing. The legal description should match the information submitted with the the form should be filled
RFA. The surveyor should provide the following information on the site: out for (entity or board)
check with the underwriter
• Boundaries
before completing as it
• Legal description
may save time.
• Encumbrances
• Easements We mainly look for the
• Structures organization to be able
• Access to provide a history of
• Right of Way development similar
• Elevation (flood or wind zone) to the development for
which the applicant is
Surveys should be ALTA/NSPS, which means the survey meets the Minimum
applying, whether single-
Standard Detail Requirements of the American Land Title Association (ALTA)
family or multi-family, with
and National Society of Professional Surveyors (NSPS). an emphasis on FHFC-
funded developments.
Site Plan
An approved site plan is required for the FHFC RFA process. Sample language of
this requirement is excerpted from RFA 2018-102 for illustration purposes below.

Status of Site Plan/Plat Approval

The borrower must demonstrate the status of site plan or plat approval as
of the Application Deadline, for the entire proposed Development site, by
providing, as Attachment 8 to Exhibit A, the applicable properly complet-
ed and executed verification form:

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 a. The Florida Housing Finance Corporation Local be covered by title insurance, such as liens, assessments
Government Verification of Status of Site Plan Ap- or other encumbrances or clouds on the title. These
proval for Multifamily Developments form (Form issues must be corrected prior to completing the un-
Rev. 08-16); or derwriting process. The title report must be linked to
b. The Florida Housing Finance Corporation Local a recent survey that shows boundaries, encroachments,
Government Verification of Status of Plat Ap- rights of way and easements. Any survey problems must
proval for Residential Rental Developments form be addressed during the underwriting process.
(Form Rev. 08-16).
Evidence of site control (i.e., copy of ground lease
analysis, sales or purchase agreement and most recent
Zoning Compliance deed to the property, or ground lease to include all
The verification of zoning provided with the application attachments and addendum, closing statement if
should be readily available. Official zoning compliance purchase has occurred within past 24 months)
may be in the form of a letter or a completed form. It is The FHFC RFA process typically includes this language
critical that the municipality has been given the correct describing the acceptable forms of site control.
description of the proposed uses and specific site to en- Applications that do not include evidence of site control
sure that the project is in compliance with zoning. Gen- in this format will not be considered. Below is an example
erally, the zoning will be consistent with the Future Land of this requirement from RFA 2018-102; each RFA should
Use designation of the property, but many projects re- be carefully reviewed to meet site control requirements.
quire a planned unit development application. This will The borrower must demonstrate site control by provid-
need to be verified with the Future Land Use element of ing, as Attachment 7 to Exhibit A, the documentation
the Comprehensive Plan as well as all other elements of required in Items (1), (2), and/or (3), as indicated below. If
the Plan. The credit underwriter may examine the cited the proposed Development consists of Scattered Sites, site
zoning classification and verify that the proposed project control must be demonstrated for all of the Scattered Sites.
is consistent with the municipal code. Unless the credit
underwriting process is exclusively for predevelopment 1. Eligible Contract - For purposes of this RFA, an el-
purposes, which includes site acquisition, all proposed igible contract is one that has a term that does not
projects must have approved zoning to be given a posi- expire before September 30, 2018 or that contains
tive credit underwriting report. extension options exercisable by the purchaser and
conditioned solely upon payment of additional
The FHFC RFA process requires evidence of proof of monies which, if exercised, would extend the term to
ability to proceed, which includes proper zoning. The a date that is not earlier than September 30, 2018;
language presented below is excerpted from RFA 2018- specifically states that the buyer’s remedy for de-
102; each RFA should be carefully reviewed for specific fault on the part of the seller includes or is specific
requirements. performance; and the buyer MUST be the borrower
unless an assignment of the eligible contract which
Appropriate Zoning assigns all of the buyer’s rights, title and interests in
The borrower must demonstrate that, as of the Applica- the eligible contract to the borrower, is provided.
tion Deadline, the entire proposed Development site is Any assignment must be signed by the assignor and
appropriately zoned and consistent with local land use the assignee. If the owner of the subject property is
regulations regarding density and intended use, or that not a party to the eligible contract, all documents
the proposed Development site is legally non-conform- evidencing intermediate contracts, agreements, as-
ing by providing (designated form) signments, options, or conveyances of any kind be-
tween or among the owner, the borrower, or other
Copy of the Most Recent Title Report for the Property parties, must be provided, and, if a contract, must
The underwriter will review the most recent title report contain the following elements of an eligible con-
from the property to identify any conditions that may not tract: (a) have a term that does not expire before

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 September 30, 2018 or contain extension options to the site. It must be determined if there will be or remain
exercisable by the purchaser and conditioned solely unpaid assessments for the installation of utilities. During the
upon payment of additional monies which, if exer- underwriting process these will be reviewed closely, and the
cised, would extend the term to a date that is not borrower may need to provide clarification on availability of
earlier than September 30, 2018, and (b) specifically service or location of connections and easements.
state that the buyer’s remedy for default on the part
of the seller includes or is specific performance. Building Plans and Specifications for the Rehab of Site
2. Deed or Certificate of Title – The deed or certificate and Buildings
of title (in the event the property was acquired through During the predevelopment process complete architectural
foreclosure) must be recorded in the county in which drawings are not prepared; at that point, sketches and sche-
the property is located and show the borrower as the matic drawings are needed for site plan approval and overall
sole Grantee. planning of the development. During the underwriting pro-
3. Lease - The lease must have an unexpired term of at cess the full plans are to be completed and submitted for per-
least 50 years after the Application Deadline and the mitting. It is thus important that the architect and engineers
lessee must be the borrower. If the owner of the subject on the development team be prepared to expeditiously com-
property is not a party to the lease, all documents evi- plete the plans and specifications upon notice. The plans and
dencing intermediate leases, subleases, assignments, specifications must be at a stage suitable for permitting since
or agreements of any kind between or among the own- loan closing is contingent upon permits being issued.
er, the lessor, or any sublessee, assignor, assignee, and
the borrower, or other parties, must be provided, and Soil Test Report
if a lease, must have an unexpired term of at least 50 Soil testing is required for all new construction projects.
years after the Application Deadline. Any assignment Projects that expand an existing building will be required
must be signed by the assignor and the assignee. to have a soil test. Preservation or rehabilitation projects
that do not expand onto new ground will most likely not
Color Photographs of the Subject Property
be required to obtain a soil test. Soil testing can reveal
Photographs should be of sufficient quality to appear clear
conditions that will adversely impact the budget or en-
when printed. The subject property should be shown
gineering of the site. This is normally conducted during
with views of each side and any distinguishing features.
the initial due diligence process as unfavorable soil con-
Aerial Photograph of the Property And Immediate ditions can render a project infeasible. The presence of
Surrounding Area, if Available dense material (i.e., rock) under the surface or poor drain-
Aerial photographs should be readily available from the age can require remediation that may be too costly. The
county property appraiser website or mapping applications soil results must be reviewed immediately upon availabil-
available from the internet. Property lines should be indicat- ity by a qualified engineer. Soil reports, along with other
ed, and the quality should be sufficient to remain clear when engineering and environmental documents must be in
printed. Adjacent streets or other uses should be labeled. compliance with ASTM Practice D-1586. (American Soci-
ety for Testing and Materials.).
Evidence of Availability of Utilities
The verification of utilities forms submitted in the RFA process Building Permits, if Available
should be readily available. The FHFC RFA process requires The completion of the credit underwriting process is
the evidence of utilities as part of documenting readiness contingent upon the issuance of development orders
to proceed. Documentation of utilities includes electric, and building permits. Projects should be ready to enter
water, sewer, and roads. If any of these are not available to the permitting process during the underwriting process.
the site an inquiry should be made as to the estimated cost Those projects that require more complicated permitting,
to bring this infrastructure to the site. It is also important to such as water management district or Army Corps ap-
check with the capital improvements plan of the municipality provals or land use plan amendments, should have that
to learn if and when these improvements might be provided process already completed or near completion.

