Texas Register
. A public comment period commenced
on September 27, 2002, and ended on October 25, 2002. In addition to publishing
the document in the
Texas Register
, a copy
was published on the Department’s web site and made available to the
public upon request. The Department held public hearings in Clint, New Braunfels,
Weslaco, Austin, Fort Worth, Wichita Falls, Pampa, Mount Pleasant, San Angelo,
and Liberty. A hearing scheduled for Galveston was canceled due to inclement
weather. In addition to comments received at the public hearings, the Department
received written comments.
The scope of the public comment concerning the Underwriting, Market Analysis,
Appraisal and Environmental Site Assessment Rules and Guidelines pertains
to the following sections:
SUMMARY OF COMMENTS RECEIVED UPON PUBLICATION OF THE PROPOSED RULES IN
THE
TEXAS REGISTER
AND COMMENTS PROVIDED AT
PUBLIC HEARINGS HELD BY THE DEPARTMENT ON ITEMS THAT RELATE DIRECTLY TO THE
UNDERWRITING, MARKET ANALYSIS, APPRAISAL, AND ENVIRONMENTAL SITE ASSESSMENT
RULES AND GUIDELINES
§1.31 General Provisions.
Comment: The Department may want to clarify how and when the Guidelines
can be changed and what public input process will be used prior to any changes.
Department Response: The public hearing process already prescribes how
this administrative code is changed. Staff does not recommend a change.
Board Response: Department response accepted.
§1.31(b)(7) Definition of Debt Coverage Ratio
Comment: Current language states, "A measure of the number of times loan
principal and interest are covered by net after tax income." §1.32(d)
refers to the Debt Coverage Ratio as being Net Operating Income divided by
debt service. This is a more accurate definition of Debt Coverage Ratio and
should be used in this §1.31(b)(7). The following language could be used:
"A measure of the number of times the required payments of loan principal
and interest are covered by Net Operating Income."
Department Response: Staff agrees the change should be made to maintain
consistency and the proposed language is recommended.
(7) DCR--Debt Coverage Ratio. Sometimes referred to as the "Debt Coverage"
or "Debt Service Coverage." A measure of the number of times the required
payments of loan principal and interest are covered by Net Operating Income.
Board Response: Department response accepted.
§1.31(b)(11) Definition of Local Amenities
Comment: Should the definition reference the location of the amenities
with respect to the Development? In other words, should it say something like:
"Amenities located near and available to the tenants of a proposed Development,
including but not limited to police and fire protection, transportation, healthcare,
retail, grocers, educational institutions, employment centers, parks, public
libraries, and entertainment centers."
Department Response: Staff agrees the change should be made and the proposed
language is recommended.
(11) Local Amenities-- Amenities located near and available to the tenants
of a proposed Development, including but not limited to police and fire protection,
transportation, healthcare, retail, grocers, educational institutions, employment
centers, parks, public libraries, and entertainment centers.
Board Response: Department response accepted.
§1.31(b)(16) Definition of Net Operating Income.
Comment: The calculation of NOI for bond-financed Developments should be
calculated using the same methodology as 9% LIHTC Developments. Applicants
should be required to identify and support which fees are "below-the-line",
fees not included by the principal lender or syndicator in their calculation
of NOI, in order to exclude the fee from the NOI calculation.
Department Response: Staff agrees that the same methodology should be used
in both bond-financed and 9% LIHTC developments. The discussion of operating
expenses in §1.32(d)(5)(A-J) is the Department’s attempt to standardize
the assumptions regarding fees and expenses. No change is recommended.
Board Response: Department response accepted.
§1.31(b)(23) Definition of Unstabilized Development
Comment: Current language states, "A Development that has not maintained
a 90% occupancy level for at least 12 consecutive months." Instead of using
a 90% standard, which may or may not indicate the actual financial stability
of the Development, should a reference to the defined term "Sustaining Occupancy"
be used? This definition could be revised to read: "A Development that has
not maintained Sustaining Occupancy for at least 12 consecutive months."
Department Response: Staff believes the proposed revision is too subjective
and the 90% standard for 12 months is a more objective way to measure stabilized
occupancy for all developments. No change is recommended.
Board Response: Department response accepted.
§1.31(b)(24) Definition of Utility Allowances.
Comment: The definition of utility costs needs to be as in prior years-using
the PHA that most closely represents the utility provider’s charges.
Harris County is twice the City of Houston cost which most closely represent
Reliant Energy’s data. In order to compete with project funds to deep
skew units, one could not develop in Harris County, outside Houston’s
city limits under the suggested language. Also, what happened to using utility
provider data for operations-seems to be prohibited by QAP which may violate
federal law. In the event of overlapping jurisdiction between local housing
authorities, the utility allowance for the building must be based on where
the Development property is located according to the Development’s legal
description unless (i) (in the case of county properties) if the property
is located within five miles of city limits, then the city allowances may
be used or (ii) if the service provider has submitted data showing costs,
then one must use the service provider’s data. (There is a HUD requirement
as to (ii).)
Department Response: While staff believes the draft definition is consistent
with the comment provided and the comment provided is significantly addressing
the QAP, the definition in this document should be consistent with that which
is proposed in the QAP. Therefore, staff recommends the following change:
(24) Utility Allowance(s)-The estimate of tenant-paid utilities, based
either on the most current HUD Form 52667, "Section 8, Existing Housing Allowance
for Tenant-Furnished Utilities and Other Services," provided by the appropriate
local Public Housing Authority consistent with the current QAP or a documented
estimate from the utility provider proposed in the Application. Documentation
from the local utility provider to support an alternative calculation can
be used to justify alternative Utility Allowance conclusions but must be specific
to the subject Development and consistent with the building plans provided.
Board Response: Department response accepted.
§1.32(a) General Provisions.
Comment: Current language states, "The Department, through the division
responsible for underwriting, produces or causes to be produced a Credit Underwriting
Analysis Report (the "Report") for every multifamily Development recommended
for funding through the Department." First, remove the word "multifamily"
because these Guidelines are supposed to apply to single family and multifamily
projects. Second, does the underwriting division really produce a report for
every Development recommended for funding? For instance, in the tax credit
program, Developments are recommended to be underwritten but are not necessarily
recommended to receive funding.
Department Response: Due to a staff error, the version of the 2003 Draft
Underwriting, Market Analysis, Appraisal, and Environmental Site Assessment
Rules and Guidelines included in the 9/12/2002 Board Book included the word
"multifamily" in inappropriate places. The version of the 2003 Draft Underwriting,
Market Analysis, Appraisal, and Environmental Site Assessment Rules and Guidelines
published in the
Texas Register
and on the
Department’s website subsequent to the 9/12/2002 board meeting does
not include the inappropriate uses of the word "multifamily."
Board Response: Department response accepted.
§1.32(b)(1)(and others) Use of the word "Principal"
Comment: Current language states, "principals of the Applicant." The word
"principals" is used from time to time throughout the Guidelines, but it is
not defined. Given the complex organizational structure of many of the Applicants,
the term "principal", without definition, could be interpreted in a variety
of ways. The Department has an interest in knowing who is going to own and
operate a Development. This includes not only the ownership entity itself
but all other entities and individuals on the organizational chart that own
or have the ability to control the ownership entity. If the Department is
going to require, on its Uniform Application, that each Applicant submit an
organizational chart for the ownership entity, then the "principals" might
be defined as every entity or individual on the organizational chart who has
the ability to control the Development owner, either directly or indirectly.
This should exclude, however, intervening entities in multi-layer ownership
structures. This gets the Department to its ultimate goal while reducing the
paperwork burden for the Applicant. Please review the use of the word "principals"
throughout the Guidelines, considering who the Department wants to identify,
and create some sort of appropriate definition for this term so that we do
not have to address interpretive issues of who is a "principal."
Department Response: Staff agrees that a definition of Principal would
be a good idea. However, staff does not recommend adding a definition of the
word "Principal" to this subchapter. As §1.32(b) states, "Many of the
terms used in this subchapter are defined in 10TAC §§49 and 50 of
this title (the Department’s Low Income Housing Tax Credit Program Qualified
Allocation Plan and Rules, known as the "QAP")." Staff understands that the
proposed 2003 QAP includes a definition of the word "Principal." Therefore,
the definition included in the QAP would apply to this subchapter.
Board Response: Department response accepted.
§1.32(d)(1)(a) Market Rents.
Comment: Current language states, ". . .and determines if the adjustments
and conclusions made are reasoned and well documented." We believe this language
should be removed, as it gives the Department too much discretion. The Department
establishes a list of Market Analysts they deem to be qualified. The Department
requires the submission of the Market Study, and the Applicant pays a significant
fee to obtain it. The Department should rely on the Market Analyst's conclusions.
If the Department has serious concerns about a Market Analyst's work, then
it should remove the Market Analyst from its approved list. Otherwise, the
Development Owner should be entitled to rely on the Market Study it pays for,
and the Department should accept the Market Analyst's conclusions. This helps
the Department to avoid criticism for exercising discretion and creates a
more level playing field.
Department Response: Removal of the statement in question is not recommended.
Although the Department maintains a list of Approved Market Analysts, §1.33(c)(2)
clearly indicates that review of submitted market analyses is required in
order to maintain the List of Approved Market Analysts. In addition, it is
believed that even Approved Market Analysts are capable of making mistakes.
The Department must have the ability to have discretion in this regard to
avoid basing a funding recommendation on flawed analysis.
Board Response: Department response accepted.
§1.32(d)(4) Effective Gross Income and (5) Expenses.
Comment: Current language states, ". . . the Underwriter will maintain
and use its independent calculation . . . regardless of the characterization
of the Applicant's figure." If the Applicant's calculation is acceptable,
then the Applicant's figure should be used in all circumstances.
Department Response: While the suggestion might on the surface make intuitive
sense, following the suggestion will distort the Underwriter’s analysis
and cause it to appear to be inconsistent when comparing similarly-sized transactions
in the same general location in the same year. By maintaining the Underwriter’s
independently derived figure for comparison, other competing transactions
can more easily see that they have been treated in a consistent manner. Staff
does not recommend a change.
Board Response: Department response accepted.
§1.32(d)(5) Expenses.
Comment: In many instances, it is not appropriate to measure operating
costs on a per square foot basis. Costs may be more dependent on the number
of units than the number of square feet in those units.
Department Response: In many cases the opposite is also true; that is why
both methods, as identified in the Rules and Guidelines, are used. Staff does
not recommend a change.
Board Response: Department response accepted.
§1.32(d)(5)(a)(h) Operating Feasibility.
Comment: Because of the diversity in the kinds of Developments and the
locations of Developments, we do not believe the Department should analyze
operating expenses on a line item basis with a tolerance level for each. Rather,
an aggregate expense figure should be used and analyzed for tolerance.
Department Response: Staff agrees that there is diversity in the kinds
of Developments and the locations of Developments; that is why line by line
adjustment is the only way to fairly evaluate expenses. For example, the utility
cost for a Development with a central boiler is very different from one without,
yet if a Development with a central boiler is also tax-exempt, its operating
expenses may be lower overall compared to a similar Development without a
central boiler and no tax exemption. This difference could not be evaluated
without taking into account the individual line item expenses. Staff does
not recommend a change.
Board Response: Department response accepted.
§1.32(d)(5)(e) Utilities Expense (Gas & Electric).
Comment: Third sentence apparently refers to common area expenses but is
not specific.
Department Response: Staff agrees and, since no specific language was suggested
by the public, staff recommends inserting the phrase "…for utility expenses
attributable to common areas."
(e) Utilities Expense (Gas & Electric). Utilities Expense includes
all gas and electric energy expenses paid by the owner. It includes any pass-through
energy expense that is reflected in the unit rents. Historically, the lower
of an estimate based on 25.5% of the PHA local Utility Allowance or the TDHCA
Database or local IREM averages have been used as the most significant data
point for utility expenses attributable to common areas. The higher amount
may be used, however, if the current typical higher efficiency standard utility
equipment is not projected to be included in the Development upon completion
or if the higher estimate is more consistent with the Applicant’s projected
estimate. Also a lower or higher percentage of the PHA allowance may be used,
depending on the amount of common area, and adjustments will be made for utilities
typically paid by tenants that in the subject are owner-paid as determined
by the Underwriter. The underwriting tolerance level for this line item is
30%.
Board Response: Department response accepted.
§1.32(d)(5)(g) Insurance Expense.
Comment: Insurance at $0.16 seems too low.
Department Response: Staff agrees that $0.16 is low in the current market
for most Developments; however some Developers contrive to provide documentation
of blanket coverage with rates at or below this level. This figure was chosen
as a minimum level at which an Applicant’s estimate may be considered
reasonable without further documentation. Since no alternative recommendation
was made, staff does not recommend a change.
Board Response: Department response accepted.
§1.32(d)(5)(h) Property Tax.
Comment: Current language states, "For CHDO owned or controlled properties,
this documentation includes, at a minimum, evidence of the CHDO designation
from the State or local participating jurisdiction and a letter from the local
taxing authority recognizing that the Applicant is or will be considered eligible
for the property exemption." In the case of American Agape Foundation, Inc.
v. Travis Central Appraisal District, the court said that an Applicant for
an ad valorem tax exemption under the CHDO exemption is not required to show
its certificate of CHDO designation to be eligible for the exemption. The
statute (§11.182 of the Texas Tax Code) says that the organization owning
the property and applying for the exemption must be organized as a CHDO; it
does not say that the organization must be certified as a CHDO. Thus, where
an Applicant for a tax exemption met all of the requirements to be a CHDO
(including an affordable housing purpose, community representation on the
board of directors, etc.) but did not have a CHDO certificate, the Applicant
and its property were still eligible for the tax exemption because the Applicant
was organized as a CHDO. Given this case law, the Department should change
its documentation requirements with respect to the CHDO ad valorem tax exemption. §11.43
of the Texas Tax Code permits a CHDO that intends to acquire control of a
property to request a pre-determination of its eligibility for the ad valorem
tax exemption. This pre-determination letter from the appraisal district should
be sufficient for the Department’s underwriting purposes. The taxing
authorities themselves do not make determinations as to exemptions; that function
is within the realm of the appraisal district. Therefore, we recommend the
language of §1.32(d)(5)(h) be revised to read: "For CHDO owned or controlled
properties, this documentation includes, at a minimum, a letter from the local
appraisal district recognizing that the Applicant is or will be considered
eligible for the ad valorem tax exemption."
Department Response: Staff agrees and recommends the suggested language.
(h) Property Tax. Property Tax includes all real and personal property
taxes but not payroll taxes. The TDHCA Database is used to interpret a per
unit assessed value average for similar properties which is applied to the
actual current tax rate. The per unit assessed value is most often contained
within a range of $15,000 to $35,000 but may be higher or lower based upon
documentation from the local tax assessor. Location, size of the units, and
comparable assessed values also play a major role in evaluating this line
item expense. Property tax exemptions or proposed payment in lieu of taxes
(PILOT) must be documented as being reasonably achievable if they are to be
considered by the Underwriter. For Community Housing Development Organization
("CHDO") owned or controlled properties, this documentation includes, at a
minimum, a letter from the local appraisal district recognizing that the Applicant
is or will be considered eligible for the ad valorem tax exemption. The underwriting
tolerance level for this line item is 10%.
Board Response: Department response accepted.
§1.32(d)(5)(i) Reserves.
Comment: It is highly recommended that reserves for replacements, with
the possible exception of new construction for elderly tenants, be set at
minimum of $250 per unit. Most other states require at least $250 per unit
for replacement reserves and increasing the minimum reserve level is proactive
preservation of affordable housing.
Department Response: Staff supports and proposed this increase in the roundtable
discussions held this summer, but after considerable discussion, a consensus
was established to maintain the current NCHA $200 per unit standard which
is viewed as an adequate reserve amount.
Board Response: Department response accepted.
§1.32(d)(5)(j)(i) Supportive Services Expense.
Comment: If any supportive service expenses are subject to available cash
flow or otherwise "soft," they should not be included in expenses and Debt
Coverage Ratio.
Department Response: We also received recommendations during the summer
ad hoc sessions to continue to differentiate the way this issue is addressed
for 9% LIHTC and 4% LIHTC/bond-financed developments. For 9% LIHTC Developments,
the fee is shown above line as an operating expense. For 4% LIHTC/bond-financed
Developments the fee has been shown below line as a potentially "soft" cost.
