The NRP Group
Department Response: Staff does not recommend a change. This safe harbor
limit at $7,500 per unit is intended to account for more than the average
historical site work cost on a per unit basis. Anything over that amount will
still be accepted as long as substantiation for the significantly higher than
average site work cost is provided. Relatively few developments exceed this
guideline and the additional administrative work required to process the qualified
third party verification is considered to be an important safeguard in evaluating
costs with difficult site issues.
(3) Site Work Costs. Project site work costs exceeding $7,500 per Unit
must be well documented and certified by a Third Party engineer on the required
application form. In addition, for Applicants seeking Tax Credits, documentation
in keeping with §50.9(i)(6)(G) of this title will be utilized in calculating
eligible basis.
Board Response: Staff response accepted.
ADMINISTRATIVE CHANGES TO UNDERWRITING, MARKET ANALYSIS, APPRAISAL, ENVIRONMENTAL
SITE ASSESSMENT, PROPERTY CONDITION ASSESSMENT, AND RESERVE FOR REPLACEMENT
RULES AND GUIDELINES.
§1.31(c)(5) - Comparable Unit
Comment: The definition was reworded to provide clarification in the proposed
rule of the difference in comparable units with regard to each of the following:
inclusive capture rate, subsidized unit rent, and market rent. Upon further
review and comments from staff and the Board, staff recommends the following
change for further clarification:
(5) Comparable Unit--A Unit, when compared to the subject Unit, similar
in overall condition, unit amenities, utility structure and common amenities,
and
(A) for purposes of calculating the inclusive capture rate targets the
same population and is likely to draw from the same demand pool;
(B) for purposes of estimating the subsidized Unit rent targets the same
population and is similar in net rentable square footage and number of bedrooms;
or
(C) for purposes of estimating the subject Unit market rent does not have
any income or rent restrictions and is similar in net rentable square footage
and number of bedrooms.
Board Response: Staff response accepted.
§1.32(d)(1)(A)(i) - Market Rents
Comment: Rent Comparable Unit is no longer a separate defined term in the
proposed rules and it is unnecessary to provide the title of the section referenced
(§1.33). Staff recommends the following change:
(i) Market Rents. The Underwriter reviews the Attribute Adjustment Matrix
of Comparable Units 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.
Board Response: Staff response accepted.
§1.32(e)(1)(B) - Identity of Interest Acquisitions
Comment: The citation (§50.9(i)(7)(A)) of related language in the
2006 Qualified Allocation Plan is incorrect. Staff recommends the following
change:
(B) Identity of Interest Acquisitions.
(i) The acquisition will be considered an identity of interest transaction
when an Affiliate of, a Related Party to, or any owner at any level of the
Development Team
(I) is the current owner in whole or in part of the proposed property,
or
(II) was the owner in whole or in part of the proposed property during
any period within the 36 months prior to the first day of the Application
Acceptance Period.
(ii) In all identity of interest transactions the Applicant is required
to provide the additional documentation identified in §50.9(h)(7)(A)
of this title to support the transfer price to be used in the underwriting
analysis.
(iii) In no instance will the acquisition cost utilized by the Underwriter
exceed
(I) the original acquisition cost listed in the submitted settlement statement
or, if a settlement statement is not available, the original asset value listed
in the most current audited financial statement for the identity of interest
owner, or
(II) the "as-is" value conclusion in the submitted appraisal.
Board Response: Staff response accepted.
§1.32(e)(5) and (6) - Hard Cost Contingency and Contractor Fee Limits
Comment: Underwriting analysis of tax credit developments has consistently
restricted eligible contractor fees and eligible contingency to certain percentages
applied to the sum of eligible site work and eligible direct construction
costs. Questions received during the cost certification process for tax credit
developments indicate clarification on the calculation of eligible contractor
fees is required. For consistency, similar clarification was added to language
regarding contingency cost. Staff recommends the following change:
(5) Hard Cost Contingency. All contingencies identified in the Applicant
project cost schedule will be added to Hard Cost Contingency with the total
limited to the guidelines detailed in this paragraph. Hard Cost Contingency
is limited to a maximum of 5% of direct costs plus site work for new construction
Developments and 10% of direct costs plus site work for rehabilitation Developments.
For tax credit Developments, the percentage is applied to the sum of the eligible
direct construction costs plus eligible site work costs in calculating the
eligible contingency cost. The Applicant's figure is used by the Underwriter
if the figure is less than 5%.
(6) Contractor Fee Limits. Contractor fees are limited to 6% for general
requirements, 2% for contractor overhead, and 6% for contractor profit. The
percentages are applied to the sum of the direct construction costs plus site
work costs. For tax credit Developments, the percentages are applied to the
sum of the eligible direct construction costs plus eligible site work costs
in calculating the eligible contractor fees. 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 TX-USDA-RHS, the combination
of builder's general requirements, builder's overhead, and builder's profit
should not exceed the lower of TDHCA or TX-USDA-RHS requirements.
Board Response: Staff response accepted.