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 Feasibility Study/Market Study
The credit underwriter orders the market study to determine the feasibility of the
project; the borrower is required to pay for the study to be completed. A mar-
ket study is an evaluation of the economic conditions of supply and demand and
from the rental rates for the type of housing being proposed, as well as the rent levels for
the specific project. The analysis must determine the feasibility of the rental rates
underwriters of the subject project and state conclusions about the impact of the project in
meeting affordable housing needs. The conclusion must address whether the
Q: Can you address the proposed project will have a negative long-term impact on existing rental com-
matter of guarantees? munities. The market study will provide information on the following topics:
When are personal
• Site Analysis – does it have good exposure and access?
guarantees required
and what types of • Improvement Analysis – is it suitable for the proposed use?
guarantees or collateral • Regional Analysis – trends in the metropolitan statistical area (MSA) such as
are acceptable? population growth and housing costs
• Neighborhood Analysis – look at same trends from regional analysis within
A: Guarantees depend
a 3-mile radius around the proposed project site
upon the particular
circumstances of the • Apartment market overview – availability of units and costs
development and • Primary Market Area determination – conclusions about market
are evaluated on a characteristics within a 10-mile radius of the proposed project site (from
case-by-case basis which 66% to 75% of tenants will come) to include:
during underwriting.
Typically, individual
1. Demographic Analysis – population inside radius
guarantors are provided 2. Rental Estimates – comparison of income-restricted rates and market rates
if they are involved in the 3. Unit Mix, unit sizes, amenities relative to competition given area
organizational structure, characteristics
unless the owner or 4. Impacts on existing affordable inventory
general partner is a 5. Average occupancy rate
verifiable not-for-profit • Absorption rate – the rate at which apartments in the proposed project are
with appropriate history expected to lease up
and experience.
The credit underwriter is responsible for reviewing the study and making a deter-
mination on the market feasibility of the proposed project.
The deal has to pencil
out…we will look for
Appraisal with Resume and References of Appraiser
some form of collateral
The credit underwriter will engage the appraiser directly to conduct a valuation of
absent a strong personal
the property as is, as developed as proposed, and as if it were developed without
guarantor.
subsidy or rent restrictions. For affordable housing projects, the rent restricted
value is the key value given the long-term compliance period. The purpose of the
appraisal is to determine if the development itself is sufficient collateral or if addi-
tional forms of collateral will be required.

A Plan and Cost Review (PCR), or Engineering and Property Condition Report
The credit underwriter will engage a qualified project cost reviewer at the borrower’s
expense. The purpose of the PCR is to determine that all proposed work is reflect-
ed in the proposed budget and that costs are reasonable. This process starts during
the credit underwriting process but continues throughout the construction phase.

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The analyst is responsible for reviewing project construction Phase I environmental review, including history of
draws and determining that work has been completed at the title to the property, with resume and references of
costs represented in the construction contract. The PCR is environmental auditor
the final review before funding is awarded and therefore is Not every project is subject to a full environmental review (i.e.,
very important to the flow of the project. every project’s environmental impact must be examined, but
the extent of this examination varies), but every project must
The PCR reviews the following:
be in compliance with the National Environmental Protection
• Construction drawings Act and other related federal and state environmental laws.
• Specifications
Initially, a Limited Due Diligence: Transaction Screen
• Total Project Budget Process (TSP) report should be provided. The work must
• Scope of work be in accordance with the American Society for Testing
• Construction contracts and Materials (ASTM) designation E-1528-06.
• Environmental reports Mitigation may be required for protected habitat, wetlands
• Geotechnical reports or species. Projects that will negatively impact properties
that have historical or archaeological significance may not
The PCR report includes the following:
be permitted or there may be mitigation requirements.
• Project Description The purchase contract should have an exit if the site has
• Sitework significant environmental issues.
• Building construction
Properties constructed before 1989 must be inspected for
• Document Review
asbestos and those constructed before 1978 must undergo a
• Regulatory
lead-based paint analysis as part of the Phase I environmental
• Infrastructure
review. Building code regulations require that testing be
• FHFC RFA requirements including construction conducted by certified analysts. If hazardous materials are
materials and energy sustainability criteria discovered, a Phase II Environmental review and assessment
• FHA, ADA, Section 104 Compliance must be conducted to include the results of testing and plan
• Cost Analysis for remediation. The housing developer should prepare for
the presence of hazardous materials when first considering a
• Estimated insurance value
rehabilitation project, as this is vitally important to the safety
Capital Needs Assessment of tenants; however, the budget impact of remediation can
A capital needs assessment (CNA) or property condition render a project infeasible.
analysis is required for all rehabilitation or preservation
Evidence of insurance including, but not limited to,
projects awarded funding from FHFC. The credit under-
general liability, worker’s compensation, builder’s
writer engages the assessor and considers the results to risk, and auto liability
determine that there is sufficient financing available to cov- The underwriter will indicate required coverages, including
er immediate needs. The analyst may request preliminary amounts, and which entities should be named as additional
construction plans and specifications to understand what is insured on insurance policies. Project completion bonding
being proposed and to identify work needed that may not must be completed during the underwriting period as well.
have been contemplated in the preparation of construc-
tion plans. The process involves a detailed inspection of all
components of an existing property including the interior
of apartments. The report should include a capital reserve
analysis that is based on the outcome of the evaluation of
the useful life of mechanical and structural systems.

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 Utility Allowances
The calculation of the maximum tenant rent is based on income and size of unit, but many programs require that if utilities are
tenant paid, the rent amount must include a utility allowance. The borrower must provide an explanation and satisfactory docu-
mentation of the projected utility allowance per unit.

