(a) General Provisions.
(1) Pursuant to Tex. Gov't Code §2306.148 and §2306.185(b),
the Board is authorized to adopt underwriting standards as set forth
in this section. Furthermore, for Housing Credit Allocation, Code §42(m)(2),
requires the tax credits allocated to a Development not to exceed
the amount necessary to assure feasibility. Additionally, 24 CFR Parts
92 and 93, as further described in CPD Notices 15-11 and 21-10 require
the Department to adopt rules and standards to determine the appropriate
Multifamily Direct Loan feasibility. The rules adopted pursuant to
the Tex. Gov't Code and the Code are developed to result in an Underwriting
Report (Report) used by the Board in decision making with the goal
of assisting as many Texans as possible by providing no more financing
than necessary based on an independent analysis of Development feasibility.
The Report generated in no way guarantees or purports to warrant the
actual performance, feasibility, or viability of the Development.
(2) Oversourcing of Funds. The total amount of Department-allocated
funds combined with any additional soft funds provided by other units
of government may not exceed the total cost of all non-market Units
at the development, calculated on a per-unit basis. For purposes of
this subsection, soft funds include any grants, below-market interest
rate loans, or similar funds with a total cost to the Applicant that
is below commercial-rate financing, but does not include payable loans
provided at commercial rates with deferred payments. If the Department
determines that a Development is oversourced in accordance with this
subsection, the Applicant will be required to reduce the soft funds
provided by other units of government so as to no longer be oversourced.
(b) Report Contents. The Report provides a synopsis
and reconciliation of the Application information submitted by the
Applicant. For the purpose of this subchapter the term Application
includes additional documentation submitted after the initial award
of funds that is relevant to any subsequent reevaluation. The Report
contents will be based upon information that is provided in accordance
with and within the timeframes set forth in this chapter, Chapters
11, 12, or 13, or in a Notice of Funds Availability (NOFA), as applicable.
(c) Recommendations in the Report. The conclusion of
the Report, if being recommended, includes a recommended award of
funds or Housing Credit Allocation Amount and states any feasibility
or other conditions to be placed on the award. The award amount is
based on the lesser of the amounts determined using the methods in
paragraphs (1) - (3) of this subsection:
(1) Program Limit Method. For Housing Credit Allocations,
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 defined in §11.1(d)
of this chapter (relating to Definitions). For Department programs
other than Housing Tax Credits, this method is based upon calculation
of the funding limit in current program rules or NOFA at the time
of underwriting.
(2) Gap Method. This method evaluates the amount of
funds needed to fill the gap created by Total Housing Development
Cost less total non-Department-sourced funds or Housing Tax Credits.
In making this determination, the Underwriter resizes any anticipated
Deferred Developer Fee downward (but not less than zero) before reducing
the amount of Department funds or Housing 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 Housing Tax Credits. In making this determination and
based upon specific conditions set forth in the Report, the Underwriter
may assume adjustments to the financing structure (including treatment
of a Cash Flow loan as if fully amortizing over its term) or make
adjustments to any Department financing, such that the cumulative
Debt Coverage Ratio (DCR) conforms to the standards described in this
section. For Housing Tax Credit Developments at cost certification,
timing adjusters may be considered as a reduction to equity proceeds
for this purpose. Timing adjusters must be consistent with and documented
in the original partnership agreement (at admission of the equity
partner) but relating to causes outside of the Developer's or Owner's
control. The equity partner must provide a calculation of the amount
of the adjuster to be used by the Underwriter.
(3) The Amount Requested. The amount of funds that
is requested by the Applicant. For Housing Tax Credit Developments
(exclusive of Tax-Exempt Bond Developments) this amount is limited
to the amount requested in the original Application documentation.
(d) Operating Feasibility. The operating feasibility
of a Development funded by the Department is tested by analyzing its
Net Operating Income (NOI) to determine the Development's ability
to pay debt service and meet other financial obligations throughout
the Affordability Period. NOI is determined by subtracting operating
expenses, including replacement reserves and taxes, from rental and
other income sources.
(1) Income. In determining the first year stabilized
pro forma, the Underwriter evaluates the reasonableness of the Applicant's
income pro forma by determining the appropriate rental rate per unit
based on subsidy contracts, program limitations including but not
limited to Utility Allowances, actual rents supported by rent rolls
and Market Rents and other market conditions. Miscellaneous income,
vacancy and collection loss limits as set forth in subparagraphs (B)
and (C) of this paragraph, respectively, are used unless well-documented
support is provided and independently verified by the Underwriter.
(A) Rental Income. The Underwriter will review the
Applicant's proposed rent schedule and determine if it is consistent
with the representations made throughout the Application. The Underwriter
will independently calculate a Pro Forma Rent for comparison to the
Applicant's estimate in the Application.
(i) Market Rents. The Underwriter will use the Market
Analyst's conclusion of Market Rent if reasonably justified and supported
by the attribute adjustment matrix of Comparable Units as described
in §11.303 of this chapter (relating to Market Analysis Rules
and Guidelines). Independently determined Market Rents by the Underwriter
may be used based on rent information gained from direct contact with
comparable properties, whether or not used by the Market Analyst and
other market data sources. For a Development that contains less than
15% unrestricted units, the Underwriter will limit the Pro Forma Rents
to the lesser of Market Rent or the Gross Program Rent at 80% AMI.
(ii) Gross Program Rent. The Underwriter will use the
Gross Program Rents for the year that is most current at the time
the underwriting begins. When underwriting for a simultaneously funded
competitive round, all Applications are underwritten with the Gross
Program Rents for the same year. If Gross Program Rents are adjusted
by the Department after the close of the Application Acceptance Period,
but prior to publication of the Report, the Underwriter may adjust
the Effective Gross Income (EGI) to account for any increase or decrease
in Gross Program Rents for the purposes of determining the reasonableness
of the Applicant's EGI.
(iii) Contract Rents. The Underwriter will review 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 Underwriter will take into
consideration the Applicant's intent to request a Contract Rent increase.
At the discretion of the Underwriter, the Applicant's proposed rents
may be used as the Pro Forma Rent, with the recommendations of the
Report conditioned upon receipt of final approval of such an increase.
Tenant-based vouchers or tenant-based rental assistance are not included
as Income.
(iv) Utility Allowances. The Utility Allowances used
in underwriting must be in compliance with all applicable federal
guidance, and §10.614 of this title (relating to Utility Allowances).
Utility Allowances must be calculated for individually metered tenant
paid utilities.
(v) Net Program Rents. Gross Program Rent less Utility
Allowance.
(vi) Actual Rents for existing Developments will be
reviewed as supported by a current rent roll. For Unstabilized Developments,
actual rents will be based on the most recent units leased with occupancy
and leasing velocity considered. Actual rents may be adjusted by the
Underwriter to reflect lease-up concessions and other market considerations.
(vii) Collected Rent. Represents the monthly rent amount
collected for each Unit Type. For rent- assisted units, the Contract
Rent is used. In absence of a Contract Rent, the lesser of the Net
Program Rent, Market Rent or actual rent is used.
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