§1.32(e)(7) - Developer Fee Limits
Comment: …we'd like some further clarification placed in the final
version of the QAP regarding consulting fees. While we understand that the
proposed language change would require that deals in the nonprofit set aside
allow at least 80 percent of the developer fees to go to the nonprofit applicant,
we are unclear as to whether or not the nonprofit applicant…will be allowed
to pay consulting fees that amount to greater than 20 percent of the developer
fees. If this is the intent of the change, we ask that language be added to
that effect. If this is not the intent, we would also request further clarification
to that effect as currently the real estate analysis division considers all
consulting fees part of the developer fee for underwriting carry over and
cost certification purposes. And if I could pause here real quick…Is
the intent to include consulting fees in that?
Tropicana
Building
Department Response: Mr. Bowling's comment led staff to the realization
that, although the consistent practice in underwriting has been to include
housing consultant fees in total eligible developer fees limited to 15% of
all other eligible costs, the REA Rules do not clearly reflect this practice.
The following clarification is proposed:
(7) Developer Fee Limits. For Tax Credit Developments, the development
cost associated with developer fees and Development Consultant (also known
as Housing Consultant) fees included in Eligible Basis cannot exceed 15% of
the project's Total Eligible Basis less developer fees, as defined in the
QAP. Developer fee claimed must be proportionate to the work for which it
is earned. In the case of an identity of interest transaction requesting acquisition
Tax Credits, no developer fee attributable to acquisition of the Development
will be included in Eligible Basis. For non-Tax Credit Developments, the percentage
remains the same but is based upon total development costs less the sum of
the fee itself, land costs, the costs of permanent financing, excessive construction
period financing described in subsection (f)(8) of this section, reserves,
and any other identity of interest acquisition cost.
Board Response: Staff response accepted.
§1.36 - Property Condition Assessment Guidelines
Comment: Review of the language changes made for clarification revealed
several administrative errors related to cutting and pasting in MSWord. The
draft language omitted an explicit reference to any construction on the site
that did not entail repairs or replacement. This omission could potentially
lead to confusion over the details needed in a PCA. Staff recommends corrections:
Board Response: Staff response accepted.
The new sections are adopted pursuant to the authority of the
Texas Government Code, Chapter 2306.
§1.31.General Provisions.
(a)
Purpose. The Rules in this subchapter apply to the underwriting,
market analysis, appraisal, environmental site assessment, property condition
assessment, and reserve for replacement 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 this subchapter
is subject to the discretion of the Department and final determination by
the Board.
(b)
Alternative Dispute Resolution Policy. In accordance with §2306.082,
Texas Government Code, it is the Department's policy to encourage the use
of appropriate alternative dispute resolution procedures ("ADR") under the
Governmental Dispute Resolution Act, Chapter 2009, Texas Government Code,
to assist in resolving disputes under the Department's jurisdiction. As described
in Chapter 154, Civil Practices and Remedies Code, ADR procedures include
mediation. Except as prohibited by the Department's ex parte communications
policy, the Department encourages informal communications between Department
staff and applicants, and other interested persons, to exchange information
and informally resolve disputes. The Department also has administrative appeals
processes to fairly and expeditiously resolve disputes. If at anytime an applicant
or other person would like to engage the Department in an ADR procedure, the
person may send a proposal to the Department's Dispute Resolution Coordinator.
For additional information on the Department's ADR Policy, see the Department's
General Administrative Rule on ADR at §1.17 of this title.
(c)
Definitions. Many of the terms used in this subchapter
are defined in the Department's Housing Tax Credit Program Qualified Allocation
Plan and Rules, known as the "QAP", as proposed. Those terms that are not
defined in the QAP or which may have another meaning when used in this subchapter,
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.
(2)
Bank Trustee--A bank authorized to do business in this
state, with the power to act as trustee.
(3)
Cash Flow--The funds available from operations after all
expenses and debt service required to be paid has 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 of this subchapter.
(5)
Comparable Unit--A Unit, when compared to the subject Unit,
similar in overall condition, unit amenities, utility structure and common
amenities, and
(A)
for purposes of calculating the inclusive capture rate
targets the same population and is likely to draw from the same demand pool;
(B)
for purposes of estimating the subsidized Unit rent targets
the same population and is similar in net rentable square footage and number
of bedrooms; or
(C)
for purposes of estimating the subject Unit market rent
does not have any income or rent restrictions and is similar in net rentable
square footage and number of bedrooms.
(6)
Contract Rent--Maximum Rent Limits based upon current and
executed rental assistance contract(s), typically with a federal, state or
local governmental agency.
(7)
DCR--Debt Coverage Ratio. Sometimes referred to as the
"Debt Coverage" or "Debt Service Coverage." A measure of the number of times
loan principal and interest are covered by Net Operating Income.
(8)
Development--Sometimes referred to as the "Subject Development."
Multi-unit residential housing that meets the affordability requirements for
and requests or has received funds from one or more of the Department's sources
of funds.
(9)
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.
(10)
ESA--Environmental Site Assessment. An environmental report
that conforms with the Standard Practice for Environmental Site Assessments:
Phase I Assessment Process (ASTM Standard Designation: E 1527) and conducted
in accordance with the Department's Environmental Site Assessment Rules and
Guidelines in §1.35 of this subchapter as it relates to a specific Development.
(11)
First Lien Lender--A lender whose lien has first priority.