Additional Information For Existing Projects

Projects involving the acquisition and rehabilitation of existing projects, including the preservation of affordable housing,
require review of additional documents not applicable to new construction. Typical items requested are described below.

1. Statement of All Outstanding Obligations against the Property

2. Certification of Project Rent Roll executed by Owner

3. Current project rent roll. Rent roll must include unit number or identification, tenant’s name, unit type,
monthly rent subsidies (if applicable), rent controlled or rent stabilized (if applicable), concessions, re-
bates or discounts given to tenant, furnished or unfurnished status, lease commencement date, lease
expiration date, arrearages owed by tenant, (if any,) and amount of security deposit(s) held.

4. The actual Income and Expense Statements on the Property for the current year-to-date, and the year-end
statements for the previous three (3) years (certified by the borrower). In addition, subsequent monthly year-
to-date statements must be submitted each month no later than the tenth day of the following month while the
loan request is in processing. Also, if any major capital improvements have been made to the Property within
the past three (3) years, and the costs are included in the operating statement(s) as expense items, provide
a break-out of said cost(s) and item(s). (Example: new roof, new heating system, replacement of appliances,
replacement of carpet, etc.)

5. Historical occupancy and rent roll information

6. Statement(s) indicating what costs, (if any,) are shared with other properties

7. Copies of all service contracts

8. Copies of laundry leases

9. If there are Commercial Leases within or associated with the Property, provide the following:
a. Complete copies (with all amendments) of all Commercial Leases;
b. Commercial Tenant’s Estoppel Certificates.

10. Personal Property Certification. borrower

Statement of All Outstanding Obligations Against the Property

The borrower must provide a written statement describing all obligations, such as existing mortgage debt, other loans, liens,
ground leases or equity obligations related to the property. The purpose of this statement is to determine whether there are
adequate resources to satisfy such obligations, particularly those that must be satisfied at the closing of the financing. This also
helps in assessing the risk that any outstanding obligation could lead to the lender or equity provider being unable to recover

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their investment. It is important that the borrower fully dis- the underwriter will compare the current and historical to
close all obligations with enough detail, so the proper anal- the borrower’s projections, and ultimately evaluate the
ysis and conclusions are reached regarding each obligation, ability of the project to support the new funding obliga-
and the project can successfully proceed to closing. tions. Combined with the rent roll information, the under-
writer will determine how the property has met all finan-
Certification of Project Rent Roll cial obligations in the past, and whether the proposed
The borrower must certify that the information provided in acquisition and rehabilitation will allow for any increase in
the current project rent roll is true and accurate to the best of income and/or reduction in expenses. Major differences
their knowledge, thus taking responsibility for the informa- between historical and current statements and projec-
tion represented in the rent roll. Therefore, prior to submis- tions will need to be addressed. For example, if projected
sion, the borrower should review the rent roll with property maintenance costs are significantly higher or lower than
management to understand the information and be pre- the historical costs, the borrower may be asked to provide
pared to address any questions raised by the underwriter. a written explanation and supporting documentation.

Current Project Rent Roll Historical Occupancy and Rent Roll Information
The borrower must provide a current rent roll to understand Current operations may not present an accurate picture of
how the project is currently operating in terms of occupan- typical operations. For example, current vacancy may be
cy and rates. The rent roll should include the following: higher than typical if the property manager is holding open
• Tenant name units for tenants displaced from their homes due to rehabil-
• Unit number itation. Therefore, the borrower will provide historical occu-
• Unit Type pancy and rent roll information, ranging from the previous 12
• Rental Rate months to 36 months. This will provide a more accurate pic-
• Amount paid by tenant and amount paid by rental ture of normal operations and serve as an indicator for future
subsidy (if applicable) operations. For example, if historical information shows that
• Information on concessions property generally operates at 98% occupancy, it will likely
• Lease beginning and expiration date continue to operate at that level of occupancy going for-
• Security deposits held ward. If history shows extended periods of low occupancy
(below 90%), that may signal issues with previous manage-
The borrower should also attach a tenant delinquency ment or the market; the underwriter may ask the borrower
report broken down into 30-, 60- and 90plus-day delin- and management company to address these issues and con-
quencies to present a snapshot of current operations. This sider when writing the property management plan.
will help determine any issues that must be addressed by
property management going forward. Further, this infor- Statement(s) Indicating Shared Costs with Other
mation helps the underwriter understand how occupancy Properties
will be managed during construction, such as how tenants It is not uncommon for costs to be shared among properties
will shift during construction, whether existing tenants will managed by the same company, particularly when the prop-
meet income qualifications for the development, and if any erties are in close proximity to each other. For example, prop-
tenants will need to be relocated from the project. erties may share a property manager, maintenance staff, or
service contracts. Statements describing these arrangements
Actual income and expense statements for current year- will further aid the underwriter in understanding the income
to-date and year-end for the previous three (3) years and expense statements as well as projections. For example,
In addition to the rent rolls, the income statements serve it may be that properties are sharing a property manager cur-
as a key indicator of future operations. Key figures consid- rently, but that may not be the case going forward. Or, it could
ered by underwriters are utilities, salaries, maintenance be that an existing maintenance contract on another property
costs (materials and contracted maintenance), taxes, in- will be extended to the acquired property without additional
surance, and deposits into reserve accounts. In the end, cost, resulting in lower operating expenses.

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 Copies of All Service Contracts amendments. The estoppel certificate is also important
Expenses such as pest control, lawn care, and equipment as a legally binding document making certain representa-
are often governed by service contracts. The terms of the tions regarding the lease, such as:
service contract should support expenses reflected in the
• When the lease started and expires
income and expense statements and the underwriter may
ask the borrower to explain any differences. For example, • Terms of renewals and extensions
the underwriter may request an explanation if the actual • Rental rate and remaining amounts to be paid
pest control expense on the year-to-date income state- under the lease
ment reflects an amount above the monthly amount in the • Deposits/escrows collected and how they can
contract, or if the projections show a lower amount for be used
pest control than the current contract. • If there were any defaults on obligations of the lease
by any party
Copies of Laundry Leases
A common practice is for properties to lease laundry • Names and contacts of the parties to the lease
equipment for their laundry facilities. The obligations un- The estoppel certificate functions as a promise of the
der such leases must be subordinated to the mortgage borrower to the lender and/or investor regarding the terms
debt and/or equity obligations to ensure that the mort- of the lease and prevents the borrower from later claiming
gagee’s or investor’s interests always supersede those of a different set of facts. The borrower must confirm that the
the equipment lessor’s (i.e., in the event of default, reve- information in the certificate is true, accurate and consistent
nue will go first to satisfy financial obligations under the with the language of the lease. The underwriter may ask the
financing agreements). borrower to explain any material differences between the
terms of the lease and those in the estoppel certificate.
Copies of Commercial Leases
If there are commercial spaces in the property contrib-
uting to income, those leases must be provided with all

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Personal Property Certificates
There may be some personal property to be transferred to the new owner as part of the transaction, such as maintenance
equipment and artwork, the value of which may be included in the acquisition price. The personal property certificate(s)
provides information the underwriter may use to determine the reasonableness of the acquisition price.