Despite this ad hoc recommendation, staff recommends in the draft rules to
treat both types of transactions in the same manner. Where supportive services
are required due to a request for points or due to QAP requirements for bond
transactions, there is no provision that allows them only to be provided when
cash flow exists, thus they should not be treated as "soft." Staff recommends
no change.
Board Response: Department response accepted.
§1.32(d)(7)(a) Interest Rate.
Comment: Current language states, "The maximum rate that will be allowed
. . . " We all agree that predicting the permanent loan interest rate that
will be in effect once a Development is stabilized is difficult. But allowing
the Department to establish a cap on the permanent loan interest rate is problematic
as well. If an artificially low rate is dictated, projects will wind up with
fewer tax credits than they need and the numbers will not work. This section
indicates that the Department has historically used a certain average figure
for the interest rate cap, but it does not say over what period the average
is calculated or that this is definitely the figure that will be used.
Department Response: The purpose of the cap is to attempt to apply a fair
and consistent maximum rate for all transactions by surveying the market at
the time of application. Prescribing an absolute method of calculating this
maximum will give rise to many transactions being set to this artificial rate
rather than the actual market rate and thereby reduce the validity of the
underwriting. The last sentence of §1.32(d)(7)(a) states, "Historically
this maximum acceptable rate has been at or below the average rate for 30-year
US Treasury Bonds plus 400 basis points." Staff does not recommend a change.
Board Response: Department response accepted.
§1.32(d)(7)(c) Acceptable Debt Coverage Ratio Range.
Comment: Current language states, "The acceptable DCR range for all priority
or foreclosable lien financing plus the Department’s proposed financing
falls between a minimum of 1.10 to a maximum of 1.30." The language "priority
or foreclosable lien financing" is ambiguous. The debt service coverage ratio
should measure "hard" debt repayment obligations and not "soft" or cash flow
debt. Yet, a cash flow debt can still have a foreclosable lien. Therefore,
the language as written does not clearly state the Department’s intention.
Also, it should be clear that the debt service coverage ratio measures permanent
financing and not construction financing.
Department Response: Staff believes the "hard" and "soft" language suggested
is equally ambiguous. Staff recommends rewriting the sentence as follows:
(c) Acceptable Debt Coverage Ratio Range. The initial acceptable DCR range
for all debt associated with permanent priority liens that are foreclosable
as a result of nonpayment of a regularly scheduled amount plus the Department’s
proposed financing falls between a minimum of 1.10 to a maximum of 1.30. In
rare instances, such as for HOPE VI and USDA Rural Development transactions,
the minimum DCR may be less than 1.10 based upon documentation of acceptance
of such an acceptable DCR from the lender. If the DCR is less than the minimum,
a reduction in the debt service amount is recommended based upon the rates
and terms in the permanent loan commitment letter as long as they are within
the ranges in subparagraphs (a) and (b) of this paragraph. If the DCR is greater
than the maximum, an increase in the debt service amount is recommended based
upon the rates and terms in the permanent loan commitment letter as long as
they are within the ranges in subparagraphs (a) and (b) of this paragraph,
and the funding gap is reviewed to determine the continued need for Department
financing. When the funding gap is reduced no adjustments are made to the
level of Department financing unless there is an excess of financing, after
the need for deferral of any developer fee is eliminated. If the increase
in debt capacity provides excess sources of funds, the Underwriter adjusts
any Department grant funds to a loan, if possible, and/or adjusts the interest
rate of any Department loans upward until the DCR does not exceed the maximum
or up to the prevailing current market rate for similar conventional funding,
whichever occurs first. Where no Department grant or loan exists or the full
market interest rate for the Department’s loan has been accomplished,
the Underwriter increases the conventional debt amount until the DCR is reduced
to the maximum allowable. Any adjustments in debt service will become a condition
of the Report, however, future changes in income, expenses, rates, and terms
could allow additional adjustments to the final debt amount to be acceptable.
In a Tax Credit transaction, an excessive DCR could negatively affect the
amount of recommended tax credit, if based upon the Gap Method, more funds
are available than are necessary after all deferral of developer fee is reduced
to zero.
Board Response: Department response accepted.
§1.32(d)(7) Net Operating Income and Debt Service.
Comment: Current language states, "NOI is the difference between the EGI
and total operating expenses." This language is different from the language
defining NOI in §1.31(b)(16). If the definition in §1.31(b)(16)
is correct, then this sentence should be eliminated to avoid confusion. In
addition, current language states, "If the NOI figure provided by the Applicant
is within five percent of the NOI figure calculated by the Underwriter, the
Applicant’s figure is characterized as acceptable or reasonable in the
Report, however, for purposes of calculating the DCR the Underwriter will
maintain and use its independent calculation of NOI regardless of the characterization
of the Applicant’s figure. Only if the Applicant’s EGI, total
expenses, and NOI are each within five percent of the Underwriter’s
estimates and characterized as acceptable or reasonable in the Report will
the Applicant’s estimate of NOI be used to determine the acceptable
debt service amount." The first sentence implies that the Applicant’s
NOI figure cannot be used for the calculation of NOI under any circumstance.
Then the second sentence states that the Applicant’s NOI figure can
be used for the calculation of NOI under special conditions. The structure
of this paragraph could be more clearly set forth as follows: "The Underwriter
will review the Development’s proposed NOI and DCR and determine an
acceptable debt level for the Development. If the Applicant’s EGI, total
expenses, and NOI are each within five percent of the Underwriter’s
estimates, then the Applicant’s estimate of NOI will be used to determine
the acceptable debt level for the Development. Otherwise, the Underwriter’s
estimate of NOI will be used to determine the acceptable debt level for the
Development. The NOI figure provided by the Applicant must be within five
percent of the NOI figure calculated by the Underwriter to be considered acceptable
or reasonable in the Report."
Department Response: Staff agrees that the first sentence is inconsistent
with the definition of NOI and, therefore, it has been deleted from §1.32(d)(7).
Staff also agrees that the suggested language for the remainder of §1.32(d)(7)
provides for a clearer statement. However, the final sentence of the suggested
language is redundant. It is recommended that the current language is replaced
with the suggested language, save the final sentence.
(7) Net Operating Income and Debt Service. The Underwriter will review
the Development’s proposed NOI and DCR and determine an acceptable debt
level for the Development. If the Applicant’s EGI, total expenses, and
NOI are each within five percent of the Underwriter’s estimates, then
the Applicant’s estimate of NOI will be used to determine the acceptable
debt level for the Development. Otherwise, the Underwriter’s estimate
of NOI will be used to determine the acceptable debt level for the Development.
In addition to NOI, the interest rate, term, and Debt Coverage Ratio range
affect the determination of the acceptable debt service amount.
Board Response: Department response accepted
§1.32(d)(7) Long Term Feasibility (or §1.32(e)(7) Developer Fee
Limit)
Comment: Much comment was received on limiting to 50% the allowable amount
of deferred developer fees. The amount of developer fee allowed to be deferred
should be limited to 50% as in 2002 or at worst 60% and this should be added
back to the QAP. An interest rate, suggested as the long term AFR, must be
considered when calculating the ability of a Development to repay deferred
developer fees within 15 years. Otherwise, part of the developer fee may be
disallowed, causing a loss of eligible basis. We do not know of an attorney
who will opine to developer fee as eligible basis unless paid back within
13 years. All investors look to the developer fee for cost overruns or as
interest rate increase protection.
Department Response: Staff believes the 50% or 60% deferred developer fee
limit can be unnecessarily burdensome to large developments in major metropolitan
areas where the expense to income ratio may be low allowing for more potential
future cash flow. In such cases, 100% of the developer fee could be deferred
and be projected to be repaid in less than 10 years. Conversely, a small development
where the expense to income ratio is high might not be able to repay a 30%
deferral of developer fee within 15 years. Staff believes the evaluation of
the repayment capacity of a Development is a better measurement of infeasibility.
The 15-year, zero percent interest limits were established to provide maximum
flexibility and when staff proposed stiffer limits of ten years at AFR during
the summer discussion groups, they were widely discouraged. Staff feels that
several transactions, which passed the 50% deferred developer fee test in
2002, would have failed a 15-year at AFR test. Fundamentally, the Department’s
objective should not be to fail the potentially marginal transaction at this
stage, but rather to fail the extreme transaction. Staff recommends no change.
Board Response: Department response accepted.
§1.32(e)(1)(b) Identity of Interest Acquisitions.
Comment: Much public comment was submitted opposing the Department’s
approach to acquisition transactions involving an identity of interest. It
was suggested that current policy may be well-intentioned, but establishes
a tremendous disincentive for property owners to rehabilitate their projects
in a manner that make them more serviceable for tenants in the long term.
The current method is also viewed by some to be discriminatory. The Internal
Revenue Code, through its related party rules, already establishes a significant
restriction on the amount of profit that a property owner can achieve in an
acquisition transaction. These federal rules should be sufficient for the
Department. The Department should rely on a third party appraisal in making
its calculations and should not open itself up to the criticism that can come
with discretionary review. Since an appraisal is required for related party
transactions, then that should be the only item required and (i), (iii), and
(iv) should be eliminated. As currently drafted, this section allows the Department
to look at a variety of factors, some of which are entirely subjective, and
to establish its own acquisition costs figure. It can completely ignore the
calculations of a third party appraiser who has been designated as a qualified
professional by the Department. Why should the Department qualify the appraisers
if it is not going to rely on them? Identity of interest transfers should
be at reasonable market value, verified by an appraisal, either from a TDHCA
approved list of appraisers or ordered by TDHCA.
Department Response: This issue received the most comment and staff’s
position was clearly opposed by the participants in the ad hoc meetings held
this summer to discuss these rules. As opposed to providing a disincentive
for rehabilitation, this rule was drafted by staff to encourage funds to stay
in the Development and to maximize their use for rehabilitation. The rule
is intended to prevent existing owners from having the benefits of the seller
and of the purchaser in the same transaction and extracting equity from a
development in need of a cash infusion to maintain its affordability. The
State of Texas, through its legislation, QAP, and rule making process, has
established and is required to establish rules for the program that in many
instances are more restrictive than the minimum Internal Revenue Code requirements.
The Department does rely upon the third party appraisals that are provided
through the Applicant. The appraisal provides a maximum acceptable transfer
value amount. The Department hopes to avoid future potential criticism from
the public for over-subsidizing an affordable Development, which could lead
to a lack of future funding support from the public for all of the Department’s
programs. The factors that should additionally be taken into account to validate
funding needs of the redevelopment have been significantly clarified in the
draft rules and were written to provide standards for considerably more objectivity
than may have been perceived to exist in the past. An example of the effect
of this rule is as follows:An Applicant claims site acquisition costs of $2
million and submits an appraisal indicating a market value of $2 million.
However, the Applicant originally acquired the property for only $1.2 million.
During the period of control, the Applicant has expended an additional $300
thousand to make site improvements and $100 thousand in interest expense,
and has provided documentation verifying these costs. In addition, it is anticipated
they will pay $100 thousand in taxes on the profit from the transfer. The
transfer value utilized in the underwriting analysis would be the
Original Acquisition Cost ($1.2 million) + Holding Costs ($0.5 million)
= Transfer Value ($1.7 million)
Items that may be considered as holding costs include property taxes paid
on vacant land, capital improvements on the improved property, interest expense
and anticipated exit taxes. The example reflects an Applicant’s request
for $300 thousand in profit that would not be limited by the 15% developer
profit limit. If, however, the final development budget indicates more than
$300 thousand in deferred developer fees, there would be no effect on the
funding source recommendation amounts as the "excess" would be funded out
of cashflow from the operation of the Development and the Applicant is already
entitled to receive Development cashflow. Staff does not recommend a change.
Board Response: Department response accepted.
§1.32(e)(3) Site Work Costs.
Comment: We believe that analyzing a distinct category for site work costs
is not necessary. The underwriting process already establishes a maximum total
construction cost per square foot, and the site work is part of this figure.
Concern about eligible basis under the TAMS has been addressed. In the alternative,
if the Department believes that site work costs must be evaluated separately,
then the $7,500 threshold number should be increased significantly because
it is not realistic. A maximum guideline of $9,200 to $10,000 per unit is
suggested. In addition, historical data should be accepted as substantiation
for costs in excess of the maximum guideline in lieu of an engineer’s
cost certification in order to save developers money.
Department Response: While other direct construction costs of "sticks and
bricks" can be predicted across transactions using costing techniques, sitework
costs are Development specific and can and do vary widely. Moreover sitework
cost differences can make or break a Development and should be thoroughly
explored, especially when they are believed to be higher than typical. The
draft rule and this rule in prior years have intended to encourage an Applicant
who anticipates a higher than typical sitework cost to more thoroughly explore
this significant variable prior to application. The Department increased this
threshold from $6,500 per unit last year and $5,500 per unit the previous
year. The actual average budgeted amount for 2002 applications underwritten
was $5,897 per unit for new construction Developments. Therefore, the 15%
increase in the draft rule to $7,500 should provide ample cushion for a typical
Development. Staff does not recommend a change.
Board Response: Department response accepted.
§1.32(e)(4)(a) New Construction.
Comment: Direct Construction Cost use of Marshall and Swift Residential
Cost Handbook has proven to be an inaccurate technique for estimating cost
around the state of Texas. The Marshall and Swift Residential Cost Handbook
generally reflects the cost of construction in smaller communities as less
than that in larger cities. However, cost associated with Developments contemplated
in the LIHTC applications are of a larger scale than those in the Handbook
and will require much of the labor and material to be imported to areas outside
the major metropolitan areas of the state. As a result, the use of the Marshall
and Swift Residential Cost Handbook places an unfair disadvantage on Developments
in rural communities that are not in close proximity to a major city. Instead
use the Marshall and Swift Cost Guide (Brown Book) to estimate cost in major
cities of Texas and add cost factor for each 100 miles from the central business
district. (i.e., 1-100 = 0%; 100-200 = 5%; 201-300 = 10%; 301-400 = 15%).
An alternative may be to use existing LIHTC production cost, both 4% and 9%,
by region, taken from final cost certifications of prior year’s allocations
indexed accordingly.
Department Response: While no cost estimating technique is going to be
capable of perfectly predicting the final actual costs of a development, the
Marshall and Swift methods employed by the Department have historically provided
reasonably fair and accurate cost estimates. The accuracy of the Department’s
methodology is most significantly impacted by the timing of the Development
as it predicts costs as if they have just occurred rather than to occur in
nine to 18 months in the future. Both the Marshall Valuation Services book
(Brown Book) and the Residential Cost Handbook (Black Book) are employed by
the Department and both emphasize the use of local multipliers which tend
to be lower for the smaller communities. This is not always the case as Austin
and San Antonio are currently reflecting multipliers that are less than those
in Longview, Beaumont and Abilene according to both books. The Department
generally emphasizes the use of the Black Book because it provides for a slightly
more detailed, yet simple and consistent, approach specifically tailored to
housing development, while the Brown Book covers more generally all types
of commercial development. While it is a long term goal of the underwriting
division to more effectively utilize the final cost certification information
available in identifying additional trends and anomalies to consider in the
Marshall and Swift-based methodology, there is insufficient volume of cost
certified transactions to base the entire costing methodology exclusively
on recent cost certifications. The use of a distance adjuster as proposed
would require significantly more detail as a proposal in regards to which
major cities would be used for what areas and then may still be considered
more arbitrary and artificial than the current Marshall and Swift methodologies.
No change is recommended.
Board Response: Department response accepted.
§1.32(e)(4)(a) New Construction.
Comment: The direct construction cost of providing gas utilities is higher
than the cost for providing only electric. This difference in costs should
be considered.
Department Response: This difference is difficult to measure except on
a case-by-case basis, but would be accepted as established through third party
documentation provided by the Applicant indicating the unique local factors
that affect gas and electric utility installation and access. Without specific
knowledge of extraordinary local differences, the general differences between
the cost of gas versus electric amount to less than 1% of the total development
budget and, therefore, are well within the Department’s 5% tolerance
level. No change is recommended.
Board Response: Department response accepted.
§1.32(e)(9) Reserves.
Comment: It is highly recommended that TDHCA underwrite Development reserves
at a minimum of three months of stabilized operating expenses including replacement
reserves and management fees. Furthermore, TDHCA should allow Applicants to
submit an amount of Development reserves in excess of three months worth so
long as the Applicant submits an affidavit that there will be no provisions
for the release of those reserves to the Applicant, Developer or its affiliates
during the compliance period except to meet valid operating deficits or debt
service payments as determined by the lender or syndicator, as applicable.
