**COMMUNITY LAND TRUSTS IN MICHIGAN**

I. [PURPOSE:]{.underline} This instruction supplements Handbook-1-3550,
Chapter 9, "Loans For

Units in a Community Land Trust".

II\. [PARAGRAPH 9.14:]{.underline} Procedure for processing an
application for a loan with a

Community Land Trust involved.

This procedure amends the HB-1-3550 Instruction to provide Local and
Area Offices with useful information in the completion these loan
dockets.

Community Land Trusts (CLT) must meet the requirements set out in
HB-1-3550. [Before processing an application]{.underline} for a loan
with a new CLT (not previously approved for RHS financing) the CLT
organization must submit to the State Office for OGC review;

-   Documents and/or statements of compliance for all items listed in
    HB-1-3550, 9.14, A,

-   A copy of the CLT's Articles of incorporation and By-Laws, and

-   A copy of the minutes of the meeting in which the Articles of
    Incorporation and By-Laws were adopted by the organization.

Rural Development loans with a CLT require use of specific documents to
perfect the Agency's lien. The documents developed for the direct loan
program are designed to be used only under the following circumstances:

Where a CLT already owns the land and lessee/RHS borrower is applying
for a;

(A) [Non-leveraged loan.]{.underline} For loans where RHS is providing
    the sole source of loan funds and/or will hold first lien position,
    the CLT and the lessee/RHS borrower will be required to execute the
    ; (see Exhibit K in three parts)

    1.  USDA CLT Terms and Conditions

    2.  USDA Uniform Ground Lease Rider, which must be recorded, and

    3.  Subsidy Repayment Agreement Addendum, or

(B) [Leveraged Loan.]{.underline} RHS will subordinate its loan to
    participating lenders in

> accordance with program regulations, guides, and applicable
> underwriting
>
> standards.

In making such leveraged loans, the CLT and the lessee/RHS borrower will
also be required to execute each of the three documents listed in
Sub-Paragraph A, above. (*Loan processors be Aware)*. If the other
lender desires the flexibility of selling their portion of the loan into
the secondary market, [execution of forms in addition to]{.underline}
those listed in subparagraph A may be necessary at loan closing. In this
event, [while NOT a requirement of Rural Development,]{.underline} the
marketing of the lender's loan may require the lender to have executed
and recorded the appropriate, pre-approved Fannie Mae mortgage
documents, including Fannie Mae's *Community Land Trust Terms and
Conditions* and *Uniform Ground Lease Rider* [for the lender's
portion]{.underline} of the leveraged loan (see MI Inst. 1980-D for
documents acceptable to Fannie Mae). These forms are for use by other
lenders. They are not the same as nor can they be substituted for the
forms referenced in subparagraph A above or vice-versa.

The basic CLT closing process is as follows:

-   The CLT Lessor and the lessee/RHS borrower enter into a long term
    ground lease.

-   Applicable Uniform Ground Lease Riders (and related documents) are
    executed and recorded.

-   Promissory Note(s) are signed and the lessee/RHS borrower delivers
    the necessary mortgage(s) (on the leasehold held land and the
    buildings) to the lender and/or Rural Development.

-   Standard RHS loan underwriting, origination, closing, disbursement,
    and servicing procedures should be used.

In the event that such standard procedures are not applicable or are
insufficient, direction should be sought from the SFH Program Director,
who will consult with the OGC as necessary.

[Modest Housing;]{.underline} In order to determine the maximum loan
amount applicable with a CLT (when the applicant is not purchasing the
site) it is necessary to deduct the market value of the lot being leased
from the are loan limit (see HB-1-3550, 5.6, D)

Reminder -- the paragraph contained in HB-1-3550, Attachment 5-C,
Amendments to Mortgages with Leasehold Interest, must be inserted in the
Michigan Real Estate Mortgage, if the property is to be held with a
leasehold interest.

> **Community Land Trust**

**Terms and Conditions**

For Direct Mortgage Loans

United States Department of Agriculture

Rural Development, Rural Housing Service, Single Family Housing

The following terms and conditions (CLT T&C) apply to leasehold
mortgages originated and delivered as community land trust mortgage
loans (CLT Mortgages). All other requirements of the rural Development
Direct Single Family Housing Loan Program as described in 7 C.F.R. part
3550 must be followed. The term "Rural Development" refers to Rural
Development's rural Housing Service, Single Family Housing Division, to
which the attached contract or commitment is being issued.