Financial Information

1. Current signed financial statements of borrower entity and each Principal, General Partner, General
Contractor and Credit Enhancer or Guarantor.

2. Most recent two years’ tax returns for borrower entity; all Principals, General Partners, General Contractor
and Credit Enhancer or Guarantor, with all supporting notes and schedules.

3. Schedules of Real Estate Owned and Contingent Liabilities certified as complete and accurate by the
party whose finances are summarized by the statement.

4. Monthly income and operating expense projections until stabilization, showing absorption, occupancy
analysis, and supporting terms and conditions for interest reserve calculations and operating reserves.

5. Fifteen-year income and expense pro forma (detail operating expense items).

6. For tax exempt developments, commitment letter from placement agency outlining terms of financing
requested. If credit enhanced, commitment letter from Credit Enhancer including Credit Enhancer’s
resume with references.

7. Commitment letters for all financing, including first mortgage loan, tax credit equity and secondary financing.

8. If a refinance, the mortgage loan payment record for the past three (3) years.

9. Detailed Sources and Uses of Funds Statement.

10. Section 8 HAP Contract (if applicable).

Current Signed Financial Statements

All of the major players must provide financial statements. Audited financial statements as well as current income and expense
statements, signed or certified, are generally required. If any entities are formed for the purpose of the transaction, the finan-
cial statements of the principals will be evaluated in lieu of the new entities. The underwriter evaluates the financial position of
each party, and the collective ability of the parties to guarantee completion of the project and ongoing financial obligations.
For example, a general contractor with weak finances may pose an unacceptable risk to the project, in terms of its ability to pay
employees and subcontractors (which results in risks of liens) or maintain proper insurance. A guarantor will need to demon-
strate adequate liquidity to meet financial obligations should the borrower default. The underwriter may request multiple years
of financial statements to demonstrate stability of financial position.

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 Most Recent Two Year’s Tax Returns the market analysis. These projections will affect such things
Similar to financial statements, the tax returns will demon- as the amounts required to be deposited into an operating
strate stability of financial position for the major actors in reserve, required lease-up reserves, and interest reserves.
the development. Submission of tax returns also demon- This information will also help determine when a project is
strates that each party is properly filing tax returns, and deemed fully qualified for tax benefits (credits and bonds),
there is little risk of penalties from the Internal Revenue which in turn affects the anticipated timing of conversion of
Service. Further, tax returns should be consistent with fi- construction to permanent financing, and the timing and
nancial statements. If two years of filed tax returns are not amounts of capital contributions from tax credit equity. Pro-
available, then two years of tax returns plus evidence of jections that are too aggressive or conservative may be ques-
an extension for the current tax return will be requested. tioned by the underwriter and may also negatively impact
the financial health of the project.
Schedule of Real Estate Owned
A schedule of real estate owned is required of the borrower Fifteen Year Operating Pro Forma
entity, its principals, general partner or managing member. The minimum compliance period for most funding is 15
The schedule will generally contain the name of the prop- years. Therefore, the underwriter will typically require a 15-
erty, location, type of property, number of units, the party’s year operating pro forma to demonstrate that the project
ownership interest, current occupancy and description will have the ability to meet financial obligations over the first
of financing. This schedule will show each party’s experi- 15 years of operation. These obligations include hard mort-
ence (or lack thereof) with the type of property that is the gage debt, soft debt (i.e., those requiring interest only and/
proposed for financing, and the strengths or weaknesses or regular compliance fees), required replacement reserve
of the properties associated with that party. Any potential deposits, and deferred developer fees. As a rule of thumb,
issues with experience or current state of the real estate incomes reflect increases of 2% per year, while expenses
owned will need to be addressed with the underwriter. The are projected to increase 3% per year. The underwriter is
underwriter may also require the party to sign and certify generally looking for a debt service coverage ratio (DSCR)
the accuracy of the information on this schedule. of at least 1.15 (where DSCR equals Net Operating Income
÷ Must-Pay Debt) or, if no debt, an income to expense ratio
Schedule of Contingent Liabilities of 1.10 (generally, all revenue sources ÷ all expenses). The
The disclosure of contingent liabilities provides the un- property should demonstrate these ratios throughout the
derwriter information regarding the amounts and likeli- entire period; if desired ratios are not met, the underwriter
hood of financial obligations associated with each party. may require adjustments to the projections. If the 15-year
Similar to the schedule of real estate owned, this schedule operating pro indicates that a project is over-subsidized, the
will name a property, the party’s ownership interest, the project may need to reduce rents or use less public subsidy.
terms of financing, and current balances of liabilities. This
information will be compared with financial statements to Commitment Letters
determine if the borrower can take on new financial obli- All financing commitments must be supported by commit-
gations resulting from the transaction at hand. ment letters from the funders, including the amounts and
terms of financing. These figures should be accurately re-
Monthly Income and Expense Projections Through flected in the sources and uses, and operating pro formas.
Stabilization
The underwriter will require the borrower to address any
Income and expense projections forecast how the property
differences between the commitment letters and budgets.
is expected to operate month by month during the first year
of operations following construction completion through Mortgage Loan Payment Record
project stabilization (i.e., when the project meets defined When financing will be used to refinance or pay off exist-
performance measures of occupancy, income and expenses ing debt, the underwriter will require documentation of
for at least three consecutive months). The borrower should the current mortgage balance and payment record. This
make sure these projections are realistic based on previous information should be consistent with that in financial state-
experience, historical operations (if an existing project), and