(12)
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").
(13)
Market Analysis--Sometimes referred to as "Market Study."
An evaluation of the economic conditions of supply, demand and rental rates
or 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 Rent--The unrestricted rent concluded by the Market
Analyst for a particular unit type and size after adjustments are made to
rents charged by owners of Comparable Units.
(15)
NOI--Net Operating Income. The income remaining after
all operating expenses, including replacement reserves and taxes have been
paid.
(16)
Primary Market--Sometimes referred to as "Primary Market
Area" or "Submarket" or "PMA". The area defined by the Qualified Market Analyst
as described in §1.33(d)(9) of this subchapter from which a proposed
or existing Development is most likely to draw the majority of its prospective
tenants or homebuyers.
(17)
PCA--Property Condition Assessment. Sometimes referred
to as "Physical Needs Assessment," "Project Capital Needs Assessments," "Property
Condition Report," or "Property Work Write-Up." An evaluation of the physical
condition of the existing property and evaluation of the cost of rehabilitation
conducted in accordance with the Department's Property Condition Assessment
Rules and Guidelines in §1.36 of this subchapter as it relates to a specific
Development.
(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)
Reserve Account--An individual account:
(A)
Created to fund any necessary repairs for a multifamily
rental housing development; and
(B)
Maintained by a First Lien Lender or Bank Trustee.
(20)
Secondary Market--Sometimes referred to as "Secondary
Market Area". The area defined by the Qualified Market Analyst as described
in §1.33(d)(8) of this subchapter.
(21)
Supportive Housing--Sometimes referred to as "Transitional
Housing." Rental housing intended solely for occupancy by individuals or households
transitioning from homelessness or abusive situations to permanent housing
and typically consisting primarily of efficiency units.
(22)
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.
(23)
TDHCA Operating Expense Database--Sometimes referred to
as "TDHCA Database." 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.
(24)
Underwriter--The author(s), as evidenced by signature,
of the Credit Underwriting Analysis Report.
(25)
Unstabilized Development--A Development with Comparable
Units that has been approved for funding by the TDHCA Board or is currently
under construction or has not maintained a 90% occupancy level for at least
12 consecutive months following construction completion.
(26)
Utility Allowance--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 local entity responsible for administering the HUD Section 8 program with
most direct jurisdiction over the majority of the buildings existing 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.
(27)
Work Out Development--A financially distressed Development
seeking a change in the terms of Department funding or program restrictions
based upon market changes.
§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)
Review and analysis of the Applicant's operating proforma;
(5)
Analysis of the Development's debt service capacity;
(6)
Review and analysis of the Applicant's development budget;
(7)
Evaluation of the commitment for additional sources of
financing for the Development;
(8)
Identification of related interests among the members of
the Development Team, Third Party service providers and/or the seller of the
property;
(9)
Analysis of the Applicant's and Principals' financial statements
and creditworthiness;
(10)
Review of the proposed Development plan and evaluation
of the proposed improvements;
(11)
Review of the Applicant's evidence of site control and
any potential title issues that may affect site control;
(12)
Identification of the site which includes review of the
independent site inspection report;
(13)
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;
(14)
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;
(15)
Review of the appraisal, if required, for conformance
with the Department's Appraisal Rules and Guidelines in §1.34 of this
subchapter; and,
(16)
Review of the Property Condition Assessment, if required,
for conformance with the Department's Property Condition Assessment Rules
and Guidelines in §1.36 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 program limit method (if applicable),
gap/DCR method, or the amount requested by the Applicant as further described
in paragraphs (1) - (3) of this subsection.
(1)
Program Limit Method. For Developments requesting Housing
Tax Credits, this method is based upon calculation of Eligible Basis after
applying all cost verification measures and program limits as described in
this section. The Applicable Percentage used is as defined in the QAP. For
Developments requesting funding through a Department program other than Housing
Tax Credits, this method is based upon calculation of the funding limit based
on current program rules at the time of underwriting.
(2)
Gap/DCR Method. This method evaluates the amount of funds
needed to fill the gap created by total development cost less total non-Department-sourced
funds or Tax Credits. In making this determination, the Underwriter resizes
any anticipated deferred developer fee down to zero before reducing the amount
of Department funds or Tax Credits. In the case of Housing Tax Credits, the
syndication proceeds needed to fill the gap in permanent funds 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 DCR
standards described in this section.
(3)
The Amount Requested. The amount of funds that is requested
by the Applicant as reflected in the application documentation.
(d)
Operating Feasibility. The operating financial feasibility
of Developments 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
(4)(D) 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)
Income. The Underwriter evaluates the reasonableness of
the Applicant's income estimate by determining the appropriate rental rate
per unit based on contract, program and market factors. Miscellaneous income
and vacancy and collection loss limits as set forth in subparagraphs (B) and
(C) of this paragraph, respectively, are applied unless well-documented support
is provided.
(A)
Rental Income. The Program Rent less Utility Allowances
or Market Rent or Contract Rent 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, Contract Rents are used,
if applicable. If Contract Rents do not apply, the lowest Program Rents less
Utility Allowance ("net Program Rent") or Market Rents, as determined by the
Market Analysis that are lower than the net Program Rents, are utilized.