However, another comment indicated operating reserves should not be required
at the time of stabilization.
Department Response: Staff agrees with the first comments and recommends
the following changes:
(9) Reserves. The Department will utilize the terms proposed by the syndicator
or lender as described in the commitment letter(s) or the amount described
in the Applicant’s projected cost schedule if it is within the range
of three to six months of stabilized operating expenses less management fees
plus debt service.
Board Response: Department response accepted.
§1.32(f) Developer Capacity.
Comment: TDHCA should consider obtaining the right for an underwriter to
contact in writing only, any contractor, syndicator or lender that has previously
worked with the Applicant, with a request for written response to determine
if a material event of default currently exists in any construction contract,
loan agreement or partnership agreement. Such responses should be noted or
attached to the credit underwriting report.
Department Response: By virtue of the Applicant signing the Department’s
Authorization to Release Credit Information form, staff believes it currently
has the right to make such inquiry on an as-needed basis. Due to time constraints
in the underwriting process and the significant delays and limited value a
routine request from every principal and every lender and syndicator is not
made. The Applicant who has had a significantly bad performance record will
have difficulty in obtaining initial and final commitments and will likely
be exposed through the previous participation compliance process. No change
is recommended.
Board Response: Department response accepted.
§1.32(f)(1) Previous Experience.
Comment: Current language indicates, "The Underwriter will characterize
the Development as ‘high risk’ if the Developer has no previous
experience in completing construction and reaching stabilized occupancy in
a previous Development." Should the defined term "Sustaining Occupancy" be
used instead for clarity?
Department Response: Staff agrees that the use of the defined term "Sustaining
Occupancy" in place of "stabilized occupancy" is acceptable and the change
is recommended.
(1) Previous Experience. The Underwriter will characterize the Development
as "high risk" if the Developer has no previous experience in completing construction
and reaching Sustaining Occupancy in a previous Development.
Board Response: Department response accepted.
§1.32(f)(3)(b) Financial Statements of Principals.
Comment: The current underwriting guidelines indicate if a Development
is financially feasible. However, there are sections within the underwriting
guidelines that characterize a Development as ‘high risk’. To
expand on this, it is suggested that TDHCA establish ranges of risk criteria
for certain aspects of each Development so that an overall feasibility risk
can be presented. The risk levels assigned to a particular Development aspect
could simply be "high risk" or "low risk". Some suggested aspects of Development
include Debt Coverage Ratio on mandatory debt service, percentage of deferred
developer fee, developer capacity, and market demand levels. For example,
Developments with a Debt Coverage Ratio of less than 1.15 would receive a
"high risk" indication on that Development aspect. The same Development could
receive a "low risk" indication for having less than 10% of the Development
fee projected to be deferred. Doing this should help provide the tax credit
evaluation committee and staff with an overall picture of the risk of a Development
in a summary format.
Department Response: Staff agrees and as part of the underwriting report
and the standard operating procedures employed by the Department, various
additional high risk indicators are indicated in the section of the report
labeled "Summary of Salient Risks and Issues." However, there are numerous
standard operating procedures that have not been re-documented in the draft
rules since they apply to how the Department summarizes applications and monitors
transactions and do not directly affect the current allocation process.
Board Response: Department response accepted.
§1.32(g)(1) Floodplains.
Comment: Local engineering studies, if available, may be a better option
than submission of FEMA floodplain maps. Floodplain requirements should be:
buildings at least one foot above floodplain and drives and parking lots no
lower than six inches below floodplain, subject to local regulations, if more
restrictive.
Department Response: Staff believes that funding in floodplains is an issue
that should be re-evaluated in the coming year. In the meantime, staff proposes
the following change:
(1) Floodplains. The Underwriter evaluates the site plan, floodplain map,
local engineering studies provided through the Applicant, and other information
provided to determine if any of the buildings, drives, or parking areas reside
within the 100-year floodplain. If such a determination is made by the Underwriter
and the buildings’ finished ground floor are not clearly engineered
to be at least one foot above the floodplain and all drives and parking lots
are not clearly engineered to be not lower than six inches below the floodplain,
the Report will include a condition that the Applicant must pursue and receive
a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR-F) or require
the Applicant to identify the cost of flood insurance for the buildings and
for the tenants’ contents for buildings within the 100-year floodplain.
Board Response: Department response accepted.
§1.32(g)(2) Inclusive Capture Rate.
Comment: It is not realistic to assume a capture rate in a community that
has had no new Development in a number of years. Generally there is a pent-up
demand for housing in smaller communities or in those communities that would
not be able to support new construction cost without the LIHTC equity. These
types of communities should be exempt from capture rate as long as the economic
climate is strong and the need for housing is apparent. Further comment states,
if the Market Study supports the feasibility of the proposed Development,
the Department should not use the capture rate to disqualify that Development
unless there is clear evidence (based on the Department's independent verifications)
that the Market Study is flawed or fails to consider all applicable comparable
units
Department Response: A Development proposed in a community that has not
had a Development in recent years would be less likely to be impacted by the
inclusive capture rate calculation since only the subject’s proposed
units would be considered. Moreover, the types of communities suggested in
the first part of this comment are typically rural and the inclusive capture
rate for rural areas allows up to 100% of the established demand to be captured
before a negative recommendation is made. In response to the second part of
the comment, the extent of the Market Study feasibility analysis as currently
conceived is for the primary focus to be on the Development at hand, only.
Unfortunately, because of timing differences, the Market Analyst is often
not aware of recent Department awards and therefore, the Department’s
re-evaluation here is critical. The inclusive capture rate is designed to
account for the effect of all proposed developments in the area. Furthermore,
the last sentence of the comment does not offer a viable tool for underwriting.
If the Market Study is flawed, staff would not have a means to calculate capture
rate because of the need for a reliable demand calculation. No change is recommended.
Board Response: Department response accepted.
§1.33(c)(2)(a) Market Analyst Qualifications.
Comment: Current language states, "Removal from the list of approved Market
Analysts will not, in and of itself, invalidate a Market Analysis that has
already been commissioned not more than 90 days before the Department’s
due date for submission as of the date the change in status of the Market
Analyst is posted to the web." This language is difficult to read and confusing.
Can it be clarified?
Department Response: Staff agrees and proposes the following:
(a) Removal from the list of approved Market Analysts will not, in and
of itself, invalidate a Market Analysis. A Market Analysis, completed by a
Market Analyst who is removed from the approved Market Analyst list, may be
valid if the Market Analysis was commissioned before the Market Analyst’s
removal from the list, and this removal occurred less than 90 days before
the Department’s due date for submission of Market Analyses. For purposes
of this paragraph, the effective date of removal from the approved Market
Analyst list is the first date in which the Department’s web posting
no longer reflects the Market Analyst as being an approved Market Analyst.
Board Response: Department response accepted.
§1.33(d)(15)(a) Conclusions.
Comment: The term "subsidized rental rate conclusion" should be revised
to reflect "restricted rental rate conclusions" to encompass units restricted
under LIHTC program rules.
Department Response: Staff agrees that the use of the defined term "restricted"
in place of "subsidized" is acceptable and the change is recommended.
(a) Provide a separate market and restricted rental rate conclusion for
each proposed unit type and rental restriction category. Conclusions of rental
rates below the maximum net rent limit rents must be well reasoned, documented,
consistent with the market data, and address any inconsistencies with the
conclusions of the demand for the subject units.
Board Response: Department response accepted.
§1.33(d)(15)(a) Conclusions.
Comment: The market rate rents should not be underwritten at a rate greater
than 90% of the market rate rents for similar units in the market area. It
is very common for lenders and syndicators to discount the market rate rents
on an income restricted Development to this level. To underwrite at a higher
rent level places a Development in serious jeopardy, especially if underwritten
at less than 1.15 DCR.
Department Response: While staff agrees in principal with this recommendation,
the Department already does not generally preclude an Applicant from anticipating
market rents that are less than the Market Analyst’s market rent conclusions
so long as they are not less than the maximum restricted rent being charged.
No change is recommended.
Board Response: Department response accepted.
§1.33(d)(15)(d) Conclusions.
Comment: Current language states, "Calculate an inclusive capture rate
for the subject Development defined as the sum of the proposed subject units
plus any previously approved but unstabilized new comparable units in the
Primary Market divided by the total income-eligible targeted renter demand
identified by the Market Analysis for the subject Development’s Primary
Market Area. The Market Analyst should calculate a separate capture rate for
the subject Development’s proposed affordable units and market rate
units as well as the subject Development as a whole." Proposed Language: "The
Market Analyst should calculate a separate capture rate for the Development’s
proposed affordable units and market rate units as well as the Development
as a whole. The capture rate of each applicable category (affordable, market
rate, or both) shall be calculated individually and as follows: the sum of
the proposed units in the Development plus any new Comparable Units located
in the Primary Market Area that are in projects that have not achieved stabilized
occupancy, divided by the total renter demand identified by the Market Analysis
for the Primary Market." The new language is suggested to improve clarity.
Department Response: Staff agrees that clarification is needed, but the
suggested language changes some of the intended meaning. Staff recommends
the following:
(d) Calculate an inclusive capture rate for the subject Development defined
as the sum of the proposed subject units plus any comparable units in previously
approved new, but unstabilized Developments in the Primary Market, divided
by the total income-eligible targeted renter demand identified by the Market
Analysis for the subject Development’s Primary Market Area. The Market
Analyst should calculate a separate inclusive capture rate for the subject
Development’s proposed affordable units, market rate units, andthe subject
Development as a whole.
Board Response: Department response accepted.
§1.33(d) Market Analysis Contents and (e) Single Family Developments.
Comment: Paragraph headings §1.33(d) deals with Market Analysis contents
for multifamily Developments, and §1.33(e) deals with Market Analysis
contents for single family Developments. In order to better distinguish these
sections, it may be desirable to title §1.33(d) as "Market Analysis Contents
Multifamily" and §1.33(e) as "Market Analysis Contents Single Family".
Department Response: Staff agrees with the proposed clarification and recommends
the following:
(d) Market Analysis Contents - Multifamily. A Market Analysis for a Development
prepared for the Department must be organized in a format that follows a logical
progression and must include, at minimum, items addressed in paragraphs (1)
through (17) of this subsection.
(e) Market Analysis Contents - Single Family.
Board Response: Department response accepted.
§1.33(g) Market Analysis Rules and Guidelines.
Comment: Current language states, ". . . the Department . . . may substitute
its own analysis and underwriting conclusions for those submitted by the Market
Analyst." If the Department is going to certify Market Analysts as "qualified",
then it should rely on the recommendations of those Analysts and should not
substitute its own discretionary conclusions without some extraordinary circumstances.
Comment was also received via comments on §49.9(e)(13)(b) of the draft
2003 Qualified Allocation Plan which states, "The Department does not have
to rely on the Market Analyst and may substitute its own analysis and conclusions
for those submitted by the qualified Market Analyst." In the event there is
a Market Study disagreement, there needs to be an independent third party
binding arbitration review to settle the issue. The Department, the Market
Analysis, and the Developer may have valid reasons to assert a position. In
fairness to all, a third party binding arbitrator can objectively review all
the issues and render an unbiased opinion. It was also suggested that the
arbiter should be an independent third party with no working history of either
the Department or the Applicant.
Department Response: The current language is not new and no comment had
been made to change it prior to the posting of these draft rules. The statement
has been in the QAP since at least 1997 and preserves the Department’s
overall discretion to disagree with the conclusions of a particular Market
Study. Applicants have the ability to appeal underwriting conclusions and
could ask for a third party arbitrator on a case-by-case basis. Moreover,
the time and resource constraints for the allocation process would preclude
introducing another appeal process. Staff does not recommend a change.
Board Response: Department response accepted.
§1.35(a) Environmental Site Assessment Guidelines.
Comment: The rule appears to exclude all environmental professionals who
are not environmental or professional engineers from conducting a Phase I
Environmental Site Assessment for the Department. A revision to the current
language was suggested as follows: "The environmental assessment shall be
conducted by a qualified environmental professional and be prepared at the
expense of the Development Owner." The intent is to allow all environmental
professionals with appropriate qualifications to be included.
Department Response: The current language is not new and has been part
of the QAP for several years, staff recommends researching the issue and setting
up an ad hoc group to focus on revising the Environmental Site Assessment
Rules and Guidelines during the coming year.
Board Response: Department response accepted.
§1.35(a)(1) Environmental Site Assessment Guidelines.
Comment: Current language states, "The report must include, but is not
limited to: "The opening phrase of §1.35(a)(1) purports to set forth
a list of information that must be included in the Environmental Site Assessment.
However, §1.35(a)(1)(c) states that a noise study "is recommended". This
implies that the noise study is discretionary and not mandatory, which is
inconsistent with the opening phrase of this section. Similarly, §1.35(a)(1)(d)
states that a survey should be provided "if available." This also implies
that the survey is discretionary and not mandatory, which is inconsistent
with the opening phrase of this section. Because §1.35(a)(1) presents
a list, ";and" should be added after clause (e) and it should be deleted after
clause (f).
Department Response: Staff agrees with the comment and recommends adjusting §1.35
accordingly.
(1) The report must include, but is not limited to:
(A) A review of records, interviews with people knowledgeable about the
property;
(B) A certification that the environmental engineer has conducted an inspection
of the property, the building(s), and adjoining properties, as well as any
other industry standards concerning the preparation of this type of environmental
assessment;
(C) A copy of a current survey or other drawing of the site reflecting
the boundaries and adjacent streets, all improvements on the site, and any
items of concern described in the body of the environmental site assessment
or identified during the physical inspection;
(D) A copy of the current FEMA Flood Insurance Rate Map showing the panel
number and encompassing the site with the site boundaries precisely identified
and superimposed on the map. A determination of the flood risk for the proposed
Development described in the narrative of the report includes a discussion
of the impact of the 100-year floodplain on the proposed Development based
upon a review of the current site plan; and
(E) A statement that clearly states that the person or company preparing
the environmental assessment will not materially benefit from the Development
in any other way than receiving a fee for the environmental assessment.
(2) A noise study is recommended for property located adjacent to or in
close proximity to industrial zones, major highways, active rail lines, and
civil and military airfields.
(3) If the report recommends further studies or establishes that environmental
hazards currently exist on the Property, or are originating off-site but would
nonetheless affect the Property, the Development Owner must act on such a
recommendation or provide a plan for either the abatement or elimination of
the hazard. Evidence of action or a plan for the abatement or elimination
of the hazard must be presented upon Application submittal.
(4) For Developments which have had a Phase II Environmental Assessment
performed and hazards identified, the Development Owner is required to maintain
a copy of said assessment on site available for review by all persons which
either occupy the Development or are applying for tenancy.
(5) Developments whose funds have been obligated by TxRD will not be required
to supply this information; however, the Development Owners of such Developments
are hereby notified that it is their responsibility to ensure that the Development
is maintained in compliance with all state and federal environmental hazard
requirements.
(6) Those Developments which have or are to receive first lien financing
from HUD may submit HUD's environmental assessment report, provided that it
conforms with the requirements of this subsection.
Board Response: Department response accepted.
REQUESTS THROUGH PUBLIC COMMENT FOR CLARIFICATION
§1.31(b)(1) Definition of Affordable Housing.
Comment: Current language states, "Housing that has been funded . . . or
has at least one unit that is restricted in the rent that can be charged either
by a Land Use Restriction Agreement or other form of Deed Restriction or by
natural market forces at the equivalent of 30% of 100% of an area’s
median income as determined by HUD." What does it mean for rents to be restricted
by "natural market forces," and does this language help in the understanding
of the definition of Affordable Housing?
Department Response: The definition is intended to suggest that market
rate units that rent at or below 30% of AMI due to "natural market forces"
are affordable even if they are not restricted by LURA to this rent level.
§1.32(c)(2) Equity Gap Method.
Comment: Current language states, "This method evaluates the amount of
funds needed to fill the gap created by total Development cost less total
non-Department-sourced funds." Does this language work in circumstances where
an Applicant requests funding under multiple TDHCA programs?
Department Response: The language that follows the quoted sentence addresses
multiple Department programs.
§1.32(d)(2) Miscellaneous Income.