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ments and tax returns. An inconsistent payment record may who is authorized to lease apartment units to residents to
be cause for concern, particularly in refinancing that does be thoroughly familiar with each federal and state law,
not involve new ownership or management. When there rule, or regulation governing tenant income certification,
are debt payoffs, the underwriter will confirm adequate as well as any other project-specific demographic require-
proceeds to pay off the balance of the loan. The under- ments, and leasing procedures.
writer will also require that the borrower address any issues
Each RFA requires management company information.
revealed by the review of the mortgage payment record.
It is the responsibility of the credit underwriter to verify
Detailed Sources and Uses of Funds the experience stated in the RFA. Along with providing
The sources and uses of funds information will be re- a prior experience chart, the borrower must document
viewed to determine that the development budget in- that the management company has demonstrated experi-
cludes all reasonably expected and foreseen expenses, ence. A typical requirement is the management of at least
including whether expenses are accurately projected and two affordable rental properties (i.e., properties funded
supported by contractual documents where applicable, through an affordable housing program such as low-in-
such as construction contracts, architect contracts, com- come housing tax credits, tax exempt bonds, HOME,
mitment letters, loan agreements, fee schedules, etc. The SAIL, etc. Further, at least one of those properties must
detail will also be reviewed to help the underwriter con- consist of a total number of units no less than 50 percent
firm the adequacy of sources to cover all uses. Amounts of the total number of units proposed in the development.
of sources will also be compared with amounts listed in To be considered, each of the two previous projects must
commitment letters to ensure accuracy and the underwrit- have been operating for at least two years.
er will require the borrower to address any discrepancies
The Credit Underwriting Checklist related to property
or anticipated shortfalls in sources.
management typically requires the following:
Section 8 HAP Contract 1. Management agent’s resume and references, to
If the project is dependent on a Section 8 Housing Assis- include number of years in business, number and
tance Payment (HAP) contract, evidence of the contract location of other properties/units managed, and
must be provided, such as the actual contract showing brief resume of key principal
the amount of assistance and expiration date, or a letter 2. Executed Management Agreement, including doc-
from HUD demonstrating approval of the HAP contract umentation of program requirements; i.e., income
application and confirmation that the project will meet and rent restrictions
requirements of such approval. 3. Management Plan
4. Copy of standard tenant lease
Property Management Agent Information
The management company is the firm selected by the
owner to oversee the operation and management of the Management agent’s resume and references, to
include number of years in business, number and
development. The property management company also
location of other properties/units managed, and brief
accepts compliance responsibility. FHFC must approve resumes of key principals
management companies selected by owners to manage The management’s prior experience information must in-
developments participating in FHFC programs. The credit clude the name of each development, location, whether
underwriter conducts the evaluation to determine that the the company is currently managing the development or
property management company is qualified and experi- formerly, the length of time and the total number of units.
enced to manage the type of housing under consideration. Resumes should describe the timeframe of an engage-
It is the borrower’s responsibility to obtain from FHFC its ment or period of employment and specific duties should
approval of the management company – this requirement be described, particularly as they relate to experience re-
is in addition to the management company information quired for the proposed project.
provided by the credit underwriter. FHFC expects anyone

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 Executed Management Agreement, including In June of 2018, FHFC received recommendations from
documentation of program requirements; i.e., income the Low Barriers to Entry (LBE) workgroup created by the
and rent restrictions 2017 Affordable Housing Workgroup regarding lower-
The management agreement should conform to the ing barriers for extremely low-income households to
program requirements for compliance as well as detail the access rental housing in FHFC’s portfolio. The memo,
roles and responsibilities of the manager in the leasing, on- “Proposed Standards and Processes that Lower Barriers to
site supervision, maintenance, and reporting duties. The Rental Housing Entry” can be downloaded at http://www.
agreement should also define the specific demographic floridahousing.org/docs/default-source/programs/devel-
requirements of tenants including the income and rent opers-multifamily-programs/2018-2019-rfa-comments/
restrictions. proposed-standards-and-processes-that-lower-barriers-to-
rental-housing-entry.pdf?sfvrsn=2892317b_2
Management Plan
The Property Management Plan is a key factor in the Copy of Standard Tenant Lease
successful and sustainable operation of affordable housing. Generally, the standard leases provided by the Florida
The Management Plan defines the governing framework of Bar or the Florida Association of Realtors are acceptable
the property and sets forth the policies and procedures to for credit underwriting. Additional provisions may be re-
be used by management staff including leasing, support quired if rental assistance was indicated in the financing
service coordination, maintenance, and compliance with application and the rental assistance agreement will be
the Regulatory Agreement and any other financing condi- requested as well.
tions. A separate Management Plan should be provided
for each property in the portfolio.

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Construction Information
Typical construction information required includes:

1. Detailed project cost breakdown highlighting breakout of hard construction costs (including
contingencies, general requirements, and all overhead and profit figures) and soft costs.

2. Proposed construction contract and general contractor’s license

3. Resume, banking and trade references (include bonding company) on the general contractor, including
a description of experience in the development of multifamily properties

4. Signed credit authorization form for general contractor (form provided by credit underwriter)

5. Copy of architect’s contract, current license, and resume which list experience with this type of
development (Executed contract required prior to loan closing)

6. Copy of engineering contract, current License, and resume which list experience with this type of
development (Executed contract required prior to loan closing)

7. Construction draw schedule (for loan programs)

8. Termite inspection report and/or a termite bond (or other acceptable evidence of damage/repair coverage

Detailed Project Cost Breakdown view the contract to ensure it contains a clear schedule of
The project cost detail information should be covered in values, inclusions and exclusions, references to the archi-
the Sources and Uses described above. The information tectural drawings and specifications, and change order
should clearly delineate between land/acquisition, hard procedures, and includes in the price the construction of
(construction) costs, and soft costs. The breakdown of all required features, amenities and items from the con-
costs should also be consistent with contracts and meet the struction needs assessments and plan/cost reviews. Gen-
requirements of financing, such as required percentages erally, the maximum general contractor fee for overhead
for hard and soft cost contingencies, general requirements and profit is 14% of the construction budget.
and overhead for the contractor, developer fee amounts as
a percentage of development costs, and required depos- Contractor’s Credentials
its into reserve accounts. Generally, required amounts for The intent of this requirement is to determine the contrac-
operating and replacement reserves are provided by the tor’s qualifications to complete the project both in terms of
underwriter and dictated by the funding source. Howev- its legal standing to do the work (licensure) as well as prior
er, other reserves, such as lease-up and interest reserves, experience with the project type proposed. Therefore,
should be supported by construction and lease-up sched- the underwriter will request a copy of the license show-
ules and loan documents. Generally, the maximum amount ing that it is active, the business resume of the contractor
of soft cost contingency is 5% of total soft costs. for general experience, banking and trade references to
demonstrate the contractor has a good reputation with
Construction Contract vendors, and an experience chart with the contractor’s
The construction contract should be a standard, AIA direct experience with the project type (multifamily, mid-
(American Institute of Architects) contract, with a guaran- rise, high-rise, etc.), with specific interest in affordable
teed maximum price. The underwriter will generally re- housing experience.