(i)
Market Rents. The Underwriter reviews the Attribute Adjustment
Matrix of Comparable Units 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.
(ii)
Program Rents less Utility Allowance. 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 division responsible
for compliance 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.
(I)
Units must be individually metered for all utility costs
to be paid by the tenant.
(II)
Gas utilities are verified on the building plans and elsewhere
in the application when applicable.
(III)
Trash allowances paid by the tenant are rare and only
considered when the building plans allow for individual exterior receptacles.
(IV)
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.
(iii)
Contract Rents. The Underwriter reviews submitted rental
assistance contracts to determine the Contract Rents currently applicable
to the Development. Documentation supporting the likelihood of continued rental
assistance is also reviewed. The underwriting analysis will take into consideration
the Applicant's intent to request a Contract Rent increase. At the discretion
of the Underwriter, the Applicant proposed rents may be used in the underwriting
analysis with the recommendations of the Report conditioned upon receipt of
final approval of such increase.
(B)
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. Exceptions may be made at the discretion
of the Underwriter for garage income, pass-through utility payments, pass-through
water, sewer and trash payments, cable fees, congregate care/assisted living/elderly
facilities, and child care facilities.
(i)
Exceptions must be justified by operating history of existing
comparable properties.
(ii)
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.
(iii)
The Applicant's operating expense schedule should reflect
an offsetting cost associated with income derived from pass-through utility
payments, pass-through water, sewer and trash payments, and cable fees.
(iv)
Collection rates of exceptional fee items will generally
be heavily discounted.
(v)
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.
(C)
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 area.
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.
(D)
Effective Gross Income. The Underwriter independently calculates
EGI. If the EGI figure provided by the Applicant is within 5% of the EGI figure
calculated by the Underwriter, the Applicant's figure is characterized as
reasonable in the Report; however, for purposes of calculating DCR the Underwriter
will maintain and use its independent calculation unless the Applicant's proforma
meets the requirements of paragraph (3) of this subsection.
(2)
Expenses. The Underwriter evaluates the reasonableness
of the Applicant's expense estimate by line item comparisons based upon the
specifics of each transaction, including the type of Development, the size
of the units, and the Applicant's expectations as reflected in their proforma.
Historical stabilized certified or audited financial statements of the Development
or Third Party quotes specific to the Development will reflect the strongest
data points to predict future performance. The Department's database of property
in the same location or region as the proposed Development also provides heavily
relied upon data points. 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 may
be referenced. 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 sources may be considered.
(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. 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, 5% 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
3% may be utilized if documented by 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. 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. 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 EGI. 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 EGI. 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. The underwriting tolerance level for this line item is 30%.
(H)
Property Tax. Property Tax includes all real and personal
property taxes but not payroll taxes. The underwriting tolerance level for
this line item is 10%.
(i)
The per unit assessed value will be calculated based on
the capitalization rate published on the county taxing authority's website.
If the county taxing authority does not publish a capitalization rate on the
internet, a capitalization rate of 10% will be used or comparable assessed
values may be used in evaluating this line item expense.
(ii)
Property tax exemptions or proposed payment in lieu of
tax agreement (PILOT) must be documented as being reasonably achievable if
they are to be considered by the Underwriter. At the discretion of the Underwriter,
a property tax exemption that meets known federal, state and local laws may
be applied based on the tax-exempt status of the Development Owner and its
Affiliates.
(I)
Reserves. Reserves include annual reserve for replacements
of future capitalizable expenses as well as any ongoing additional operating
reserve requirements. The Underwriter includes minimum reserves of $200 per
unit for new construction and $300 per unit for all other Developments. The
Underwriter may require an amount above $300 for Developments other than new
construction based on information provided in the PCA. Higher levels of reserves
also may be used if they are documented in the financing commitment letters.
(J)
Other Expenses. The Underwriter will include other reasonable
and documented expenses, not including 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 also are not considered in the Department's calculation of debt coverage.
The most common other expenses are described in more detail in clauses (i)
- (iv) of this subparagraph.
(i)
Supportive Services Expense. Supportive Services Expense
includes the documented cost to the owner of any non-traditional tenant benefit
such as payroll for instruction or activities personnel. The Underwriter will
not evaluate any selection points for this item. The Underwriter's verification
will be limited to assuring any anticipated costs are included. For all transactions
supportive services expenses are considered in calculating the Debt Coverage
Ratio.
(ii)
Security Expense. Security Expense includes contract or
direct payroll expense for policing the premises of the Development. The Applicant's
amount is typically accepted as provided. The Underwriter will require documentation
of the need for security expenses that exceed 50% of the anticipated payroll
expense estimate discussed in subparagraph (C) of this paragraph.
(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 in calculating the Debt Coverage Ratio.
(iv)
Cable Television Expense. Cable Television Expense includes
fees charged directly to the owner of the Development to provide cable services
to all units. The expense will be considered only if a contract for such services
with terms is provided and income derived from cable television fees is included
in the projected EGI. Cost of providing cable television in only the community
building should be included in General and Administrative Expense as described
in subparagraph (A) of this paragraph.