Rural Development's rules and regulations, as amended from time to time,
and as modified by these terms and conditions, are incorporated herein
by reference and are collectively referred to as the "Incorporated
Documents."

By delivery of a CLT Mortgage to rural Development in accordance with
this CLT T&C document, the applicant represents and warrants that the
CLT Mortgage complies with, and covenants that it will service the CLT
Mortgage in accordance with, the Incorporated Documents.

The CLT T&C does not describe a stand-alone mortgage product. Instead,
CLT Mortgages must be delivered in connection with rural Development's
Direct Single Family Housing Loan Program. The purpose of this loan
program is to provide financing to low- and very-low income borrowers
who cannot obtain adequate credit from other sources to obtain adequate
housing in rural areas. Title 7 of the Code of Federal Regulations at
Part 3550 contains the basic eligibility requirements for Rural
Development financing. The applicant and Rural Development will work
together to ensure that the appropriate criteria for financing are met.
At a minimum, however, only the following are eligible for CLT
Mortgages: owner-occupied, modest, principal residences in rural areas
consisting of one dwelling, including units in condominiums and planned
unit developments ("PUDs") that conform with an related Rural
Development requirements. Funds may be used to buy (in whole or in
part), build, improve, or relocate an eligible dwelling and provide
related facilities for use by the borrower as a permanent residence.
Rural Development funds may be used in connection with other funding
sources as in a leveraged or participation loan (typically, rural
Development funds are used this way to enable a borrower to make a
downpayment while another lender provides the balance of the financing).

**Community Land Trusts**

To preserve affordable housing for low- and moderate-income households,
many communities are forming community land trusts (typically nonprofit
organizations) to own land that they will lease at affordable prices.
The community land trust, as ground lessor under a long-term ground
lease, grants the low- or moderate-income household the right to use the
land and improvements.

Furthermore, the ground lease contains certain land use restrictions
which ensure the continued

use of the property for low- and moderate-income households. Rural
Development financing is available for low- and very-low income
borrowers.

The community land trust must have, or must be affiliated with an
organization that has, a minimum of two years of experience in
successfully developing or managing low- and/or very-low income housing,
as evidenced by an organizational resume or history detailing the
community land trust's and/or affiliated organization's experience in
providing housing together with a list of its principal officers, their
titles, and their resumes. If Rural Development identifies a particular
community land trust that does not meet the two-year test, but otherwise
has experienced staff and/or the capability to develop and manage
appropriately the housing plan contemplated by the community land trust,
Rural Development may, at its discretion, approve that CLT for
participation in its lending program.

**Ground Lease Provisions**

The ground leans in use by the CLT must be the one approved by the
Institute for Community Economics and the Board of Directors for the CLT
shall certify that the ground lease in use by the CLT is in strict
compliance with that model. If the lease in use by the CLT deviates from
that model, the Board of the CLT must highlight the variations and
submit them to Rural Development for approval in consultation with its
Office of General Counsel.

Rural Development will accept CLT Mortgages provided that Rural
Development's Uniform Community Land Trust Ground Lease Rider is
executed, thereby amending and supplementing the terms of the ground
lease. The form of the Uniform Community Land Trust Ground Lease Rider
is attached hereto as Exhibit A (referred to herein as the "CLT Rider").
The purpose of the CLT Rider is to bring the ground lease into
conformance with rural Development's guidelines for CLT Mortgages
without the delay that would result from rural Development's guidelines
for CLT Mortgages without the delay that would result from Rural
Development's exercise of prior review and approval of each form of
ground lease.

The leasehold estate created by the ground lease must constitute real
property under applicable local law. The ground lease, as amended by the
CLT Rider, must be recorded with the local recorder of real estate
documents.

The term of the estate created under the ground lease must run for at
least ten years beyond the maturity of the CLT Mortgage.

Where the CLT Rider has been executed and recorded with respect to the
particular ground lease, Rural Development will not review the ground
lease, and rural Development may deliver CLT Mortgages in accordance
with the terms hereunder unless rural Development has advised the
community land trust in writing that prior ground lease review and
approval is required. Though rural Development reserves the right to
review the ground lease prior to delivery of CLT Mortgages, rural
Development anticipates that it would exercise this right only in
circumstances where the document deviates from the model adopted by the
Institute for Community Economics.