Comment: Current language states, "Exceptions must be justified by operating
history of existing comparable properties . . ." What if there are no comparable
properties? For instance, what if this is the first property in this area
to provide certain kinds of services?
Department Response: Staff believes there would be significantly more risk
associated with the Development’s ability to rely on a fee for a service
that has not been tested in the market place. Therefore, reliance on it would
be more speculative and generally should not be relied upon.
§1.32(d)(2) Miscellaneous Income.
Comment: Current language states, "Collection rates of these exceptional
fee items will generally be heavily discounted." What does the highlighted
language mean? This appears to give the Department a great deal of discretion
in calculation without any discernible standards.
Department Response: Because there are a myriad of potential fees that
could be considered and because some are more speculative than others, the
allowance of anything over the standard $5 to $15 per unit must be evaluated
on a case-by-case basis. Likewise, the appropriate amount of the discount
must be evaluated on a case-by-case basis depending on the reliability of
the documentation provided.
§1.32(d)(7)(c) Acceptable Debt Coverage Ratio Range.
Comment: Current language states, "Any adjustments in debt service will
become a condition of the Report, however, future changes in income, expenses,
rates, and terms could allow additional adjustment to the final debt amount
to be acceptable." Many transactions have a change in the debt service between
the time they are underwritten and the time the final permanent loan is closed.
What does the sentence above mean for that scenario? If a change in the debt
structure is a condition to the commitment, then virtually every Development
Owner will need to come back to the Department with a revised debt service
plan at the time of permanent loan closing. This places a significant burden
on the Department and creates uncertainty for the Development Owner in trying
to syndicate its tax credits.
Department Response: Staff believes that SB 322 and the QAP already require
every Development owner to come back to the Department with a revised debt
structure as a material change when that occurs. In addition, every deal is
already required to be re-evaluated for feasibility at cost certification.
The language in this rule is intended to provide some acknowledgement to the
Applicant of the Department’s understanding that structures and conditions
can and do change.
§1.32(e) Development Costs.
Comment: Current language states, "In the case of a rehabilitation Development,
the Underwriter may use a lower tolerance level, due to the reliance upon
the Applicant’s authorized Third Party cost assessment." What does this
mean? It appears to give the Department a great deal of discretion in calculation
without any discernible standards.
Department Response: The statement means that if the Applicant provides
a third party cost assessment, the Underwriter may use it to determine the
appropriate fund amount even if the Applicant’s figure is within 5%
of the third party assessment.
§1.32(e)(4)(a) New Construction.
Comment: Current language states, "Whenever the Applicant’s estimate
is more than fiver percent greater or less than the Underwriter’s Marshall
and Swift based estimate, the Underwriter will attempt to reconcile this concern
and ultimately identify this as a cost concern in the Report." The language
says that the Underwriter will attempt to reconcile deviations. What does
this mean for the feasibility of the Development and the Underwriter’s
ultimate recommendation for funding? Further, the Department requires the
Market Analyst to determine if the cost of construction is reasonable. Why
isn't this used for the analysis if it is required?
Department Response: The underwriting report will denote differences in
Development costs and will identify them as a salient Development risk. The
Market Analyst is not required to make such a determination.
§1.32(e)(8) Financing Costs.
Comment: We want to be sure that limiting construction period interest
to one year of fully drawn interest on the construction loan applies only
to limit eligible basis and not to limit total costs for gap calculation purposes.
Each project is unique and leases up at its own rate. Seniors projects, in
particular, are slow to lease up, and the construction loan may be outstanding
for more than a year. Limiting the eligible basis may not affect the deal,
but the costs are real and should be allowed for gap calculation purposes.
Department Response: This statement pertains to eligible basis only. The
remaining "excess" interim interest cost would be removed to ineligible cost
and, therefore, would be included in gap calculation.
§1.33(c)(1) Market Analyst Qualifications.
Comment: When is this information submitted? How much discretion is the
Department going to have in placing a Market Analyst on the list or removing
a Market Analyst from the list after receiving this?
Department Response: This information must be submitted before a Market
Analyst can be placed on the approved list. If it is provided, they will be
placed on the list and they will remain on the list until they ask to be removed
or until removal as described in §1.33(c)(2) occurs.
§1.33(d)(13)(a) Comparable Property Analysis.
Comment: "Total adjustments made to the Comparable Units in excess of 15%
suggest a weak comparable." What are the implications of this for the underwriting
and the potential allocation of funding?
Department Response: This provides the Market Analyst with a guideline
beyond which the Department would require additional explanation. Without
the additional explanation, the underwriting report would indicate a reduced
confidence in the conclusions of the study.
MINOR TECHNICAL CHANGES FOR CONSISTENCY
§§1.32 and 1.33 Defined Terms.
Comment: A number of terms are capitalized and defined in §1.31(b).
Once they are defined, they should be used as capitalized, defined terms consistently
throughout the Guidelines. Consistency in the use of defined terms ensures
uniform interpretation of the Guidelines in a manner that is consistent with
the Department’s intent. The following defined terms should be capitalized
in the Sections described below.
Applicant §§1.33(d)(15)(b), 1.33(g)
Debt Coverage Ratio §§1.32(d), 1.32(d)(5)(j)(i), 1.32(d)(5)(j)(iii),
1.32(d)(7)
Development §1.32(d)(1)(b)
Market Analyst §§1.33(c), 1.33(c)(1), 1.33(c)(2), 1.33(c)(2)(a)
Market Study §§1.32(d)(2), 1.33(e)(1)
Net Operating Income §1.32(d)
Program Rents §1.32(d)(1)
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.31(b)(3) Definition of Cash Flow.
Comment: Current language states, "The funds available from operations
after all expenses and debt service required to be paid has been considered."
Due to a tense problem, the statement should be changed to: "The funds available
from operations after all expenses and debt service required to be paid have
been considered."
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(d)(2) Miscellaneous Income.
Comment: Current language states, "Any estimates for secondary income above
or below this amount are only considered if they are well documented by the
financial statements of comparable properties as being achievable in the proposed
market area as determined by the Underwriter." "Market area" should be changed
to "Primary Market".
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(d)(3) Vacancy and Collection Loss.
Comment: Current language states, "The Underwriter uses a vacancy rate
of 7.5% (5% vacancy plus 2.5% for collection loss) unless the Market Analysis
reflects a higher or lower established vacancy rate for the area." Change
"area" to "Primary Market". Use of a defined term is always preferable for
clarity of interpretation.
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(d)(7)(b) Term.
Comment: Current language states, "The primary debt loan term is reflected
in the commitment letter." For clarity, the statement should be changed to:
"The primary debt loan term utilized by the Underwriter is the one reflected
in the commitment letter."
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(d)(7) Long Term Feasibility.
Comment: Current language states, "The base year projection utilized is
the Underwriter’s EGI, expenses, and NOI unless the Applicant’s
EGI, total expenses, and NOI are each within five percent . . . . " To make
language consistent internally and also consistent with a similar provision
in Section 1.32(d)(7), the statement should be changed to: "The base year
projection utilized is the Underwriter’s EGI, total expenses, and NOI
unless the Applicant’s EGI, total expenses, and NOI are each within
five percent . . . . "
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(e)(2) Off-Site Costs.
Comment: Current language states, "Off-Site costs are costs of Development
up to the site itself such as the cost of roads, water, sewer and other utilities
to provide the site with access." For clarity, the statement should be changed
to: "Off-site costs are Development costs for work done outside of the actual
Development site such as the cost of roads, water, sewer and other utilities
to provide the site with access."
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(e)(4)(a) New Construction.
Comment: Current language states, "Whenever the Applicant’s estimate
is more than fiver percent greater or less than the Underwriter’s Marshall
and Swift based estimate, the Underwriter will attempt to reconcile this concern
and ultimately identify this as a cost concern in the Report." Note, the incorrect
spelling of the word "five".
Department Response: The spelling correction from "fiver" to "five’
is recommended.
Board Response: Department response accepted.
§1.32(e)(5) Hard Cost Contingency.
Comment: Current language states, "The Applicant’s figure is used
by the Underwriter if the figure is less than five percent (5%)." For balance
with the immediately preceding sentence, the statement should be changed to:
"The Applicant’s figure is used by the Underwriter if the figure is
less than five percent (5%) or ten percent (10%), respectively."
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.32(e)(10) Other Soft Costs.
Comment: Current language states, ". . . the Applicant is given an opportunity
to clarify and address the concern prior to removal form basis." Due to a
spelling error, the statement should be changed to: ". . . the Applicant is
given an opportunity to clarify and address the concern prior to removal from
basis."
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.34(e)(13)(d) Description of Improvements.
Comment: Current language states, "Provide a thorough description and analysis
of the improvement . . . " To correct syntax, the statement should be changed
to: "Provide a thorough description and analysis of the improvements . . .
"
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.34(e)(15)(b)(ii)(iii) NOI/Unit of Comparison.
Comment: Current language states, "If used in the report, the net income
statistics for the comparables for must . . . " To correct syntax, the statement
should be changed to: "If used in the report, the net income statistics for
the comparables must . . . "
Department Response: Staff recommends the change.
Board Response: Department response accepted.
§1.34(e)(15)(c)(iii) Vacancy/Collection Loss.
Comment: Current language states, ". . . overall occupancy data for the
subject’s market area." Change "market area" to "Primary Market." Use
of a defined term is always preferable for clarity of interpretation.
Department Response: Staff recommends the change.
Board Response: Department response accepted.
The new sections are adopted pursuant to the authority of the
Texas Government Code, Chapter 2306; and Chapter 2001 and 2002, Texas Government
Code, V.T.C.A., which provides the Departments with the authority to adopt
rules governing the administration of the Department and its programs.
§1.31.General Provisions.
(a)
Purpose. The Rules in this subchapter apply to the underwriting,
market analysis, appraisal, and environmental site assessment standards employed
by the Texas Department of Housing and Community Affairs (the "Department"
or "TDHCA"). This chapter provides rules for the underwriting review of an
affordable housing Development’s financial feasibility and economic
viability. In addition, this chapter guides the underwriting staff in making
recommendations to the Executive Award and Review Advisory Committee ("the
Committee"), Executive Director, and TDHCA Governing Board ("the Board") to
help ensure procedural consistency in the award determination process. Due
to the unique characteristics of each Development the interpretation of the
rules and guidelines described in subchapter B of this chapter is subject
to the discretion of the Department and final determination by the Board.
(b)
Definitions. Many of the terms used in this subchapter
are defined in 10 TAC §§49 and 50 of this title (the Department’s
Low Income Housing Tax Credit Program Qualified Allocation Plan and Rules,
known as the "QAP"). Those terms that are not defined in the QAP or which
may have another meaning when used in subchapter B of this title, shall have
the meanings set forth in this subsection unless the context clearly indicates
otherwise.
(1)
Affordable Housing-Housing that has been funded through
one or more of the Department’s programs or other local, state or federal
programs or has at least one unit that is restricted in the rent that can
be charged either by a Land Use Restriction Agreement or other form of Deed
Restriction or by natural market forces at the equivalent of 30% of 100% of
an area’s median income as determined by the United States Department
of Housing and Urban Development ("HUD").
(2)
Affordability Analysis-An analysis of the ability of a
prospective buyer or renter at a specified income level to buy or rent a housing
unit at specified price or rent.
(3)
Cash Flow--The funds available from operations after all
expenses and debt service required to be paid have been considered.
(4)
Credit Underwriting Analysis Report-Sometimes referred
to as the "Report." A decision making tool used by the Department and Board,
described more fully in §1.32(a) and (b) of this subchapter.
(5)
Comparable Unit-A unit of housing that is of similar type,
age, size, location and other discernable characteristics that can be used
to compare and contrast from a proposed or existing unit.
(6)
DCR--Debt Coverage Ratio. Sometimes referred to as the
"Debt Coverage" or "Debt Service Coverage." A measure of the number of times
the required payments of loan principal and interest are covered by Net Operating
Income.
(7)
Development-Proposed multi-unit residential housing that
meets the affordability requirements for and requests funds from one or more
of the Department’s sources of funds.
(8)
EGI--Effective Gross Income. The sum total of all sources
of anticipated or actual income for a rental Development less vacancy and
collection loss, leasing concessions, and rental income from employee-occupied
units that is not anticipated to be charged or collected.
(9)
Gross Program Rent-Sometimes called the "Program Rents."
Maximum Rent Limits based upon the tables promulgated by the Department’s
division responsible for compliance by program and by county or Metropolitan
Statistical Area ("MSA") or Primary Metropolitan Statistical Area ("PMSA").
(10)
HUD--The United States Department of Housing and Urban
Development. The department of the US Government responsible for major housing
and urban Development programs, including programs that are redistributed
through the State such as HOME and CDBG.
(11)
Local Amenities-- Amenities located near and available
to the tenants of a proposed Development, including but not limited to police
and fire protection, transportation, healthcare, retail, grocers, educational
institutions, employment centers, parks, public libraries, and entertainment
centers.
(12)
Low Income Housing Tax Credit(s)--Sometimes referred to
as "LIHTC" or "Tax Credit(s)." A financing source allocated by the Department
as determined by the QAP. The Tax Credits are typically sold through syndicators
to raise equity for the Development.
(13)
Market Analysis-Sometimes referred to as a Market Study.
An evaluation of the economic conditions of supply, demand and pricing conducted
in accordance with the Department’s Market Analysis Rules and Guidelines
in §1.33 of this subchapter as it relates to a specific Development
(14)
Market Analyst-An individual or firm providing market
information for use by the Department.
(15)
Market Rent-The unrestricted rent concluded by the Market
Analyst for a particular unit type and size after adjustments are made to
Comparable Units.
(16)
NOI--Net Operating Income. The income remaining after
all operating expenses, including replacement reserves and taxes have been
paid.
(17)
Primary Market-Sometimes referred to as "Primary Market
Area" or "Submarket." The area defined from which political/geographical boundaries
that a proposed or existing Development is most likely to draw the bulk of
its prospective tenants or homebuyers.
(18)
Rent Over-Burdened Households-- Non-elderly households
paying more than 35% of gross income towards total housing expenses (unit
rent plus utilities) and elderly households paying more than 40% of gross
income towards total housing expenses.
(19)
Sustaining Occupancy--The occupancy level at which rental
income plus secondary income is equal to all operating expenses and mandatory
debt service requirements for a Development.
(20)
TDHCA Operating Expense Database-Sometimes called the
TDHCA Database. This is a consolidation of recent actual operating expense
information collected through the Department’s Annual Owner Financial
Certification process and published on the Department’s web site.
(21)
Third Party--A Third Party is a Person which is not an
Affiliate, Related Party, or Beneficial Owner of the Applicant, General Partner(s),
Developer, or Person receiving any portion of the developer fee or contractor
fee.
(22)
Underwriter-the author(s), as evidenced by signature,
of the Credit Underwriting Analysis Report.
(23)
Unstabilized Development- A Development that has not maintained
a 90% occupancy level for at least 12 consecutive months.
(24)
Utility Allowance(s)-The estimate of tenant-paid utilities,
based either on the most current HUD Form 52667, "Section 8, Existing Housing
Allowance for Tenant-Furnished Utilities and Other Services," provided by
the appropriate local Public Housing Authority consistent with the current
QAP or a documented estimate from the utility provider proposed in the Application.
Documentation from the local utility provider to support an alternative calculation
can be used to justify alternative Utility Allowance conclusions but must
be specific to the subject Development and consistent with the building plans
provided.
§1.32.Underwriting Rules and Guidelines.
(a)
General Provisions. The Department, through the division
responsible for underwriting, produces or causes to be produced a Credit Underwriting
Analysis Report (the "Report") for every Development recommended for funding
through the Department. The primary function of the Report is to provide the
Committee, Executive Director, the Board, Applicants, and the public a comprehensive
analytical report and recommendations necessary to make well informed decisions
in the allocation or award of the State’s limited resources. The Report
in no way guarantees or purports to warrant the actual performance, feasibility,
or viability of the Development by the Department.