(K)
The Department will communicate with and allow for clarification
by the Applicant when the overall expense estimate is over 5% greater or less
than the Underwriter's estimate. In such a case, the Underwriter will inform
the Applicant of the line items that exceed the tolerance levels indicated
in this paragraph, but may request additional documentation supporting some,
none or all expense line items. If an acceptable rationale for the 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
5% of the final total expense figure calculated by the Underwriter, the Applicant's
figure is characterized as reasonable in the Report; however, for purposes
of calculating DCR the Underwriter will maintain and use its independent calculation
unless the Applicant's proforma meets the requirements of paragraph (3) of
this subsection.
(3)
Net Operating Income. NOI is the difference between the
EGI and total operating expenses. If the NOI figure provided by the Applicant
is within 5% of the NOI figure calculated by the Underwriter, the Applicant's
figure is characterized as reasonable in the Report; however, for purposes
of calculating the DCR the Underwriter will maintain and use his independent
calculation of NOI unless the Applicant's EGI, total expenses, and NOI are
each within 5% of the Underwriter's estimates.
(4)
Debt Coverage Ratio. Debt Coverage Ratio is calculated
by dividing Net Operating Income by the sum of loan principal and interest
for all permanent sources of funds. Loan principal and interest, or "Debt
Service," is calculated based on the terms indicated in the submitted commitments
for financing. Terms generally include the amount of initial principal, the
interest rate, amortization period, and repayment period. Unusual financing
structures and their effect on Debt Service will also be taken into consideration.
(A)
Interest Rate. The interest rate used should be the rate
documented in the commitment letter.
(i)
Commitments indicating a variable rate must provide a detailed
breakdown of the component rates comprising the all-in rate. The commitment
must also state the lender's underwriting interest rate, or the Applicant
must submit a separate statement executed by the lender with an estimate of
the interest rate as of the date of the statement.
(ii)
The maximum rate allowed for a competitive application
cycle is evaluated by the Director of the Department's division responsible
for Credit Underwriting Analysis Reports 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)
Amortization Period. 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 period may be used if the
Department's funds are fully amortized over the same period.
(C)
Repayment Period. For purposes of projecting the DCR over
a 30-year period for Developments with permanent financing structures with
balloon payments in less than 30 years, the Underwriter will carry forward
Debt Service calculated based on a full amortization and the interest rate
stated in the commitment.
(D)
Acceptable Debt Coverage Ratio Range. The initial 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. HOPE
VI and USDA Rural Development transactions may underwrite to a DCR less than
1.10 based upon documentation of acceptance from the lender.
(i)
For Developments other than HOPE VI and USDA Rural Development
transactions, if the DCR is less than the minimum, the recommendations of
the Report are conditioned upon a reduced debt service and the Underwriter
will make adjustments to the assumed financing structure in the order presented
in subclauses (I) - (III) of this clause.
(I)
A reduction of the interest rate or an increase in the
amortization period for TDHCA funded loans;
(II)
A reclassification of TDHCA funded loans to reflect grants,
if permitted by program rules;
(III)
A reduction in the permanent loan amount for non-TDHCA
funded loans 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.
(ii)
If the DCR is greater than the maximum, the recommendations
of the Report are conditioned upon an increase in the debt service and the
Underwriter will make adjustments to the assumed financing structure in the
order presented in subclauses (I) - (III) of this clause.
(I)
A reclassification of TDHCA funded grants to reflect loans,
if permitted by program rules;
(II)
An increase in the interest rate or a decrease in the
amortization period for TDHCA funded loans;
(III)
An increase in the permanent loan amount for non-TDHCA
funded loans 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.
(iii)
For Housing Tax Credit Developments, a reduction in the
recommended Tax Credit allocation may be made based on the gap/DCR method
described in subsection (c)(2) of this section.
(iv)
Although adjustments in Debt Service may become a condition
of the Report, future changes in income, expenses, and financing terms could
allow for an acceptable DCR.
(5)
Long Term Feasibility. The Underwriter will evaluate the
long term feasibility of the Development by creating a 30-year operating proforma.
(A)
A 3% annual growth factor is utilized for income and a
4% annual growth factor is utilized for expenses.
(B)
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 5% of the Underwriter's estimates.
(C)
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. DCR will
be calculated based on the guidelines stated in subsection (d)(4) of this
section.
(D)
Any Development with a 30-year proforma, used in the underwriting
analysis, reflecting cumulative Cash Flow over the first fifteen years as
insufficient to repay the projected amount of deferred developer fee , amortized
in irregular payments at 0% interest, is characterized as infeasible. An infeasible
Development 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 Development's need for permanent
funds and, when applicable, the Development's Eligible Basis is based upon
the projected total development costs. The Department's estimate of the total
development 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 Underwriter's total cost estimate will
be used unless the Applicant's total development cost is within 5% of the
Underwriter's estimate. In the case of a rehabilitation Development, the Underwriter
may use a lower tolerance level due to the reliance upon the PCA. If the Applicant's
total development cost is utilized and the Applicant's line item costs are
inconsistent with documentation provided in the Application or program rules,
the Underwriter may make adjustments to the Applicant's total cost estimate.