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 Credit Authorization for the Contractor Architect/Engineer Insurance Requirements
The credit underwriter will require the contractor to pro- Appropriate insurance for the architect and engineer is
vide authorization for a credit check in addition to check- required. If the engineer contracts with the architect, the
ing references to form a complete background check. underwriter will request a copy of this agreement.
The credit underwriter will provide the authorization form
to be signed by the contractor. Construction Draw Schedule
In addition to the sources and uses, the underwriter must
Architect’s Contract understand how capital is anticipated to flow to the proj-
Similar to the construction contract, this should also be a ect starting from loan closing through project stabiliza-
standard AIA contract. The scope of work should be clear, tion. As there are likely various sources involved, each
particularly regarding approval of change orders, and with its own requirements in terms of timing and use, the
price of services. Also, because the architect will be re- underwriter will review the draw schedule to determine
quired to sign off on all draw requests, the contract should that all sources are timed and used appropriately to meet
include provisions for inspections by the architect period- funding requirements and keep the project in balance.
ically throughout construction. The draw schedule will be updated with each draw re-
quest as the project proceeds, mainly due to increases or
Architect’s Credentials decreases in budget.
Also, just as with the general contractor, the architect
must possess an active license, and the architect’s resume Termite Inspection Report
should demonstrate experience working on the develop- Termites are a particular issue in Florida; therefore, existing
ment type proposed. buildings (in the case of acquisition and rehabilitation) re-
quire termite inspections, as their presence could lead to
Engineer’s Contract safety issues due to compromised structures. Therefore,
In most cases, the architect will contract with an engi- if found, termites must be eradicated, and any structural
neer; however, there may be cases where the borrower issues addressed as part of the rehabilitation.
will contract directly with an engineer or engineers for
specific aspects of a project. This scope of work should
be well-defined, including approval authority of the engi-
neer on work completed and design changes. The price
of services should also be clear. The underwriter will need
to understand this contract and expect that the borrower
will follow the procedures outlined in the contract.

Engineer’s Credentials
As with the general contractor and architect, the engineer
must possess the proper active license, and the engi-
neer’s resume should demonstrate experience working
on the development type proposed.

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Appendix A
Additional Information on Required 3rd Party Reports
Survey value of the property. For purposes of obtaining financ-
The surveyor should provide the following information on ing for a development, the credit underwriter expects the
the site: purchase price to be consistent with appraised values. The
• Boundaries appraisal considers the market rate rental income the prop-
• Legal description erty could garner, the land value, and the value as a property
• Encumbrances with restricted rents.
• Easements
Land Use and Zoning
• Structures Florida real properties may have a basic zoning category
• Access that would allow the development of rental housing, but
• Right of way a planned unit development zoning request might be
• Elevation (flood or wind zone) more compatible with the specific requirements of the
site. This process takes time and there are fees. Property
Appraisal – Informal that is not zoned for residential uses may be problematic.
The informal appraisal can give a general idea of the current In these cases, it is best to seek guidance from the planning
value and that of comparable properties. The informal department and request that the City or County conduct
appraisal helps in making the “go or no-go” decision. the rezoning on behalf of the project.
• Comparative analysis of similar properties
Environmental Review
• General market for similar properties — how long
on market, price reductions Not every project is subject to a full environmental review
(i.e., every project’s environmental impact must be
• Value of vacant and unimproved land
examined, but the extent of this examination varies), but
every project must be in compliance with the National
Appraisal – Formal
Environmental Protection Act and other related Federal
It is likely that the credit underwriter will require a specific
and state environmental laws. Mitigation may be required
type of appraisal. Credit underwriters for Florida Housing
for protected habitat, wetlands or species. Projects that will
Finance Corporation order the appraisal and the develop-
negatively impact properties that have historical or archae-
er must pay the fees involved. Once the appraisal is com-
ological significance may not be permitted or there may be
pleted, it is important to discuss the findings in the report
mitigation requirements. The purchase contract should
with the appraiser so proper decisions can be made. The
have an exit if the site has significant environmental issues.
formal appraisal will provide the following:
• Market overview A Limited Due Diligence: Transaction Screen Process (TSP)
• Improvement analysis report should be initially provided. The work must be in accor-
• Highest and best use analysis dance with the American Society for Testing and Materials
(ASTM) designation E-1528-06.
• Marketability and exposure period
The formal appraisal valuation procedures result in a set of Negative Site Features
valuations for the property ranging from undeveloped, to Proposed sites that are adjacent to or in the vicinity of
developed with or without long term affordability restric- certain negative land uses may not be a desirable location
tions. Affordable housing subsidies will result in long term or for affordable housing. The criteria below are suggested
permanent affordability requirements that affect the market

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 for consideration: development of the project. Full architectural drawings
are costly and should not be undertaken until funding has
• Junkyards – not adjacent or within 300 feet
been awarded and the project is in the underwriting stage.
• Railroad tracks – not adjacent or within 3,000 feet
Access and Egress
• Interstate Highways – not adjacent or within 1,000 feet
The entry and exit points to a property should be consid-
• Heavy industrial uses – not adjacent or within 300 feet ered with regard to traffic safety as well as safety of
• Solid waste or sanitary landfill – not adjacent or pedestrians who come and go from the property. Projects
within 300 feet on a busy road will require protective fencing and signage
• High voltage transmission power lines – not adjacent to protect residents.
of within 100 feet
Lot Coverage
Hazardous Materials Most zoning ordinances have maximum lot coverage ra-
Any pre-1978 buildings must be inspected for the presence tios of built to open space. This can be a barrier if the pro-
of lead-based paint and for pre-1989 buildings for asbestos. posed project is multiple buildings or the building size
If the project moves forward remediation will be required by required exceeds the lot coverage ratio, so the developer
licensed, certified hazardous materials professionals. should inquire to determine if relief is offered through the
local government’s SHIP LHAP (Local Housing Assistance
Flood Elevation Plan) or Housing Element.
The prospective applicant should determine the eleva-
tion of the site and if it is within a 100-year flood zone or Storm Water Retention
a wind velocity zone. Generally funding will not be ap- Many land development codes require storm water runoff
proved for projects within the 100-year floodplain. Since to be retained on site. If the engineer determines that there
the maps are updated from time to time it is important is inadequate space on a site to handle the retention areas,
to check with the most current map. Projects within the an alternative methodology may be required. A site with a
500-year floodplain can generally be approved. Flood low elevation that collects water may need to be rejected if
and wind insurance will be required as well as advanced there is inadequate space for the excess water or if the site
disaster preparedness. is in a flood hazard area.