(b)
Report Contents. The Report provides an organized and consistent
synopsis and reconciliation of the application information submitted by the
Applicant. At a minimum, the Report includes:
(1)
Identification of the Applicant and any principals of the
Applicant;
(2)
Identification of the funding type and amount requested
by the Applicant;
(3)
The Underwriter’s funding recommendations and any
conditions of such recommendations;
(4)
Evaluation of the affordability of the proposed housing
units to prospective residents;
(5)
Review and analysis of the Applicant’s operating
proforma as compared to industry information, similar Developments previously
funded by the Department, and the Department guidelines described in this
section;
(6)
Analysis of the Development’s debt service capacity;
(7)
Review and analysis of the Applicant’s Development
budget as compared to the estimate prepared by the Underwriter under the guidelines
in this section;
(8)
Evaluation of the commitment for additional sources of
financing for the Development;
(9)
Review of the experience of the Development team members;
(10)
Identification of related interests among the members
of the Development team, Third Party service providers and/or the seller of
the property;
(11)
Analysis of the Applicant’s and principals’
financial statements and creditworthiness including a review of the credit
report for each of the principals in for-profit Developments subject to the
Texas Public Information Act;
(12)
Review of the proposed Development plan and evaluation
of the proposed improvements and architectural design;
(13)
Review of the Applicant’s evidence of site control
and any potential title issues that may affect site control;
(14)
Identification and analysis of the site which includes
review of the independent site inspection report prepared by a TDHCA staff
member;
(15)
Review of the Phase I Environmental Site Assessment in
conformance with the Department’s Environmental Site Assessment Rules
and Guidelines in §1.35 of this subchapter or soils and hazardous material
reports as required; and,
(16)
Review of market data and Market Study information and
any valuation information available for the property in conformance with the
Department’s Market Analysis Rules and Guidelines in §1.33 of this
subchapter.
(c)
Recommendations in the Report. The conclusion of the Report
includes a recommended award of funds or allocation of Tax Credits based on
the lesser amount calculated by the eligible basis method (if applicable),
equity gap method, or the amount requested by the Applicant as further described
in paragraphs (1) through (3) of this subsection.
(1)
Eligible Basis Method. This method is only used for Developments
requesting Low Income Housing Tax Credits. This method is based upon calculation
of eligible basis after applying all cost verification measures and limits
on profit, overhead, general requirements, and developer fees as described
in this section. The Applicable Percentage used in the Eligible Basis Method
is as defined in the QAP.
(2)
Equity Gap Method. This method evaluates the amount of
funds needed to fill the gap created by total Development cost less total
non-Department-sourced funds. In making this determination, the Underwriter
resizes any anticipated deferred developer fee down to zero before reducing
the amount of Department funds. In the case of Low Income Housing Tax Credits,
the syndication proceeds are divided by the syndication rate to determine
the amount of Tax Credits. In making this determination, the Department adjusts
the permanent loan amount and/or any Department-sourced loans, as necessary,
such that it conforms to the NOI and DCR standards described in this section.
(3)
The Amount Requested. This is the amount of funds that
is requested by the Applicant as reflected in the application documentation.
(d)
Operating Feasibility. The operating financial feasibility
of every Development funded by the Department is tested by adding total income
sources and subtracting vacancy and collection losses and operating expenses
to determine Net Operating Income. This Net Operating Income is divided by
the annual debt service to determine the Debt Coverage Ratio. The Underwriter
characterizes a Development as infeasible from an operational standpoint when
the Debt Coverage Ratio does not meet the minimum standard set forth in paragraph
(7) of this subsection. The Underwriter may choose to make adjustments to
the financing structure, such as lowering the debt and increasing the deferred
developer fee that could result in a re-characterization of the Development
as feasible based upon specific conditions set forth in the Report.
(1)
Rental Income. The Program Rent less Utility Allowances
and/or Market Rent (if the project is not 100% affordable) is utilized by
the Underwriter in calculating the rental income for comparison to the Applicant’s
estimate in the application. Where multiple programs are funding the same
units, the lowest Program Rents for those units is used. If the Market Rents,
as determined by the Market Analysis, are lower than the net Program Rents,
then the Market Rents for those units are utilized.
(A)
Market Rents. The Underwriter reviews the Attribute Adjustment
Matrix of Market Rent comparables by unit size provided by the Market Analyst
and determines if the adjustments and conclusions made are reasoned and well
documented. The Underwriter uses the Market Analyst’s conclusion of
adjusted Market Rent by unit, as long as the proposed Market Rent is reasonably
justified and does not exceed the highest existing unadjusted market comparable
rent. Random checks of the validity of the Market Rents may include direct
contact with the comparable properties. The Market Analyst’s Attribute
Adjustment Matrix should include, at a minimum, adjustments for location,
size, amenities, and concessions as more fully described in §1.33 of
this subchapter, the Department’s Market Analysis Rules and Guidelines.
(B)
Program Rents. The Underwriter reviews the Applicant’s
proposed rent schedule and determines if it is consistent with the representations
made in the remainder of the application. The Underwriter uses the Program
Rents as promulgated by the Department’s Compliance Division for the
year that is most current at the time the underwriting begins. When underwriting
for a simultaneously funded competitive round, all of the applications are
underwritten with the rents promulgated for the same year. Program Rents are
reduced by the Utility Allowance. The Utility Allowance figures used are determined
based upon what is identified in the application by the Applicant as being
a utility cost paid by the tenant and upon other consistent documentation
provided in the application. Water and sewer can only be a tenant-paid utility
if the units will be individually metered for such services. Gas utilities
are verified on the building plans and elsewhere in the application when applicable.
Trash allowances paid by the tenant are rare and only considered when the
building plans allow for individual exterior receptacles. Refrigerator and
range allowances are not considered part of the tenant-paid utilities unless
the tenant is expected to provide their own appliances, and no eligible appliance
costs are included in the Development cost breakdown.
(2)
Miscellaneous Income. All ancillary fees and miscellaneous
secondary income, including but not limited to late fees, storage fees, laundry
income, interest on deposits, carport rent, washer and dryer rent, telecommunications
fees, and other miscellaneous income, are anticipated to be included in a
$5 to $15 per unit per month range. Any estimates for secondary income above
or below this amount are only considered if they are well documented by the
financial statements of comparable properties as being achievable in the proposed
Primary Market as determined by the Underwriter. Exceptions may be made for
special uses, such as garages, congregate care/assisted living/elderly facilities,
and child care facilities. Exceptions must be justified by operating history
of existing comparable properties and should also be documented as being achievable
in the submitted Market Study. The Applicant must show that the tenant will
not be required to pay the additional fee or charge as a condition of renting
an apartment unit and must show that the tenant has a reasonable alternative.
Collection rates of these exceptional fee items will generally be heavily
discounted. If the total secondary income is over the maximum per unit per
month limit, any cost associated with the construction, acquisition, or Development
of the hard assets needed to produce an additional fee may also need to be
reduced from eligible basis for Tax Credit Developments as they may, in that
case, be considered to be a commercial cost rather than an incidental to the
housing cost of the Development. The use of any secondary income over the
maximum per unit per month limit that is based on the factors described in
this paragraph is subject to the determination by the Underwriter that the
factors being used are well documented.
(3)
Vacancy and Collection Loss. The Underwriter uses a vacancy
rate of 7.5% (5% vacancy plus 2.5% for collection loss) unless the Market
Analysis reflects a higher or lower established vacancy rate for the Primary
Market. Elderly and 100% project-based rental subsidy Developments and other
well documented cases may be underwritten at a combined 5% at the discretion
of the Underwriter if the historical performance reflected in the Market Analysis
is consistently higher than a 95% occupancy rate.
(4)
Effective Gross Income ("EGI"). The Underwriter independently
calculates EGI. If the EGI figure provided by the Applicant is within five
percent of the EGI figure calculated by the Underwriter, the Applicant’s
figure is characterized as acceptable or reasonable in the Report, however,
for purposes of calculating DCR the Underwriter will maintain and use its
independent calculation of EGI regardless of the characterization of the Applicant’s
figure.
(5)
Expenses. The Underwriter evaluates the reasonableness
of the Applicant’s expense estimate based upon line item comparisons
with specific data sources available. Evaluating the relative weight or importance
of the expense data points is one of the most subjective elements of underwriting.
Historical stabilized certified or audited financial statements of the property
will reflect the strongest data points to predict future performance. The
Department also maintains a database of performance of other similar sized
and type properties across the State. In the case of a new Development, the
Department’s database of property in the same location or region as
the proposed Development provides the most heavily relied upon data points.
The Department also uses data from the Institute of Real Estate Management’s
(IREM) most recent
Conventional Apartments-Income/Expense
Analysis
book for the proposed Development’s property type and
specific location or region. In some cases local or project-specific data
such as Public Housing Authority ("PHA") Utility Allowances and property tax
rates are also given significant weight in determining the appropriate line
item expense estimate. Finally, well documented information provided in the
Market Analysis, the application, and other well documented sources may be
considered. In most cases, the data points used from a particular source are
an average of the per unit and per square foot expense for that item. The
Underwriter considers the specifics of each transaction, including the type
of Development, the size of the units, and the Applicant’s expectations
as reflected in the proforma to determine which data points are most relevant.
The Underwriter will determine the appropriateness of each data point being
considered and must use their reasonable judgment as to which one fits each
situation. The Department will create and utilize a feedback mechanism to
communicate and allow for clarification by the Applicant when the overall
expense estimate is over five percent greater or less than the Underwriter‘s
estimate or when specific line items are inconsistent with the Underwriter’s
expectation based upon the tolerance levels set forth for each line item expense
in subparagraphs (a) through (j) of this paragraph. If an acceptable rationale
for the individual or total difference is not provided, the discrepancy is
documented in the Report and the justification provided by the Applicant and
the countervailing evidence supporting the Underwriter’s determination
is noted. If the Applicant’s total expense estimate is within five percent
of the final total expense figure calculated by the Underwriter, the Applicant’s
figure is characterized as acceptable or reasonable in the Report, however,
for purposes of calculating DCR the Underwriter will maintain and use its
independent calculation of expenses regardless of the characterization of
the Applicant’s figure.
(A)
General and Administrative Expense. General and Administrative
Expense includes all accounting fees, legal fees, advertising and marketing
expenses, office operation, supplies, and equipment expenses. Historically,
the TDHCA Database average has been used as the Department’s strongest
initial data point as it has generally been consistent with IREM regional
and local figures. The underwriting tolerance level for this line item is
20%.
(B)
Management Fee. Management Fee is paid to the property
management company to oversee the effective operation of the property and
is most often based upon a percentage of Effective Gross Income as documented
in the management agreement contract. Typically, five percent of the effective
gross income is used, though higher percentages for rural transactions that
are consistent with the TDHCA Database can be concluded. Percentages as low
as three percent may be utilized if documented with a Third Party management
contract agreement with an acceptable management company. The Underwriter
will require documentation for any percentage difference from the 5% of the
Effective Gross Income standard.
(C)
Payroll and Payroll Expense. Payroll and Payroll Expense
includes all direct staff payroll, insurance benefits, and payroll taxes including
payroll expenses for repairs and maintenance typical of a conventional Development.
It does not, however, include direct security payroll or additional supportive
services payroll. In urban areas, the local IREM per unit figure has historically
held considerable weight as the Department’s strongest initial data
point. In rural areas, however, the TDHCA Database is often considered more
reliable. The underwriting tolerance level for this line item is 10%.
(D)
Repairs and Maintenance Expense. Repairs and Maintenance
Expense includes all repairs and maintenance contracts and supplies. It should
not include extraordinary capitalized expenses that would result from major
renovations. Direct payroll for repairs and maintenance activities are included
in payroll expense. Historically, the TDHCA Database average has been used
as the Department’s strongest data point as it has generally been consistent
with IREM regional and local figures. The underwriting tolerance level for
this line item is 20%.
(E)
Utilities Expense (Gas & Electric). Utilities Expense
includes all gas and electric energy expenses paid by the owner. It includes
any pass-through energy expense that is reflected in the unit rents. Historically,
the lower of an estimate based on 25.5% of the PHA local Utility Allowance
or the TDHCA Database or local IREM averages have been used as the most significant
data point for utility expenses attributable to common areas. The higher amount
may be used, however, if the current typical higher efficiency standard utility
equipment is not projected to be included in the Development upon completion
or if the higher estimate is more consistent with the Applicant’s projected
estimate. Also a lower or higher percentage of the PHA allowance may be used,
depending on the amount of common area, and adjustments will be made for utilities
typically paid by tenants that in the subject are owner-paid as determined
by the Underwriter. The underwriting tolerance level for this line item is
30%.
(F)
Water, Sewer and Trash Expense. Water, Sewer and Trash
Expense includes all water, sewer and trash expenses paid by the owner. It
would also include any pass-through water, sewer and trash expense that is
reflected in the unit rents. Historically, the lower of the PHA allowance
or the TDHCA Database average has been used. The underwriting tolerance level
for this line item is 30%.
(G)
Insurance Expense. Insurance Expense includes any insurance
for the buildings, contents, and liability but not health or workman’s
compensation insurance. Historically, the TDHCA Database is used with a minimum
$0.16 per net rentable square foot. Additional weight is given to a Third
Party bid or insurance cost estimate provided in the application reflecting
a higher amount for the proposed Development. The underwriting tolerance level
for this line item is 50%.
(H)
Property Tax. Property Tax includes all real and personal
property taxes but not payroll taxes. The TDHCA Database is used to interpret
a per unit assessed value average for similar properties which is applied
to the actual current tax rate. The per unit assessed value is most often
contained within a range of $15,000 to $35,000 but may be higher or lower
based upon documentation from the local tax assessor. Location, size of the
units, and comparable assessed values also play a major role in evaluating
this line item expense. Property tax exemptions or proposed payment in lieu
of taxes (PILOT) must be documented as being reasonably achievable if they
are to be considered by the Underwriter. For Community Housing Development
Organization ("CHDO") owned or controlled properties, this documentation includes,
at a minimum, a letter from the local appraisal district recognizing that
the Applicant is or will be considered eligible for the ad valorem tax exemption.
The underwriting tolerance level for this line item is 10%.
(I)
Reserves. Reserves include annual reserve for replacements
of future capitalizable expenses as well as any ongoing additional operating
reserve requirements. The Underwriter includes reserves of $200 per unit for
new construction and $300 per unit for rehabilitation Developments. Higher
levels of reserves may be used if they are documented in the financing commitment
letters. The Underwriter will require documentation for any difference from
the $200 new construction and $300 rehabilitation standard.
(J)
Other Expenses. The Underwriter will include other reasonable
and documented expenses, other than depreciation, interest expense, lender
or syndicator’s asset management fees, or other ongoing partnership
fees. Lender or syndicator’s asset management fees or other ongoing
partnership fees are not considered in the Department’s calculation
of debt coverage in any way. The most common other expenses are described
in more detail in clauses (i) through (iii) of this subparagraph.
(i)
Supportive Services Expense. Supportive Services Expense
includes the cost to the owner of any non-traditional tenant benefit such
as payroll for instruction or activities personnel. Documented contract costs
will be reflected in Other Expenses. Any selection points for this item will
be evaluated prior to underwriting. The Underwriter’s verification will
be limited to assuring any documented costs are included. For all transactions
supportive services expenses are considered part of Other Expenses and are
considered part of the Debt Coverage Ratio.
(ii)
Security Expense. Security Expense includes contract or
direct payroll expense for policing the premises of the Development and is
included as part of Other Expenses. The Applicant’s amount is moved
to Other Expenses and typically accepted as provided. The Underwriter will
require documentation of the need for security expenses that exceed 50% of
the anticipated payroll and payroll expenses estimate discussed in subsection
(d)(4)(c) of this section.
(iii)
Compliance Fees. Compliance fees include only compliance
fees charged by TDHCA. The Department’s charge for a specific program
may vary over time, however, the Underwriter uses the current charge per unit
per year at the time of underwriting. For all transactions compliance fees
are considered part of Other Expenses and are considered part of the Debt
Coverage Ratio.
(6)
Net Operating Income and Debt Service. The Underwriter
will review the Development’s proposed NOI and DCR and determine an
acceptable debt level for the Development. If the Applicant’s EGI, total
expenses, and NOI are each within five percent of the Underwriter’s
estimates, then the Applicant’s estimate of NOI will be used to determine
the acceptable debt level for the Development. Otherwise, the Underwriter’s
estimate of NOI will be used to determine the acceptable debt level for the
Development. In addition to NOI, the interest rate, term, and Debt Coverage
Ratio range affect the determination of the acceptable debt service amount.