(1)
Acquisition Costs. The proposed acquisition price is verified
with the fully executed site control document(s) for the entire proposed 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.
(i)
The acquisition will be considered an identity of interest
transaction when an Affiliate of, a Related Party to, or any owner at any
level of the Development Team
(I)
is the current owner in whole or in part of the proposed
property, or
(II)
was the owner in whole or in part of the proposed property
during any period within the 36 months prior to the first day of the Application
Acceptance Period.
(ii)
In all identity of interest transactions the Applicant
is required to provide the additional documentation identified in §50.9(h)(7)(A)
of this title to support the transfer price to be used in the underwriting
analysis.
(iii)
In no instance will the acquisition cost utilized by
the Underwriter exceed
(I)
the original acquisition cost listed in the submitted settlement
statement or, if a settlement statement is not available, the original asset
value listed in the most current audited financial statement for the identity
of interest owner, or
(II)
the "as-is" value conclusion in the submitted appraisal.
(C)
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. The Underwriter may
alternatively prorate the actual or identity of interest sales price based
upon a lower calculated improvement value over the as-is value provided in
the appraisal, so long as the resulting land value utilized by the Underwriter
is not less than the land value indicated in the appraisal or tax assessment.
(2)
Off-Site Costs. 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. All off-site costs must be well documented
and certified by a Third Party engineer on the required application form.
(3)
Site Work Costs. Project site work costs exceeding $7,500
per Unit must be well documented and certified by a Third Party engineer on
the required application form. In addition, for Applicants seeking Tax Credits,
documentation in keeping with §50.9(i)(6)(G) of this title will be utilized
in calculating eligible basis.
(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 Marshall
and Swift Residential Cost Handbook and historical final cost certifications
of all previous housing tax credit allocations to estimate the direct construction
cost for a new construction Development. If the Applicant's estimate is more
than 5% greater or less than the Underwriter's estimate, the Underwriter will
attempt to reconcile this concern and ultimately identify this as a cost concern
in the Report.
(i)
The "Average Quality" multiple, townhouse, or single family
costs, as appropriate, from the Marshall and Swift Residential Cost Handbook,
based upon the details provided in the application and particularly site and
building plans and elevations will be used to estimate direct construction
costs. 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.
(ii)
If the difference in the Applicant's direct cost estimate
and the direct construction cost estimate detailed in clause (i) of this subparagraph
is more than 5%, the Underwriter shall also evaluate the direct construction
cost of the Development based on acceptable cost parameters as adjusted for
inflation and as established by historical final cost certifications of all
previous housing tax credit allocations for:
(I)
the county in which the Development is to be located, or
(II)
if cost certifications are unavailable under subclause
(I) of this clause, the uniform state service region in which the Development
is to be located.
(B)
Rehabilitation Costs. In the case where the Applicant has
provided a PCA which is inconsistent with the Applicant's figures as proposed
in the development cost schedule, the Underwriter may request a supplement
executed by the PCA provider supporting the Applicant's estimate and detailing
the difference in costs. If said supplement is not provided or the Underwriter
determines that the reasons for the initial difference in costs are not well-documented,
the Underwriter utilizes the initial PCA estimations in lieu of the Applicant's
estimates.
(5)
Hard Cost Contingency. All contingencies identified in
the Applicant project cost schedule will be added to Hard Cost Contingency
with the total limited to the guidelines detailed in this paragraph. Hard
Cost Contingency is limited to a maximum of 5% of direct costs plus site work
for new construction Developments and 10% of direct costs plus site work for
rehabilitation Developments. For tax credit Developments, the percentage is
applied to the sum of the eligible direct construction costs plus eligible
site work costs in calculating the eligible contingency cost. The Applicant's
figure is used by the Underwriter if the figure is less than 5%.
(6)
Contractor Fee Limits. Contractor fees are limited to 6%
for general requirements, 2% for contractor overhead, and 6% for contractor
profit. The percentages are applied to the sum of the direct construction
costs plus site work costs. For tax credit Developments, the percentages are
applied to the sum of the eligible direct construction costs plus eligible
site work costs in calculating the eligible contractor fees. 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 TX-USDA-RHS,
the combination of builder's general requirements, builder's overhead, and
builder's profit should not exceed the lower of TDHCA or TX-USDA-RHS requirements.
(7)
Developer Fee Limits. For Tax Credit Developments, the
development cost associated with developer fees and Development Consultant
(also known as Housing Consultant) fees included in Eligible Basis cannot
exceed 15% of the project's Total Eligible Basis less developer fees, as defined
in the QAP. Developer fee claimed must be proportionate to the work for which
it is earned. In the case of an identity of interest transaction requesting
acquisition Tax Credits, no developer fee attributable to acquisition of the
Development will be included in Eligible Basis. For non-Tax Credit Developments,
the percentage remains the same but is based upon total development costs
less the sum of the fee itself, land costs, the costs of permanent financing,
excessive construction period financing described in subsection (f)(8) of
this section, reserves, and any other identity of interest acquisition cost.
(8)
Financing Costs. Eligible construction period financing
is limited to not more than one year's 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 considered
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 project cost schedule if it is within
the range of two 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. 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 Eligible 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 financial statements, and personal credit reports for
those individuals anticipated to guarantee the completion of the Development.