Soil Testing Utility Access

Soil testing can reveal conditions that will adversely impact The existence of utilities at the site must be documented
the budget or engineering of the site. The presence of when responding to the RFA process of FHFC. The re-
dense material (rock) under the surface can require fund- quirements include electricity, water, sewer, and roads. If
ing to remove it. Sandy soils may not drain properly and any of these are not available to the site an inquiry should
can require additional engineering expenses to correct. be made as to the estimated cost to bring this infrastruc-
ture to the site. It is also important to check with the cap-
Site Planning Sketches ital improvements plan of the municipality to learn if and
Site plan approval is required by FHFC in the Request for when these improvements might be provided to the site.
Application process. This is a threshold item. Site plan-
ning is not the same as architectural drawings for the

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APPENDIX B
Guidelines for Local Government
Timing of Review • Planning Staff – ensure the proposal can be exe-
Generally, the timing of review should allow for a thorough cuted under the zoning code and comprehensive
assessment and meet any program guidelines or require- plan; or if changes and amendments are needed
ments. The timing of review is important for several reasons, • Building Department – determine the proper per-
both to the reviewer and proposer. The main reason for spe- mits needed and that the cost and timing of such
cial attention to timing relates to funding sources. Most local are accurately represented in the proposal
sources of funding have expenditure deadlines, such as SHIP • Economic Development – determine that the pro-
with its two-year expenditure requirements. Further, in many posal supports economic development plans
cases, preliminary approval for local funding is sought prior
• Legal – determine legal use, consistency with pro-
to applying for larger sources of funding through state and gram rules, and involved with drafting and negotiat-
local housing finance authorities, such as low-income hous- ing legal documents related to funding awards
ing tax credits and mortgage revenue bonds. Therefore, the
decision on when to accept applications and length of time Site Evaluation
for review should be made in context with: The following lists outline elements of evaluating the site of the
• SHIP expenditure requirements proposal and will involve several members of the review team.
• Florida Housing Finance Corporation RFA timelines Housing, Economic and Social Services Focus
• Other local funding expenditure requirements (fed- • Location of proposed development
eral entitlements such as HOME and CDBG, infra- • Desirability of neighborhood (considering access
structure surtax, etc.) to jobs, transportation, schools, shopping, health-
care, access to other service providers)
The timing of review should also take into consideration internal • Location within geography for local initiatives
processes, as well as (to the extent possible) application-specific • Location in relation to similar developments
issues such as closing deadlines in purchase and sale agree-
Planning and Building Focus
ments, and financing commitment letters already obtained.
• Proper zoning and future land use
The Review Team • Adequate utilities
Reviewing applications should involve a team of individuals • Other infrastructure needs, such as road
providing input on various parts and issues within a proposal. improvements and sidewalks
The result of the review should be an overall determination • Required permits, such as environmental
• Impact fees that must be paid
of a project’s ability to proceed and meet funding require-
• Other planning/zoning costs
ments. The phrase “ability to proceed” or “project readiness”
addresses the question: if the project received funding today, Environmental Focus
would it be able to proceed to construction tomorrow? • Previous and current use
• Existing buildings/structures (age, type, will they
Potential members of the review team include: be demolished or incorporated)
• Housing Staff – the primary reviewers; determine the • Any environmental constraints (wetlands, endangered
proposal meets all funding requirements, meets local species, brownfields, hazardous materials)
requirements, and has the ability to succeed with the Legal Focus
Florida Housing Finance Corporation RFA process • Confirm the Borrower has adequate site control
• Social Services Staff – review the proposed provi- • Confirm no issues with land ownership (title history,
sion of services; of particular importance to projects easements, encumbrances)
serving high-need populations • Confirm legal use is proposed

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 Project Feasibility Evaluation • Are other anticipated sources reasonable/probable?
The following lists outline elements of evaluating project • Are there commitments from other sources?
feasibility from the local government perspective. Operating Budget
Revenue Analysis:
Market Analysis
• Are rents in line with SHIP or other funding source
Complete an informal market analysis by:
requirements?
• Speaking with contacts and obtaining/analyzing • Are other sources of revenue reliable?
easily accessible market data (census data, other
Operating Expense Analysis:
market reports)
• Are operating expenses reasonable, considering
• Looking at occupancy of similar developments
the market analysis, appraisal, and knowledge of
• Observing the current condition and trajectory of
other developments?
the neighborhood of the proposed development
• Is Net Operating Income sufficient to meet
• Comparing the proposed development to like de-
reserves and debt service coverage requirements?
velopments (unit mix, amenities, location, etc.)
If a formal market study is already complete, focus on Borrower Evaluation
these key items: Evaluate threshold requirements:
• Anticipated absorption rate – how quickly the • Does the borrower meet minimum threshold
project can expect to lease up requirements of local funding?
• Market rents or sales prices – what the project can • Does the borrower meet minimum threshold
expect to demand requirements of other proposed funding sources?
Compare both to the borrower’s projections and deter- Evaluate staff capacity:
mine if they are reasonable • Does key staff have the qualifications needed to
carry out the project?
Financial Analysis • Does the organizational chart indicate additional
Development Budget staff and report chain for key contacts?
Evaluation of development budget should start with un- Evaluate Board capacity:
derstanding the uses of funds. Big items to examine in • Does the expertise of Board members augment
terms of uses: knowledge and skills of staff?
• Acquisition/land costs Evaluate the partnership/joint venture structure:
• Hard (construction) costs and contingencies • Understand split in ownership and/or division of
• Architectural design and supervision responsibilities
• Financing costs • Determine if it will facilitate effective execution of
• Permitting and zoning the project
• Insurance Evaluate financial capacity:
• Relocation (if acquisition/rehab) • Review audited financial statements and the auditor’s
• Reserves management letter to determine whether there are
• Developer fees1 stable finances with strong internal controls
Then moving on to examine the sources of funds, consid- • Review the current income statement and balance
erations include: sheet for strength and stability

• Are anticipated sources adequate to cover costs?

• What percentage of costs will local funding cover?

1 A Note on Developer Fees: Developer Fees are compensation to the developer for the time and risk involved to develop the project. The fee is based on the
type of project, the total cost and the risk associated with the project. Developer fees include all amounts received for project management and overhead, including
consulting fees. The maximum aggregated amount for developer and consultant fees are calculated as a percentage of total project costs excluding land, project
reserves, and the developer fee cost category (generally capped at 16% of project budget for family projects, 18% for special needs housing projects, and up to 21%
to allow for an operating reserve).

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APPENDIX C
Brief Guide to Financial Statements
Explanation of Selected Financial Statements to Determine Borrower Capacity
and Credit Worthiness
During the underwriting process the borrower will be asked to provide financial statements for review. This purpose is
to determine the financial capacity of the borrower. Results may determine the type of collateral that might be required
to secure the debt. Selected financial statements are reviewed below.

• Balance Sheet • Bank statements (for the past 6 months

• Audited Income and Expenses statement • Tax returns (for the past 3 years
• Statement of cash flows • Credit report (for example Experian Business
• Statement of contingent liabilities Credit Report) or business report from Dunn
and Bradstreet
• Real estate holdings

BASIC FORMULAS AND

STATEMENT QUESTIONS TO ANSWER
EXPLANATIONS

Balance Sheet What is the borrowers’ financial Assets – Liabilities = Net Worth
Assets include cash, capital and creditworthiness? Operating Capital = Current assets –
accounts receivable, How likely is the borrower to repay Current liabilities
investments, property, etc. the loan? Current ratio = Current assets/
Does the borrower have a positive current liabilities
Liabilities include accrued
expenses, notes payable, net worth? Debt to Equity Ratio = Total
Liabilities/Owners Equity
taxes due, etc. How liquid are their assets?
Liquid assets in the amount of 10%
The difference between Are there past due accounts?
of funding request is a general
assets and liabilities is net Does the borrower have sufficient standard.
worth (or equity). operating capital?