(A)
Interest Rate. The interest rate used should be the rate
documented in the commitment letter. The maximum rate that will be allowed
for a competitive application cycle is evaluated by the Director of Credit
Underwriting and posted to the Department’s web site prior to the close
of the application acceptance period. Historically this maximum acceptable
rate has been at or below the average rate for 30-year U.S. Treasury Bonds
plus 400 basis points.
(B)
Term. The primary debt loan term utilized by the Underwriter
is the one reflected in the commitment letter. The Department generally requires
an amortization of not less than 30 years and not more than 50 years or an
adjustment to the amortization structure is evaluated and recommended. In
non-Tax Credit transactions a lesser amortization term may be used if the
Department’s funds are fully amortized over the same period.
(C)
Acceptable Debt Coverage Ratio Range. The initial acceptable
DCR range for all debt associated with permanent priority liens that are foreclosable
as a result of nonpayment of a regularly scheduled amount plus the Department’s
proposed financing falls between a minimum of 1.10 to a maximum of 1.30. In
rare instances, such as for HOPE VI and USDA Rural Development transactions,
the minimum DCR may be less than 1.10 based upon documentation of acceptance
of such an acceptable DCR from the lender. If the DCR is less than the minimum,
a reduction in the debt service amount is recommended based upon the rates
and terms in the permanent loan commitment letter as long as they are within
the ranges in subparagraphs (a) and (b) of this paragraph. If the DCR is greater
than the maximum, an increase in the debt service amount is recommended based
upon the rates and terms in the permanent loan commitment letter as long as
they are within the ranges in subparagraphs (a) and (b) of this paragraph,
and the funding gap is reviewed to determine the continued need for Department
financing. When the funding gap is reduced no adjustments are made to the
level of Department financing unless there is an excess of financing, after
the need for deferral of any developer fee is eliminated. If the increase
in debt capacity provides excess sources of funds, the Underwriter adjusts
any Department grant funds to a loan, if possible, and/or adjusts the interest
rate of any Department loans upward until the DCR does not exceed the maximum
or up to the prevailing current market rate for similar conventional funding,
whichever occurs first. Where no Department grant or loan exists or the full
market interest rate for the Department’s loan has been accomplished,
the Underwriter increases the conventional debt amount until the DCR is reduced
to the maximum allowable. Any adjustments in debt service will become a condition
of the Report, however, future changes in income, expenses, rates, and terms
could allow additional adjustments to the final debt amount to be acceptable.
In a Tax Credit transaction, an excessive DCR could negatively affect the
amount of recommended tax credit, if based upon the Gap Method, more funds
are available than are necessary after all deferral of developer fee is reduced
to zero.
(7)
Long Term Feasibility. The Underwriter will evaluate the
long term feasibility of the Development by creating a 30-year operating proforma.
A three percent annual growth factor is utilized for income and a four percent
annual growth factor is utilized for expenses. The base year projection utilized
is the Underwriter’s EGI, total expenses, and NOI unless the Applicant’s
EGI, total expenses, and NOI are each within five percent of the Underwriter’s
estimates and characterized as acceptable or reasonable in the Report. The
DCR should remain above a 1.10 and a continued positive Cash Flow should be
projected for the initial 30-year period in order for the Development to be
characterized as feasible for the long term. Any Development where the amount
of cumulative Cash Flow over the first fifteen years is insufficient to pay
the projected amount of deferred developer fee amortized in irregular payments
at zero percent interest is characterized as infeasible and will not be recommended
for funding unless the Underwriter can determine a plausible alternative feasible
financing structure and conditions the recommendation(s) in the Report accordingly.
(e)
Development Costs. The Department’s estimate of the
Development’s cost will be based on the Applicant’s project cost
schedule to the extent that it can be verified to a reasonable degree of certainty
with documentation from the Applicant and tools available to the Underwriter.
For new construction Developments, the Applicant’s total cost estimate
will be compared to the Underwriter’s total cost estimate and where
the difference in cost exceeds five percent of the Underwriter’s estimate,
the Underwriter shall substitute their own estimate for the Total Housing
Development Cost to determine the Equity Gap Method and Eligible Basis Method
where applicable. In the case of a rehabilitation Development, the Underwriter
may use a lower tolerance level due to the reliance upon the Applicant’s
authorized Third Party cost assessment. Where the Applicant’s costs
are inconsistent with documentation provided in the Application, the Underwriter
may adjust the Applicant’s total cost estimate. The Department will
create and utilize a feedback mechanism to communicate and allow for clarification
by the Applicant before the Underwriter’s total cost estimate is substituted
for the Applicant’s estimate.
(1)
Acquisition Costs. The proposed acquisition price is verified
with the fully executed site control document(s) for the entirety of the site.
(A)
Excess Land Acquisition. Where more land is being acquired
than will be utilized for the site and the remaining acreage is not being
utilized as permanent green space, the value ascribed to the proposed Development
will be prorated from the total cost reflected in the site control document(s).
An appraisal or tax assessment value may be tools that are used in making
this determination; however, the Underwriter will not utilize a prorated value
greater than the total amount in the site control document(s).
(B)
Identity of Interest Acquisitions. Where the seller or
any principals of the seller is an Affiliate, Beneficial Owner, or Related
Party to the Applicant, Developer, General Contractor, Housing Consultant,
or persons receiving any portion of the Contractor or Developer Fees, the
sale of the property will be considered to be an Identity of Interest transfer.
In all such transactions the Applicant is required to provide the additional
documentation identified in clauses (i) through (iv) of this subparagraph
to support the transfer price and this information will be used by the Underwriter
to make a transfer price determination.
(i)
Documentation of the original acquisition cost, such as
the settlement statement.
(ii)
An appraisal that meets the Department's Appraisal Rules
and Guidelines as described in §1.34 of this subchapter. In no instance
will the acquisition value utilized by the Underwriter exceed the appraised
value.
(iii)
A copy of the current tax assessment value for the property.
(iv)
Any other reasonably verifiable costs of owning, holding,
or improving the property that when added to the value from clause (i) of
this subparagraph justifies the Applicant’s proposed acquisition amount.
(I)
For land-only transactions, documentation of owning, holding
or improving costs since the original acquisition date may include: property
taxes; interest expense; a calculated return on equity at a rate consistent
with the historical returns of similar risks; the cost of any physical improvements
made to the property; the cost of rezoning, replatting, or developing the
property; or any costs to provide or improve access to the property.
(II)
For transactions which include existing buildings that
will be rehabilitated or otherwise maintained as part of the property, documentation
of owning, holding, or improving costs since the original acquisition date
may include capitalized costs of improvements to the property and the cost
of exit taxes not to exceed an amount necessary to allow the sellers to be
indifferent to foreclosure or breakeven transfer.
(C)
Non-Identity of Interest Acquisition of Buildings for Tax
Credit Properties. In order to make a determination of the appropriate building
acquisition value, the Applicant will provide and the Underwriter will utilize
an appraisal that meets the Department’s Appraisal Rules and Guidelines
as described in §1.34 of this subchapter. The value of the improvements
are the result of the difference between the as-is appraised value less the
land value. Where the actual sales price is more than ten percent different
than the appraised value, the Underwriter may alternatively prorate the actual
sales price based upon the calculated improvement value over the as-is value
provided in the appraisal, so long as the improved value utilized by the Underwriter
does not exceed the total as-is appraised value of the entire property.
(2)
Off-Site Costs. Off-Site costs are Development costs for
work done outside of the actual Development site such as the cost of roads,
water, sewer and other utilities to provide the site with access. All off-site
costs must be well documented and certified by a Third Party engineer as presented
in the required application form to be included in the Underwriter’s
cost budget.
(3)
Site Work Costs. If Project site work costs exceed $7,500
per Unit, the Applicant must submit a detailed cost breakdown certified as
being prepared by a Third Party engineer or architect, to be included in the
Underwriter’s cost budget. In addition, for Applicants seeking Tax Credits,
a letter from a certified public accountant properly allocating which portions
of the engineer’s or architect’s site costs should be included
in eligible basis and which ones are ineligible, in keeping with the holding
of the Internal Revenue Service Technical Advice Memoranda, is required for
such costs to be included in the Underwriter’s cost budget.
(4)
Direct Construction Costs. Direct construction costs are
the costs of materials and labor required for the building or rehabilitation
of a Development.
(A)
New Construction. The Underwriter will use the "Average
Quality" multiple or townhouse costs, as appropriate, from the
Marshal and Swift Residential Cost Handbook
, based upon the details
provided in the application and particularly site and building plans and elevations.
If the Development contains amenities not included in the Average Quality
standard, the Department will take into account the costs of the amenities
as designed in the Development. If the Development will contain single-family
buildings, then the cost basis should be consistent with single-family Average
Quality as defined by
Marshall & Swift Residential
Cost Handbook
. Whenever the Applicant’s estimate is more than
five percent greater or less than the Underwriter’s
Marshall and Swift
based estimate, the Underwriter will attempt to
reconcile this concern and ultimately identify this as a cost concern in the
Report.
(B)
Rehabilitation Costs. In the case where the Applicant has
provided Third Party signed bids with a work write-up from contractors or
estimates from certified or licensed professionals which are inconsistent
with the Applicant’s figures as proposed in the project cost schedule,
the Underwriter utilizes the Third Party estimations in lieu of the Applicant’s
estimates even when the difference between the Underwriter’s costs and
the Applicant’s costs is less than five percent. The underwriting staff
will evaluate rehabilitation Developments for comprehensiveness of the Third
Party work write-up and will determine if additional information is needed.
(5)
Hard Cost Contingency. This is the only contingency figure
considered by the Underwriter and is only considered in underwriting prior
to final cost certification. Contingency is limited to a maximum of five percent
(5%) of direct costs plus site work for new construction Developments and
ten percent (10%) of direct costs plus site work for rehabilitation Developments.
The Applicant’s figure is used by the Underwriter if the figure is less
than five percent (5%) or ten percent (10%), respectively.
(6)
Contractor Fee Limits. Contractor fees are limited to six
percent (6%) for general requirements, two percent (2%) for contractor overhead,
and six percent (6%) for contractor profit. These fees are based upon the
direct costs plus site work costs. Minor reallocations to make these fees
fit within these limits may be made at the discretion of the Underwriter.
For Developments also receiving financing from TxRD-USDA, the combination
of builder’s general requirements, builder’s overhead, and builder’s
profit should not exceed the lower of TDHCA or TxRD-USDA requirements.
(7)
Developer Fee Limits. For Tax Credit Developments, the
Development cost associated with developer’s fees cannot exceed fifteen
percent (15%) of the project’s Total Eligible Basis, as defined in §§49
and 50 of this title (adjusted for the reduction of federal grants, below
market rate loans, historic credits, etc.), not inclusive of the developer
fees themselves. The fee can be divided between overhead and fee as desired
but the sum of both items must not exceed the maximum limit. The Developer
Fee may be earned on non-eligible basis activities, but only the maximum limit
as a percentage of eligible basis items may be included in basis for the purpose
of calculating a project’s credit amount. Any non-eligible amount of
developer fee claimed must be proportionate to the work for which it is earned.
For non-Tax Credit Developments, the percentage remains the same but is based
upon total Development costs less: the fee itself, land costs, the costs of
permanent financing, excessive construction period financing described in
paragraph (8) of this subsection, and reserves.
(8)
Financing Costs. Eligible construction period financing
is limited to not more than one year’s worth of fully drawn construction
loan funds at the construction loan interest rate indicated in the commitment.
Any excess over this amount is removed to ineligible cost and will not be
considerd in the determination of developer fee.
(9)
Reserves. The Department will utilize the terms proposed
by the syndicator or lender as described in the commitment letter(s) or the
amount described in the Applicant’s projected cost schedule if it is
within the range of three to six months of stabilized operating expenses less
management fees plus debt service.
(10)
Other Soft Costs. For Tax Credit Developments all other
soft costs are divided into eligible and ineligible costs. Eligible costs
are defined by Internal Revenue Code but generally are costs that can be capitalized
in the basis of the Development for tax purposes; whereas ineligible costs
are those that tend to fund future operating activities. The Underwriter will
evaluate and accept the allocation of these soft costs in accordance with
the Department’s prevailing interpretation of the Internal Revenue Code.
If the Underwriter questions the eligibility of any soft costs, the Applicant
is given an opportunity to clarify and address the concern prior to removal
from basis.
(f)
Developer Capacity. The Underwriter will evaluate the capacity
of the Person(s) accountable for the role of the Developer to determine their
ability to secure financing and successfully complete the Development. The
Department will review certification of previous participation, financial
statements, and personal credit reports for those individuals anticipated
to guarantee the completion of the Development.
(1)
Previous Experience. The Underwriter will characterize
the Development as "high risk" if the Developer has no previous experience
in completing construction and reaching Sustaining Occupancy in a previous
Development.
(2)
Credit Reports. The Underwriter will characterize the Development
as "high risk" if the Developer or principals thereof have a credit score
which reflects a 40% or higher potential default rate.
(3)
Financial Statements of Principals. The Applicant, Developer,
any principals of the Applicant, General Partner, and Developer and any Person
who will be required to guarantee the Development will be required to provide
a signed and dated financial statement and authorization to release credit
information. The financial statement for individuals may be provided on the
Personal Financial and Credit Statement form provided by the Department and
must not be older than 90 days from the first day of the Application Acceptance
Period. If submitting partnership and corporate financials in addition to
the individual statements, the certified annual financial statement or audited
statement, if available, should be for the most recent fiscal year not more
than twelve months from first date of the Application Acceptance Period. This
document is required for an entity even if the entity is wholly-owned by a
person who has submitted this document as an individual. For entities being
formed for the purposes of facilitating the contemplated transaction but who
have no meaningful financial statements at the present time, a letter attesting
to this condition will suffice.
(A)
Financial statements must be provided to the Underwriting
Division at least seven days prior to the close of the application acceptance
period in order for an acknowledgment of receipt to be provided as a substitute
for inclusion of the statements themselves in the application. The Underwriting
Division will FAX, e-mail or send via regular mail an acknowledgement for
each financial statement received. The acknowledgement will not constitute
acceptance by the Department that financial statements provided are acceptable
in any manner but only acknowledge their receipt. Where time permits, the
acknowledgement may identify the date of the statement and whether it will
meet the time constraints under the QAP.
(B)
The Underwriter will evaluate and discuss individual financial
statements in a confidential portion of the Report. Where the financial statement
indicates a limited net worth and/ or lack of significant liquidity and the
Development is characterized as a high risk for either of the reasons described
in paragraphs (1) and (2) of this subsection, the Underwriter must condition
any potential award upon the identification and inclusion of additional Development
partners who can meet the criteria described in this subsection.
(g)
Other Underwriting Considerations. The Underwriter will
evaluate numerous additional elements as described in subsection (b) of this
section and those that require further elaboration are identified in this
subsection.
(1)
Floodplains. The Underwriter evaluates the site plan, floodplain
map, local engineering studies provided through the Applicant, and other information
provided to determine if any of the buildings, drives, or parking areas reside
within the 100-year floodplain. If such a determination is made by the Underwriter
and the buildings’ finished ground floor are not clearly engineered
to be at least one foot above the floodplain and all drives and parking lots
are not clearly engineered to be not lower than six inches below the floodplain,
the Report will include a condition that the Applicant must pursue and receive
a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR-F) or require
the Applicant to identify the cost of flood insurance for the buildings and
for the tenant’s contents for buildings within the 100-year floodplain.
(2)
Inclusive Capture Rate. The Underwriter will not recommend
the approval of funds to new Developments requesting funds where the anticipated
inclusive capture rate is in excess of 25% for the Primary Market unless the
market is a rural market or the units are targeted toward the elderly. In
rural markets and for Developments that are strictly targeted to the elderly,
the Underwriter will not recommend the approval of funds to new housing Developments
requesting funds from the Department where the anticipated capture rate is
in excess of 100% of the qualified demand. Affordable Housing which replaces
previously existing substandard Affordable Housing within the same Submarket
on a Unit for Unit basis, and which gives the displaced tenants of the previously
existing Affordable Housing a leasing preference, is excepted from these inclusive
capture rate restrictions. The inclusive capture rate for the Development
is defined as the sum of the proposed units for a given project plus any previously
approved but not yet stabilized new Comparable Units in the Submarket divided
by the total income-eligible targeted renter demand identified in the Market
Analysis for a specific Development’s Primary Market. The Department
defines Comparable Units, in this instance, as units that are dedicated to
the same household type as the proposed subject property using the classifications
of family, elderly or transitional as housing types. The Department defines
a stabilized project as one that has maintained a 90% occupancy level for
at least 12 consecutive months. The Department will independently verify the
number of affordable units included in the Market Study and will ensure that
all projects previously allocated funds through the Department are included
in the final analysis. The documentation requirements needed to support decisions
relating to this item are identified in §1.33 of this subchapter.