(1)
Credit Reports. The Underwriter will characterize the Development
as "high risk" if the Applicant, General Partner, Developer, anticipated Guarantor
or Principals thereof have a credit score which reflects a 40% or higher potential
default rate.
(2)
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 in accordance with the Department's program rules.
(A)
Individuals. The Underwriter will evaluate and discuss
financial statements for individuals in a confidential portion of the Report.
The Development may be characterized as "high risk" if the Developer, anticipated
Guarantor or Principals thereof is determined to have limited net worth or
significant lack of liquidity.
(B)
Partnerships and Corporations. The Underwriter will evaluate
and discuss financial statements for partnerships and corporations in the
Report. The Development may be characterized as "high risk" if the Developer,
anticipated Guarantor or Principals thereof is determined to have limited
net worth or significant lack of liquidity.
(C)
If the Development is characterized as a high risk for
either lack of previous experience as determined by the TDHCA division responsible
for compliance or a higher potential default rate is identified as described
in paragraph (1) or (2) of this subsection, the Report must condition any
potential award upon the identification and inclusion of additional Development
partners who can meet the Department's guidelines.
(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, survey 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, the Report will include a condition
that:
(A)
The Applicant must pursue and receive a Letter of Map Amendment
(LOMA) or Letter of Map Revision (LOMR-F); or
(B)
The Applicant must identify the cost of flood insurance
for the buildings and for the tenant's contents for buildings within the 100-year
floodplain; or
(C)
The Development must be designed to comply with the QAP,
as proposed.
(2)
Inclusive Capture Rate. The Underwriter will not recommend
the approval of funds to new Developments requesting funds if the anticipated
inclusive capture rate, as defined in §1.33 of this subchapter, exceeds
25% for the Primary Market unless:
(A)
The Developments is classified as a Rural Development according
to the QAP, as proposed, in which case an inclusive capture rate of 100% is
acceptable; or
(B)
The Development is strictly targeted to the elderly or
special needs populations, in which case an inclusive capture rate of 100%
is acceptable; or
(C)
The Development is comprised of Affordable Housing which
replaces previously existing substandard Affordable Housing within the same
Primary Market Area on a Unit for Unit basis, and which gives the displaced
tenants of the previously existing Affordable Housing a leasing preference,
in which case an inclusive capture rate is not applicable.
(3)
The Underwriter will identify in the report any Developments
funded or known and anticipated to be eligible for funding within one linear
mile of the subject.
(4)
Supportive Housing. The unique development and operating
characteristics of Supportive Housing Developments may require special consideration
in the following areas:
(A)
Operating Income. The extremely-low-income tenant population
typically targeted by a Supportive Housing Development may include deep-skewing
of rents to well below the 50% AMI level or other maximum rent limits established
by the Department. The Underwriter should utilize the Applicant's proposed
rents in the Report as long as such rents are at or below the maximum rent
limit proposed for the units and equal to any project based rental subsidy
rent to be utilized for the Development.
(B)
Operating Expenses. A Supportive Housing Development may
have significantly higher expenses for payroll, security, resident support
services, or other items than typical Affordable Housing Developments. The
Underwriter will rely heavily upon the historical operating expenses of other
Supportive Housing Developments provided by the Applicant or otherwise available
to the Underwriter.
(C)
DCR and Long Term Feasibility. Supportive Housing Developments
may be exempted from the DCR requirements of subsection (d)(4)(D) of this
section if the Development is anticipated to operate without conventional
debt. Applicants must provide evidence of sufficient financial resources to
offset any projected 30-year cumulative negative cash flows. Such evidence
will be evaluated by the Underwriter on a case-by-case basis to satisfy the
Department's long term feasibility requirements and may take the form of one
or a combination of the following: executed subsidy commitment(s), set-aside
of Applicant's financial resources, to be substantiated by an audited financial
statement evidencing sufficient resources, and/or proof of annual fundraising
success sufficient to fill anticipated operating losses. If either a set aside
of financial resources or annual fundraising are used to evidence the long
term feasibility of a Supportive Housing Development, a resolution from the
Applicant's governing board must be provided confirming their irrevocable
commitment to the provision of these funds and activities.
(D)
Development Costs. For Supportive Housing that is styled
as efficiencies, the Underwriter may use "Average Quality" dormitory costs
from the Marshall & Swift Valuation Service, with adjustments for amenities
and/or quality as evidenced in the application, as a base cost in evaluating
the reasonableness of the Applicant's direct construction cost estimate for
new construction Developments.
(h)
Work Out Development. Developments that are underwritten
subsequent to Board approval in order to refinance or gain relief from restrictions
may be considered infeasible based on the guidelines in this section, but
may be characterized as "the best available option" or "acceptable available
option" depending on the circumstances and subject to the discretion of the
Underwriter as long as the option analyzed and recommended is more likely
to achieve a better financial outcome for the property and the Department
than the status quo.
§1.36.Property Condition Assessment Guidelines.
(a)
General Provisions. The objective of the Property Condition
Assessment (the PCA) is to provide cost estimates for repairs, replacements,
or new construction which are: immediately necessary; proposed by the developer;
and expected to be required throughout the term of the regulatory period.