Audited Income and Does the borrower have a track Revenues – Expenses = Profit
Expense Statement record of generating sufficient and
Revenues include rental steady income to meet its financial
income and other income obligations?
How well do principals manage cash
Expenses include
to meet financial obligations?
operating expenses, taxes
Are borrowers’ future projections
In addition, the footnotes
logical and reasonable based on
to the financial statements historical trends?
disclose short-term
debt and contractual
obligations.

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 BASIC FORMULAS AND
STATEMENT QUESTIONS TO ANSWER
EXPLANATIONS

Bank Statements Do these documents confirm the A measure of cash on hand

numbers in the financial statements?

Cash Flow Statement The amount of net cash received Reports generated include operating
after expenses, debt service and activities within income statement,
taxes are excluded. as well as investing activities such as
purchase or sale of assets

Contingent Liabilities What potential liabilities could affect Statement should include:
Statement the borrowers’ capacity to carry out • Outstanding lawsuits
the project or repay the loan? • Claims against company not
acknowledged as debts
• Legal Liability
• Guarantees
• Disputed taxes

Real Estate Owned Do other real estate holdings Consider:

undermine the strength of the • Value
borrower or bolster it? • Contingent liabilities
• Liquidity

Tax Returns Does information on tax returns If these do not match, borrower
confirm numbers on financial should provide an explanation.
statements?

Credit Worthiness • Credit reports should be run on • Seek scores of 700+ and no
all principals bankruptcies in past
• Credit reports should be no • Check business credit history
more than 120 days through Dunn and Bradstreet
• Check public records for
bankruptcies and judgments

THE FIVE C’S OF CREDIT

1. Capacity: Cash to pay the loan as agreed
2. Capital: Borrower’s investment in the project
3. Collateral: Real estate and/or other assets and guarantees to pay the loan if project cannot
4. Character: Experience and track record of performance of borrower and its team
5. Compliance: Program compliance and the ability of the development team to meet all objectives

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APPENDIX D
Brief Guide to Selected Terms
The guide below provides an explanation of terms that may be used during the underwriting process. Basic formulas
are provided as needed.

TERMS EXPLANATION FORMULA (IF APPROPRIATE)

Annual The 15-year pro forma projects Annual operating expenses may be capped. A
Income & income and expenses on an annual typical amount may be between $3,600 and
Operating basis. Generally, income may be $3,900 per year per unit and up to $5,000
Expense
increased by 2% per year and per year per unit for units assisted with project-
Growth
expenses by 3% per year. based housing vouchers.

Collateral Property pledged as security for Collateral examples:

a debt. • Real property
• Personal property
• Debt service reserve
• Personal and/or corporate guarantee (need
to underwrite the guarantee source as
rigorously as property collateral)

Debt Service The periodic payments, generally principal and interest, on a loan. Debt service is usually
calculated on an annual basis.

Debt Service The relationship between Net NOI/DS = DSCR

Coverage Operating Income (NOI) and $100,000/90,000 = 1.11
Ratio (DSCR) Annual Debt Service. Generally,
or (DCR) $100,000/85,000 = 1.25
the acceptable DCR for affordable $100,000/75,000 = 1.33
housing projects is no less than
1.15 and no more than 1.3.

Intercreditor If there are multiple sources of financing, collateral and loan repayment guarantees,
Agreement lender may require agreement that establishes restrictions on subordinate lenders.

Loan to Value The relationship between the First Position Loans:

Ratio appraised value of the total project LTV = Loan Amount / Fair Market Value
and the loan. Generally, lenders will Example:
not exceed 100% of appraised value. LTV = $100,000 / $140,000 = 71%
Loan Amount = 80% = $112,000 / $140,000

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 TERMS EXPLANATION FORMULA (IF APPROPRIATE)

Loan Sizing The lender uses the lesser result of Standards Example:
(Two Methods): LTV or DCR methods LTV < 80% DCR < 1.25
Based on Loan Lenders use LTV based on real Example Using LTV:
to Value Ratio estate appraised value Appraised Value = $5,000,000
(LTV) LTV = 80%
Lenders use DCR to determine
Based on Debt amount available for debt services Maximum Loan Amount =
Coverage Ratio $5,000,000 x .80% = $4,000,000
(DCR) Example Using DCR:
NOI = $400,000
Maximum Loan Amount =
$400,000/1.25*12 = $3,722,000

Occupancy Percentage of currently rented O = Occupied Units O/T = R

Rate units in a project T = Total Units 95/100 = 95%
R = Occupancy Rate

Operating An account maintained to provide funds for general operations that may be required
Reserve to offset a gap in revenue over expenses. Generally operating reserves should be
maintained to cover at least 3 months of debt service and operating costs.

Replacement An amount set aside from net operating income to pay for the eventual wearing out of
Reserve short-lived assets such as carpets, HVAC equipment, appliances, or roofing.

Reserve Fund An account maintained to provide New Construction Seniors: $250 per unit per year
funds for anticipated expenditures New Construction Other: $300 per unit per year
needed to maintain or operate a
Existing Buildings: Determined by Capital
building. A reserve may be required
Needs Assessment
by a lender in the form of escrow to
pay upcoming taxes and insurance.

Vacancy Rate Percentage of vacant units in a V = Vacant Units V/T = R

project. Pro Forma projection T = Total Units 7/100 = 7%
should use 7% R = Vacancy Rate

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APPENDIX E
Subsidy Layering
Projects financed with HOME funds must be evaluated in part by a subsidy layering test. Subsidy layering is required
by 24 CFR Part 92 to assure that Federal resources are neither duplicative nor wasteful when used for affordable rental
housing. Subsidy layering is a tool to use in making sure that the amount of public funds, in particular HOME funds, are
the least amount required. HUD establishes the amount of HOME funds that can be invested on a per unit basis. The
borrower is expected to “layer” funds committed to a project so that HOME funds are used only to fill a gap in sources
and that the amount of HOME investment does not exceed the maximum subsidy amount.

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NOTES
 ACCESS AN ELECTRONIC VERSION OF THE

Credit Underwriting Guide

FOR MULTI-FAMILY AFFORDABLE HOUSING IN FLORIDA
AND OTHER VALUABLE RESOURCES UNDER THE PUBLICATIONS TAB
ON THE FLORIDA HOUSING COALITION’S WEBSITE AT:
WWW.FLHOUSING.ORG