§1.33.Market Analysis Rules and Guidelines.
(a)
General Provision. A Market Analysis prepared for the Department
must evaluate the need for decent, safe, and sanitary housing at rental rates
or sales prices that eligible tenants can afford. The analysis must determine
the feasibility of the subject property rental rates or sales price and state
conclusions as to the impact of the property with respect to the determined
housing needs. Furthermore, the Market Analyst shall certify that they are
a Third Party and are not being compensated for the assignment based upon
a predetermined outcome.
(b)
Self-Contained. A Market Analysis prepared for the Department
must contain sufficient data and analysis to allow the reader to understand
the market data presented, the analysis of the data, and the conclusion(s)
derived from such data and its relationship to the subject property. The complexity
of this requirement will vary in direct proportion with the complexity of
the real estate and the real estate market being analyzed. The analysis must
clearly lead the reader to the same or similar conclusion(s) reached by the
Market Analyst.
(c)
Market Analyst Qualifications. A Market Analysis submitted
to the Department must be prepared and certified by an approved Market Analyst.
The Department will maintain an approved Market Analyst list based on the
guidelines set forth in paragraphs (1) through (3) of this subsection.
(1)
Market analysts must submit subparagraphs (A) through (F)
of this paragraph for review by the Department.
(A)
A current organization chart or list reflecting all members
of the firm who may author or sign the Market Analysis.
(B)
General information regarding the firm’s experience
including references, the number of previous similar assignments and time
frames in which previous assignments were completed.
(C)
Resumes for all members of the firm who may author or sign
the Market Analysis.
(D)
Certification from an authorized representative of the
firm that the services to be provided will conform to the Department’s
Market Analysis Rules and Guidelines described in this section.
(E)
A sample Market Analysis that conforms to the Department’s
Market Analysis Rules and Guidelines described in this section.
(F)
Documentation of organization and good standing in the
State of Texas.
(2)
During the underwriting process each Market Analysis will
be reviewed and any discrepancies with the rules and guidelines set forth
in this section may be identified and require timely correction. Subsequent
to the completion of the funding cycle and as time permits, staff and/or a
review appraiser will re-review a sample set of submitted market analyses
to ensure that the Department’s Market Analysis Rules and Guidelines
are met. If it is found that a Market Analyst has not conformed to the Department’s
Market Analysis Rules and Guidelines, as certified to, the Market Analyst
will be notified of the discrepancies in the Market Analysis and will be removed
from the approved Market Analyst list.
(A)
Removal from the list of approved Market Analysts will
not, in and of itself, invalidate a Market Analysis. A Market Analysis, completed
by a Market Analyst who is removed from the approved Market Analyst list,
may be valid if the Market Analysis was commissioned before the Market Analyst’s
removal from the list, and this removal occurred less than 90 days before
the Department’s due date for submission of Market Analyses. For purposes
of this paragraph, the effective date of removal from the approved Market
Analyst list is the first date in which the Department’s web posting
no longer reflects the Market Analyst as being an approved Market Analyst.
(B)
To be reinstated as an approved Market Analyst, the Market
Analyst must submit a new sample Market Analysis that conforms to the Department’s
Market Analysis Rules and Guidelines. This new study will then be reviewed
for conformance with the rules of this section and if found to be in compliance,
the Market Analyst will be reinstated.
(3)
The list of approved Market Analysts is posted on the Department’s
web site and updated within 72 hours of a change in the status of a Market
Analyst.
(d)
Market Analysis Contents - Multifamily. A Market Analysis
for a Development prepared for the Department must be organized in a format
that follows a logical progression and must include, at minimum, items addressed
in paragraphs (1) through (17) of this subsection.
(1)
Title Page. Include property address and/or location, housing
type, TDHCA addressed as client, effective date of analysis, date of report,
name and address of person authorizing report, and name and address of Market
Analyst.
(2)
Letter of Transmittal. Include date of letter, property
address and/or location, description of property type, statement as to purpose
of analysis, reference to accompanying Market Analysis, reference to all person(s)
providing significant assistance in the preparation of analysis, statement
from Market Analyst indicating any and all relationships to any member of
the Development team and/or owner of the subject property, date of analysis,
effective date of analysis, date of property inspection, name of person(s)
inspecting subject property, and signatures of all Market Analysts authorized
to work on the assignment.
(3)
Table of Contents. Number the exhibits included with the
report for easy reference.
(4)
Summary Form. Complete and include the TDHCA Primary Market
Area Analysis Summary form. An electronic version of the form and instructions
are available on the Department’s website at http://www.tdhca.state.tx.us/underwrite.html.
(5)
Assumptions and Limiting Conditions. Include a summary
of all assumptions, both general and specific, made by the Market Analyst
concerning the property.
(6)
Disclosure of Competency. Include the Market Analyst's
qualifications, detailing education and experience of all Market Analysts
authorized to work on the assignment.
(7)
Identification of the Property. Provide a statement to
acquaint the reader with the Development. Such information includes street
address, tax assessor's parcel number(s), and Development characteristics.
(8)
Statement of Ownership for the Subject Property. Disclose
the current owners of record and provide a three year history of ownership.
(9)
Purpose of the Market Analysis. Provide a brief comment
stating the purpose of the analysis.
(10)
Scope of the Market Analysis. Address and summarize the
sources used in the Market Analysis. Describe the process of collecting, confirming,
and reporting the data used in the Market Analysis.
(11)
Secondary Market Information. Include a general description
of the geographic location and demographic data and analysis of the secondary
market area if applicable. The secondary market area will be defined on a
case-by-case basis by the Market Analyst engaged to provide the Market Analysis.
Additional demand factors and comparable property information from the secondary
market may be addressed. However, use of such information in conclusions regarding
the subject property must be well-reasoned and documented. A map of the secondary
market area with the subject property clearly identified should be provided.
In a Market Analysis for a Development targeting families, the demand and
supply effects from the secondary market are not significant. For a Development
that targets smaller subgroups such as elderly households, the demand and
supply effects may be more relevant.
(12)
Primary Market Information. Include a specific description
of the subject's geographical location, specific demographic data, and an
analysis of the Primary Market Area. The Primary Market Area will be defined
on a case-by-case basis by the Market Analyst engaged to provide the Market
Analysis. The Department encourages a conservative Primary Market Area delineation
with use of natural political/geographical boundaries whenever possible. Furthermore,
the Primary Market for a Development chosen by the Market Analyst will generally
be most informative if it contains no more than 250,000 persons, though a
Primary Market with more residents may be indicated by the Market Analyst,
where political/geographic boundaries indicate doing so, with additional supportive
narrative. A summary of the neighborhood trends, future Development, and economic
viability of the specific area must be addressed with particular emphasis
given to Affordable Housing. A map of the Primary Market with the subject
property clearly identified must be provided. A separate scaled distance map
of the Primary Market that clearly identifies the subject and the Local Amenities
must also be included.
(13)
Comparable Property Analysis. Provide a comprehensive
evaluation of the existing supply of comparable properties in the Primary
Market Area defined by the Market Analyst. The analysis should include census
data documenting the amount and condition of local housing stock as well as
information on building permits since the census data was collected. The analysis
must separately evaluate existing market rate housing and existing subsidized
housing to include local housing authority units and any and all other rent-
or income-restricted units with respect to items discussed in subparagraphs
(A) through (F) of this paragraph.
(A)
Analyze comparable property rental rates. Include a separate
attribute adjustment matrix for the most comparable market rate and subsidized
units to the units proposed in the subject, a minimum of three Developments
each. The Department recommends use of HUD Form 922273. Analysis of the Market
Rents must be sufficiently detailed to permit the reader to understand the
Market Analyst's logic and rationale. Total adjustments made to the Comparable
Units in excess of 15% suggest a weak comparable. Total adjustments in excess
of 15% must be supported with additional narrative. The Department also encourages
close examination of the overall use of concessions in the Primary Market
Area and the effect on effective Market Rents.
(B)
Provide an Affordability Analysis of the comparable unrestricted
units.
(C)
Analyze occupancy rates of each of the comparable properties
and occupancy trends by property class. Physical occupancy should be compared
to economic occupancy.
(D)
Provide annual turnover rates of each of the comparable
properties and turnover trends by property class.
(E)
Provide absorption rates for each of the comparable properties
and absorption trends by property class.
(F)
The comparable Developments must indicate current research
for the proposed property type. The rental data must be confirmed with the
landlord, tenant or agent and individual data sheets must be included. The
minimum content of the individual data sheets include: property address, lease
terms, occupancy, turnover, Development characteristics, current physical
condition of the property, etc. A scaled distance map of the Primary Market
that clearly identifies the subject Development and existing comparable market
rate Developments and all existing/proposed subsidized Developments must be
provided.
(14)
Demand Analysis. Provide a comprehensive evaluation of
the demand for the proposed housing. The analysis must include an analysis
of the need for market rate and Affordable Housing within the subject Development's
Primary Market Area using the most current census and demographic data available.
The demand for housing must be quantified, well reasoned, and segmented to
include only relevant income- and age-eligible targets of the subject Development.
Each demand segment should be addressed independently and overlapping segments
should be minimized and clearly identified when required. In instances where
more than 20% of the proposed units are comprised of three- and four-bedroom
units, the analysis should be refined by factoring in the number of large
households to avoid overestimating demand. The final quantified demand calculation
may include demand due to items in subparagraphs (A) through (C) of this paragraph.
(A)
Quantify new household demand due to documented population
and household growth trends for targeted income-eligible renter households
OR confirmed targeted income-eligible renter household growth due to new employment
growth.
(B)
Quantify existing household demand due to documented turnover
of existing targeted income-eligible renter households OR documented rent
over-burdened targeted income-eligible renter households that would not be
rent over-burdened in the proposed Development and documented targeted income-eligible
renter households living in substandard housing.
(C)
Include other well reasoned and documented sources of demand
determined by the Market Analyst.
(15)
Conclusions. Include a comprehensive evaluation of the
subject property, separately addressing each housing type and specific population
to be served by the Development in terms of items in subparagraphs (A) through
(F) of this paragraph.
(A)
Provide a separate market and restricted rental rate conclusion
for each proposed unit type and rental restriction category. Conclusions of
rental rates below the maximum net rent limit rents must be well reasoned,
documented, consistent with the market data, and address any inconsistencies
with the conclusions of the demand for the subject units.
(B)
Provide rental income, secondary income, and vacancy and
collection loss projections for the subject derived independent of the Applicant’s
estimates, but based on historic and/or well established data sources of comparable
properties.
(C)
Correlate and quantify secondary market and Primary Market
demographics of housing demand to the current and proposed supply of housing
and the need for each proposed unit type and the subject Development as a
whole. The subject Development specific demand calculation may consider total
demand from the date of application to the proposed place in service date.
(D)
Calculate an inclusive capture rate for the subject Development
defined as the sum of the proposed subject units plus any comparable units
in previously approved new, but unstabilized Developments in the Primary Market,
divided by the total income-eligible targeted renter demand identified by
the Market Analysis for the subject Development’s Primary Market Area.
The Market Analyst should calculate a separate inclusive capture rate for
the subject Development’s proposed affordable units, market rate units,
andthe subject Development as a whole.
(E)
Project an absorption period and rate for the subject until
a Sustaining Occupancy level has been achieved. If absorption projections
for the subject differ significantly from historic data, an explanation of
such should be included.
(F)
Analyze the effects of the subject Development on the Primary
Market occupancy rates and provide sufficient support documentation.
(16)
Photographs. Include good quality color photographs of
the subject property (front, rear and side elevations, on-site amenities,
interior of typical units if available). Photographs should be properly labeled.
Photographs of the neighborhood, street scenes, and comparables should also
be included. An aerial photograph is desirable but not mandatory.
(17)
Appendices. Any Third Party reports relied upon by the
Market Analyst must be provided in appendix form and verified directly by
the Market Analyst as to its validity.
(e)
Market Analysis Contents - Single Family.
(1)
Market studies for single-family Developments proposed
as rental Developments must contain the elements set forth in subsections
(d)(1) through (17) of this section. Market analyses for Developments proposed
for single-family home ownership must contain the elements set forth in subsections
(d)(1) through (17) of this section as they would apply to home ownership
in addition to paragraphs (2) through (4) of this subsection.
(2)
Include no less than three actual market transactions to
inform the reader of current market conditions for the sale of each unit type
in the price range contemplated for homes in the proposed Development. The
comparables must rely on current research for this specific property type.
The sales prices must be confirmed with the buyer, seller, or real estate
agent and individual data sheets must be included. The minimum content of
the individual data sheets should include property address, Development characteristics,
purchase price and terms, description of any federal, state, or local affordability
subsidy associated with the transaction, date of sale, and length of time
on the market.
(3)
Analysis of the comparable sales should be sufficiently
detailed to permit the reader to understand the Market Analyst's logic and
rationale. The evaluation should address the appropriateness of the living
area, room count, market demand for Affordable Housing, targeted sales price
range, demand for interior and/or exterior amenities, etc. A scaled distance
map of the Primary Market that clearly identifies the subject Development
and existing comparable single family homes must be provided.
(4)
A written statement is required stating if the projected
sales prices for homes in the proposed Development are, or are not, below
the range for comparable homes within the Primary Market Area. Sufficient
documentation should be included to support the Market Analyst’s conclusion
with regard to the Development's absorption.
(f)
The Department reserves the right to require the Market
Analyst to address such other issues as may be relevant to the Department's
evaluation of the need for the subject property and the provisions of the
particular program guidelines.
(g)
All Applicants shall acknowledge, by virtue of filing an
application, that the Department shall not be bound by any such opinion or
Market Analysis, and may substitute its own analysis and underwriting conclusions
for those submitted by the Market Analyst
§1.34.Appraisal Rules and Guidelines.
(a)
General Provisions. Appraisals prepared for the Department
must conform to the Uniform Standards of Professional Appraisal Practice (USPAP)
as adopted by the Appraisal Standards Board of the Appraisal Foundation. Self-contained
reports must describe sufficient and adequate data and analyses to support
the final opinion of value. The final value(s) must be reasonable, based on
the information included. Any Third Party reports relied upon by the appraiser
must be verified by the appraiser as to the validity of the data and the conclusions.
The report must contain sufficient data, included in the appendix when possible,
and analysis to allow the reader to understand the property being appraised,
the market data presented, analysis of the data, and the appraiser's value
conclusion. The complexity of this requirement will vary in direct proportion
with the complexity of the real estate and real estate interest being appraised.
The report should lead the reader to the same or similar conclusion(s) reached
by the appraiser.
(b)
Value Estimates. All appraisals shall contain a separate
estimate of land value, based upon sales comparables. Appraisal assignments
for new construction, which are required to provide a future value of to be
completed structures, shall provide an "as restricted with favorable financing"
value as well as an "unrestricted market" value. Properties to be rehabilitated
shall address the "as restricted with favorable financing" value as well as
both an "as is" value and an "as completed" value. Include a separate assessment
of personal property, furniture, fixtures, and equipment (FF&E) and/or
intangible items because their economic life may be shorter than the real
estate improvements and may require different lending or underwriting considerations.
If personal property, FF7E, or intangible items are not part of the transaction
or value estimate, a statement to such effect should be included.
(c)
Date of Appraisal. The appraisal report must be dated and
signed by the appraiser who inspected the property. The date of the valuation,
except in the case of proposed construction or extensive rehabilitation, must
be a current date. The date of valuation should not be more than six months
prior to the date of the application to the Department.
(d)
Appraiser Qualifications. The qualifications of each appraiser
are determined and approved on a case-by-case basis by the Director of Credit
Underwriting and/or review appraiser, based upon the quality of the report
itself and the experience and educational background of the appraiser, as
set forth in the Statement of Qualifications appended to the appraisal. At
minimum, a qualified appraiser will be certified or licensed by the Texas
Appraiser Licensing and Certification Board.