The PCA prepared for the Department should be conducted and reported in conformity
with the American Society for Testing and Materials "Standard Guide for Property
Condition Assessments: Baseline Property Condition Assessment Process (ASTM
Standard Designation: E 2018)" except as provided for in subsections (b) and
(c) of this section. The PCA must include discussion and analysis of the following:
(1)
Useful Life Estimates. For each system and component of
the property the PCA should assess the condition of the system or component,
and estimate its remaining useful life, citing the basis or the source from
which such estimate is derived.
(2)
Code Compliance. The PCA should review and document any
known violations of any applicable federal, state, or local codes. In developing
the cost estimates specified herein, it is the responsibility of the Housing
Sponsor or Applicant to ensure that the PCA adequately considers any and all
applicable federal, state, and local laws and regulations which may govern
any work performed to the subject property.
(3)
Program Rules. The PCA should assess the extent to which
any systems or components must be modified, repaired, or replaced in order
to comply with any specific requirements of the housing program under which
the Development is proposed to be financed, particular consideration being
given to accessibility requirements, the Department's Housing Quality Standards,
and any scoring criteria for which the Applicant may claim points.
(4)
Cost Estimates for Repair and Replacement. It is the responsibility
of the Housing Sponsor or Applicant to ensure that the PCA provider is apprised
of all development activities associated with the proposed transaction and
consistency of the total immediately necessary and proposed repair and replacement
cost estimates with the development cost schedule submitted as an exhibit
of the Application.
(A)
Immediately Necessary Repairs and Replacement. Systems
or components which are expected to have a remaining useful life of less than
one year, which are found to be in violation of any applicable codes, which
must be modified, repaired or replaced in order to satisfy program rules,
or which are otherwise in a state of deferred maintenance or pose health and
safety hazards should be considered immediately necessary repair and replacement.
The PCA must provide a separate estimate of the costs associated with the
repair, replacement, or maintenance of each system or component which is identified
as being an immediate need, citing the basis or the source from which such
cost estimate is derived.
(B)
Proposed Repair, Replacement, or New Construction. If the
development plan calls for additional repair, replacement, or new construction
above and beyond the immediate repair and replacement described in subparagraph
(A) of this paragraph, such items must be identified and the nature or source
of obsolescence or improvement to the operations of the Property discussed.
The PCA must provide a separate estimate of the costs associated with the
repair, replacement, or new construction which is identified as being above
and beyond the immediate need, citing the basis or the source from which such
cost estimate is derived.
(C)
Expected Repair and Replacement Over Time. The term during
which the PCA should estimate the cost of expected repair and replacement
over time must equal the longest term of any land use or regulatory restrictions
which are, or will be, associated with the provision of housing on the property.
The PCA must estimate the periodic costs which are expected to arise for repairing
or replacing each system or component or the property, based on the estimated
remaining useful life of such system or component as described in paragraph
(1) of this subsection adjusted for completion of repair and replacement immediately
necessary and proposed as described in subparagraphs (A) and (B) of this paragraph.
The PCA must include a separate table of the estimated long term costs which
identifies in each line the individual component of the property being examined,
and in each column the year during the term in which the costs are estimated
to be incurred. The estimated costs for future years should be given in both
present dollar values and anticipated future dollar values assuming a reasonable
inflation factor of not less than 2.5% per annum.
(b)
If a copy of such standards or a sample report have been
provided for the Department's review, if such standards are widely used, and
if all other criteria and requirements described in this section are satisfied,
the Department will also accept copies of reports commissioned or required
by the primary lender for a proposed transaction, which have been prepared
in accordance with:
(1)
Fannie Mae's criteria for Physical Needs Assessments,
(2)
Federal Housing Administration's criteria for Project Capital
Needs Assessments,
(3)
Freddie Mac's guidelines for Engineering and Property Condition
Reports,
(4)
TX-USDA-RHS guidelines for Capital Needs Assessment, or
(5)
Standard and Poor's Property Condition Assessment Criteria:
Guidelines for Conducting Property Condition Assessments, Multifamily Buildings.
(c)
The Department may consider for acceptance reports prepared
according to other standards which are not specifically named above in subsection
(b) of this section, if a copy of such standards or a sample report have been
provided for the Department's review, if such standards are widely used, and
if all other criteria and requirements described in this section are satisfied.
(d)
The PCA shall be conducted by a Third Party at the expense
of the Applicant, and addressed to TDHCA as the client. Copies of reports
provided to TDHCA which were commissioned by other financial institutions
should address TDHCA as a co-recipient of the report, or letters from both
the provider and the recipient of the report should be submitted extending
reliance on the report to TDHCA. The PCA report should also include a statement
that the person or company preparing the PCA report will not materially benefit
from the Development in any other way than receiving a fee for performing
the PCA. The PCA should be signed and dated by the Third Party report provider
not more than six months prior to the date of the application.
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 January 12, 2006.
TRD-200600209
Edwina P. Carrington
Executive Director
Texas Department of Housing and Community Affairs
Effective date: February 1, 2006
Proposal publication date: September 2, 2005
For further information, please call: (512) 475-4595