(e)
Appraisal Contents. An appraisal of a Development prepared
for the Department must be organized in a format that follows a logical progression
and must include, at minimum, items addressed in paragraphs (1) through (18)
of this subsection.
(1)
Title Page. Include identification as to appraisal (e.g.,
type of process - complete or limited, type of report - self-contained, summary
or restricted), property address and/or location, housing type, the Department
addressed as the client, effective date of value estimate(s), date of report,
name and address of person authorizing report, and name and address of appraiser(s).
(2)
Letter of Transmittal. Include date of letter, property
address and/or location, description of property type, extraordinary/special
assumptions or limiting conditions that were approved by person authorizing
the assignment, statement as to function of the report, statement of property
interest being appraised, statement as to appraisal process (complete or limited),
statement as to reporting option (self-contained, summary or restricted),
reference to accompanying appraisal report, reference to all person(s) that
provided significant assistance in the preparation of the report, date of
report, effective date of appraisal, date of property inspection, name of
person(s) inspecting the property, identification of type(s) of value(s) estimated
(e.g., market value, leased fee value, as-financed value, etc.), estimate
of marketing period, signatures of all appraisers authorized to work on the
assignment.
(3)
Table of Contents. Number the exhibits included with the
report for easy reference.
(4)
Assumptions and Limiting Conditions. Include a summary
of all assumptions, both general and specific, made by the appraiser(s) concerning
the property being appraised. Statements may be similar to those recommended
by the Appraisal Institute.
(5)
Certificate of Value. This section may be combined with
the letter of transmittal and/or final value estimate. Include statements
similar to those contained in Standard Rule 2-3 of USPAP.
(6)
Disclosure of Competency. Include appraiser’s qualifications,
detailing education and experience, as discussed in subsection (c) of this
section.
(7)
Identification of the Property. Provide a statement to
acquaint the reader with the property. Real estate being appraised must be
fully identified and described by street address, tax assessor's parcel number(s),
and Development characteristics. Include a full, complete, legible, and concise
legal description.
(8)
Statement of Ownership of the Subject Property. Discuss
all prior sales of the subject property which occurred within the past three
years. Any pending agreements of sale, options to buy, or listing of the subject
property must be disclosed in the appraisal report.
(9)
Purpose and Function of the Appraisal. Provide a brief
comment stating the purpose of the appraisal and a statement citing the function
of the report.
(A)
Property Rights Appraised. Include a statement as to the
property rights (e.g., fee simple interest, leased fee interest, leasehold,
etc.) being considered. The appropriate interest must be defined in terms
of current appraisal terminology with the source cited.
(B)
Definition of Value Premise. One or more types of value
(e.g., "as is," "as if," "prospective market value") may be required. Definitions
corresponding to the appropriate value must be included with the source cited.
(10)
Scope of the Appraisal. Address and summarize the methods
and sources used in the valuation process. Describes the process of collecting,
confirming, and reporting the data used in the assignment.
(11)
Regional Area Data. Provide a general description of the
geographic location and demographic data and analysis of the regional area.
A map of the regional area with the subject identified is requested, but not
required.
(12)
Neighborhood Data. Provide a specific description of the
subject's geographical location and specific demographic data and an analysis
of the neighborhood. A summary of the neighborhood trends, future Development,
and economic viability of the specific area should be addressed. A map with
the neighborhood boundaries and the subject identified must be included.
(13)
Site/Improvement Description. Discuss the site characteristics
including subparagraphs (a) through (f) of this paragraph.
(A)
Physical Site Characteristics. Describe dimensions, size
(square footage, acreage, etc.), shape, topography, corner influence, frontage,
access, ingress-egress, etc. associated with the site. Include a plat map
and/or survey.
(B)
Floodplain. Discuss floodplain (including flood map panel
number) and include a floodplain map with the subject clearly identified.
(C)
Zoning. Report the current zoning and description of the
zoning restrictions and/or deed restrictions, where applicable, and type of
Development permitted. Any probability of change in zoning should be discussed.
A statement as to whether or not the improvements conform to the current zoning
should be included. A statement addressing whether or not the improvements
could be rebuilt if damaged or destroyed, should be included. If current zoning
is not consistent with the Highest and Best Use, and zoning changes are reasonable
to expect, time and expense associated with the proposed zoning change should
be considered and documented. A zoning map should be included.
(D)
Description of Improvements. Provide a thorough description
and analysis of the improvements including size (net rentable area, gross
building area, etc.), number of stories, number of buildings, type/quality
of construction, condition, actual age, effective age, exterior and interior
amenities, items of deferred maintenance, etc. All applicable forms of depreciation
should be addressed along with the remaining economic life.
(E)
Fair Housing. It is recognized appraisers are not an expert
in such matters and the impact of such deficiencies may not be quantified;
however, the report should disclose any potential violations of the Fair Housing
Act of 1988, Section 504 of the Rehabilitation Act of 1973, and the Americans
with Disabilities Act of 1990 and/or report any accommodations (e.g., wheelchair
ramps, handicap parking spaces, etc.) which have been performed to the property
or may need to be performed.
(F)
Environmental Hazards. It is recognized appraisers are
not an expert in such matters and the impact of such deficiencies may not
be quantified; however, the report should disclose any potential environmental
hazards (e.g., discolored vegetation, oil residue, asbestos-containing materials,
lead-based paint etc.) noted during the inspection.
(14)
Highest and Best Use. Market Analysis and feasibility
study is required as part of the highest and best use. The highest and best
use analysis should consider subsection (d)(13)(A) through (F) of this section
as well as a supply and demand analysis.
(A)
The appraisal must inform the reader of any positive or
negative market trends which could influence the value of the appraised property.
Detailed data must be included to support the appraiser's estimate of stabilized
income, absorption, and occupancy.
(B)
The highest and best use section must contain a separate
analysis "as if vacant" and "as improved" (or "as proposed to be improved/renovated").
All four elements in appropriate order as outlined in the Appraisal of Real
Estate (legally permissible, physically possible, feasible, and maximally
productive) must be sequentially considered.
(15)
Appraisal Process. The Cost Approach, Sales Comparison
Approach and Income Approach are three recognized appraisal approaches to
valuing most properties. It is mandatory that all three approaches are considered
in valuing the property unless specifically instructed by the Department to
ignore one or more of the approaches; or unless reasonable appraisers would
agree that use of an approach is not applicable. If an approach is not applicable
to a particular property, then omission of such approach must be fully and
adequately explained.
(A)
Cost Approach. This approach should give a clear and concise
estimate of the cost to construct the subject improvements. The type of cost
(reproduction or replacement) and source(s) of the cost data should be reported.
(i)
Cost comparables are desirable; however, alternative cost
information may be obtained from Marshall & Swift Valuation Service or
similar publications. The section, class, page, etc. should be referenced.
All soft costs and entrepreneurial profit must be addressed and documented.
(ii)
All applicable forms of depreciation must be discussed
and analyzed. Such discussion must be consistent with the description of the
improvements analysis.
(iii)
The land value estimate should include a sufficient number
of sales which are current, comparable, and similar to the subject in terms
of highest and best use. Comparable sales information should include address,
legal description, tax assessor’s parcel number(s), sales price, date
of sale, grantor, grantee, three year sales history, and adequate description
of property transferred. The final value estimate should fall within the adjusted
and unadjusted value ranges. Consideration and appropriate cash equivalent
adjustments to the comparable sales price for subclauses (I) though (VII)
of this clause should be made when applicable.
(I)
Property rights conveyed.
(II)
Financing terms.
(III)
Conditions of sale.
(IV)
Location.
(V)
Highest and best use.
(VI)
Physical characteristics (e.g., topography, size, shape,
etc.).
(VII)
Other characteristics (e.g., existing/proposed entitlements,
special assessments, etc.).
(B)
Sales Comparison Approach. This section should contain
an adequate number of sales to provide the reader with the current market
conditions concerning this property type. Sales data should be recent and
specific for the property type being appraised. The sales must be confirmed
with buyer, seller, or an individual knowledgeable of the transaction.
(i)
Minimum content of the sales should include address, legal
description, tax assessor’s parcel number(s), sale price, financing
considerations, and adjustment for cash equivalency, date of sale, recordation
of the instrument, parties to the transaction, three year sale history, complete
description of the property and property rights conveyed, and discussion of
marketing time. A scaled distance map clearly identifying the subject and
the comparable sales must be included.
(ii)
Several methods may be utilized in the Sale Comparison
Approach. The method(s) used must be reflective of actual market activity
and market participants.
(I)
Sale Price/Unit of Comparison. The analysis of the sale
comparables must identify, relate and evaluate the individual adjustments
applicable for property rights, terms of sale, conditions of sale, market
conditions and physical features. Sufficient narrative analysis must be included
to permit the reader to understand the direction and magnitude of the individual
adjustments, as well as a unit of comparison value indicator for each comparable.
The appraiser(s) reasoning and thought process must be explained.
(II)
Potential Gross Income/Effective Gross Income Analysis.
If used in the report, this method of analysis must clearly indicate the income
statistics for the comparables. Consistency in the method for which such economically
statistical data was derived should be applied throughout the analysis. At
least one other method should accompany this method of analysis.
(III)
NOI/Unit of Comparison. If used in the report, the net
income statistics for the comparables must be calculated in the same manner
and disclosed as such. It should be disclosed if reserves for replacement
have been included in this method of analysis. At least one other method should
accompany this method of analysis.
(C)
Income Approach. This section is to contain an analysis
of both the actual historical and projected income and expense aspects of
the subject property.
(i)
Market Rent Estimate/Comparable Rental Analysis. This section
of the report should include an adequate number of actual market transactions
to inform the reader of current market conditions concerning rental units.
The comparables must indicate current research for this specific property
type. The rental comparables must be confirmed with the landlord, tenant or
agent and individual data sheets must be included. The minimum content of
the individual data sheets should include property address, lease terms, description
of the property (e.g., unit type, unit size, unit mix, interior amenities,
exterior amenities, etc.), physical characteristics of the property, and location
of the comparables. Analysis of the Market Rents should be sufficiently detailed
to permit the reader to understand the appraiser's logic and rationale. Adjustment
for lease rights, condition of the lease, location, physical characteristics
of the property, etc. must be considered.
(ii)
Comparison of Market Rent to Contract Rent. Actual income
for the subject along with the owner's current budget projections must be
reported, summarized and analyzed. If such data is unavailable, a statement
to this effect is required and appropriate assumptions and limiting conditions
should be made. The contract rents should be compared to the market-derived
rents. A determination should be made as to whether the contract rents are
below, equal to, or in excess of market rates. If there is a difference, its
impact on value must be qualified.
(iii)
Vacancy/Collection Loss. Historical occupancy data for
the subject should be reported and compared to occupancy data from the rental
comparable and overall occupancy data for the subject's Primary Market.
(iv)
Expense Analysis. Actual expenses for the subject, along
with the owner's projected budget, must be reported, summarized, and analyzed.
If such data is unavailable, a statement to this effect is required and appropriate
assumptions and limiting conditions should be made. Historical expenses should
be compared to comparables expenses of similar property types or published
survey data (e.g., IREM, BOMA, etc.). Any expense differences should be reconciled.
Historical data regarding the subject's assessment and tax rates should be
included. A statement as to whether or not any delinquent taxes exist should
be included.
(v)
Capitalization. Several capitalization methods may be utilized
in the Income Approach. The appraiser should present the method(s) reflective
of the subject market and explain the omission of any method not considered
in the report.
(I)
Direct Capitalization. The primary method of deriving an
overall rate (OAR) is through market extraction. If a band of investment or
mortgage equity technique is utilized, the assumptions must be fully disclosed
and discussed.
(II)
Yield Capitalization (Discounted Cash Flow Analysis).
This method of analysis should include a detailed and supportive discussion
of the projected holding/investment period, income and income growth projections,
occupancy projections, expense and expense growth projections, reversionary
value and support for the discount rate.
(16)
Reconciliation and Final Value Estimate. This section
of the report should summarize the approaches and values that were utilized
in the appraisal. An explanation should be included for any approach which
was not included. Such explanations should lead the reader to the same or
similar conclusion of value. Although the values for each approach may not
"agree", the differences in values should be analyzed and discussed. Other
values or interests appraised should be clearly labeled and segregated. Such
values may include FF&E, leasehold interest, excess land, etc. In addition,
rent restrictions, subsidies and incentives should be explained in the appraisal
report and their impact, if any, needs to be reported in conformity with the
Comment section of USPAP Standards Rule 1-2(e), which states, "Separation
of such items is required when they are significant to the overall value."
In the appraisal of subsidized housing, value conclusions that include the
intangibles arising from the programs will also have to be analyzed under
a scenario without the intangibles in order to measure their influence on
value.
(17)
Marketing Period. Given property characteristics and current
market conditions, the appraiser(s) should employ a reasonable marketing period.
The report should detail existing market conditions and assumptions considered
relevant.
(18)
Photographs. Provide good quality color photographs of
the subject property (front, rear, and side elevations, on-site amenities,
interior of typical units if available). Photographs should be properly labeled.
Photographs of the neighborhood, street scenes, and comparables should be
included. An aerial photograph is desirable but not mandatory.
(f)
Additional Appraisal Concerns. The appraiser(s) must recognize
and be aware of the particular TDHCA program rules and guidelines and their
relationship to the subject's value. Due to the various programs offered by
the Department, various conditions may be placed on the subject which would
impact value. Furthermore, each program may require that the appraiser apply
a different set of specific definitions for the conclusions of value to be
provided. Consequently, as a result of such criteria, the appraiser(s) should
be aware of such conditions and definitions and clearly identify them in the
report.
§1.35.Environmental Site Assessment Rules and Guidelines
Environmental Site Assessment Guidelines. The environmental assessment
required under Section 50.7(e) of this title should be conducted and reported
in conformity with the standards of the American Society for Testing and Materials
(ASTM) and such other recognized industry standards as a reasonable person
would deem relevant in view of the Property's anticipated use for human habitation.
The environmental assessment shall be conducted by an environmental or professional
engineer and be prepared at the expense of the Development Owner.
(1)
The report must include, but is not limited to:
(A)
A review of records, interviews with people knowledgeable
about the property;
(B)
A certification that the environmental engineer has conducted
an inspection of the property, the building(s), and adjoining properties,
as well as any other industry standards concerning the preparation of this
type of environmental assessment;
(C)
A copy of a current survey or other drawing of the site
reflecting the boundaries and adjacent streets, all improvements on the site,
and any items of concern described in the body of the environmental site assessment
or identified during the physical inspection;
(D)
A copy of the current FEMA Flood Insurance Rate Map showing
the panel number and encompassing the site with the site boundaries precisely
identified and superimposed on the map. A determination of the flood risk
for the proposed Development described in the narrative of the report includes
a discussion of the impact of the 100-year floodplain on the proposed Development
based upon a review of the current site plan; and
(E)
A statement that clearly states that the person or company
preparing the environmental assessment will not materially benefit from the
Development in any other way than receiving a fee for the environmental assessment.
(2)
A noise study is recommended for property located adjacent
to or in close proximity to industrial zones, major highways, active rail
lines, and civil and military airfields.
(3)
If the report recommends further studies or establishes
that environmental hazards currently exist on the Property, or are originating
off-site but would nonetheless affect the Property, the Development Owner
must act on such a recommendation or provide a plan for either the abatement
or elimination of the hazard. Evidence of action or a plan for the abatement
or elimination of the hazard must be presented upon Application submittal.
(4)
For Developments which have had a Phase II Environmental
Assessment performed and hazards identified, the Development Owner is required
to maintain a copy of said assessment on site available for review by all
persons which either occupy the Development or are applying for tenancy.
(5)
Developments whose funds have been obligated by TxRD will
not be required to supply this information; however, the Development Owners
of such Developments are hereby notified that it is their responsibility to
ensure that the Development is maintained in compliance with all state and
federal environmental hazard requirements.
(6)
Those Developments which have or are to receive first lien
financing from HUD may submit HUD's environmental assessment report, provided
that it conforms with the requirements of this subsection.
This agency hereby certifies that the adoption has been
reviewed by legal counsel and found to be a valid exercise of the agency's
legal authority.
Filed with the Office of
the Secretary of State on December 20, 2002.
TRD-200208507
Edwina P. Carrington
Executive Director
Texas Department of Housing and Community Affairs
Effective date: January 9, 2003
Proposal publication date: September 27, 2002
For further information, please call: (512) 475-3726