Alternatively, CLT Mortgages may be delivered where the CLT Rider has
not been executed and recorded with respect to the particular ground
lease, but in that case the applicant must make a written request to
Rural Development that the ground lease by considered on a variance
basis. If Rural Development consents to consider the matter on a
variance basis, the applicant must then submit the ground lease to Rural
Development for review and approval, along with a narrative description
of the elements of nonconformance with the terms of the CLT Rider. If
the applicant chooses to seek variance approval, the request should be
made well in advance of the anticipated mortgage delivery.

**Resale Restrictions**

Community land trust ground leases may contain resale restrictions (or
such restrictions may be contained in a separate recorded document)
limiting future eligible buyers and/or maximum sales prices, but any
such restrictions must be recorded and must provide that they are
terminated automatically upon foreclosure or assignment in lieu of
foreclosure of the Mortgage, except to the extent permitted under the
CLT Rider. (To save closing expenses, a notice or memorandum of the
ground lease with an excerpt of the relevant resale or maximum sales
price restrictions attached, may be recorded instead of the entire
ground lease.)

**Appraisal Guidelines**

Because community land trusts may not be common in many localities, and
because the nature of the restrictions created under the ground lease
may affect the value of the property, the applicant must adhere to the
guidelines on the valuation of community land trust properties as
contained in Exhibit B attached hereto ("Rural Development guidelines on
the Valuation of Property Subject to a Leasehold Interest and/or
Community Land Trust").

**Ground Lease in Good Standing**

Before the applicant can deliver the CLT Mortgage to rural Development,
the applicant must confirm that all ground lease rents, other payments,
or assessments that have become due must be paid, and the applicant must
not be in default under any other provision of the ground lease -- nor
may such a default have been claimed by the ground lessor. In all
aspects, the ground lease must be valid, in good standing, and in full
force and effect.

**Title Insurance**

Title Insurance is required on all CLT Mortgages, Where community land
trust ground lease restrictions apply and where rural Development is
providing complete financing, the title insurance policy (or an
endorsement thereto) must expressly confirm (1) the recording of the
community land trust ground lease and the CLT Rider (where applicable);
(2) that the CLT Mortgage is a first leasehold lien on the leasehold
estate; (3) that there are no existing mortgages or other liens on the
fee estate, except as may be permitted under the CLT Rider; (4) that the
ground lessor's reversionary interest is subordinate to the CLT
Mortgage; and (5) that any related community land trust ground lease
occupancy and resale restrictions, covenants, agreements, etc., that
"run with the land" and that have been recorded apart from the ground
lease shall terminate upon foreclosure or assignment in lieu of
foreclosure of the CLT Mortgage.

Where community land trust ground lease restrictions apply and where
Rural Development is providing a leveraged or participation loan, the
title insurance policy (or an endorsement thereto) must expressly
confirm (1) the recording of the community land trust ground lease and
the CLT Rider (where applicable); (2) that the rural Development CLT
Mortgage is secured against the leasehold estate with a lien position as
required by Rural Development; (3) that there are no existing mortgages
or other liens on the fee estate, except as specified and approved by
Rural Development and as may be permitted under the CLT rider; (4) that
the ground lessor's reversionary interest is subordinate to the rural
Development CLT Mortgage; and (5) that any related community land trust
ground lease occupancy and resale restrictions, covenants, agreements,
etc., that "run with the land" and that have been recorded apart from
the ground lease shall terminate upon foreclosure or assignment in lieu
of foreclosure of the Rural Development CLT Mortgage.

**Other Requirements**

Such CLT mortgages may be subject to other requirements from time to
time as the statutes and regulations governing such program may be
amended, provided that such amendments are not inconsistent with the
contractual terms between the parties. Additionally, Rural Development
policies and procedures may be altered or amended and may impose certain
other requirements for the operation of the program, the servicing of
loans, or other purposes as necessary.

**Nondiscrimination**

The United States Department of Agriculture (USDA) prohibits in all its
programs and activities discrimination on the basis of race, national
origin, gender, age, disability, political beliefs, sexual orientation,
and marital or family status. (Not all prohibited bases apply to all
programs.) Persons who require alternative means of communication of
program information (Braille, large print, audiotape, etc.) should
contact USDA's Target Center at 202-720-2600 (voice and TDD). To file a
complaint of discrimination, write USDA, Director, Office of Civil
Rights, Room 326-W, Whitten Building, 1400 Independence Avenue SW,
Washington, D.C. 20250-9410 or call 202-720-5954 (voice or TDD). USDA is
an equal opportunity provider and employer.

BY SIGNING BELOW, the Lessor acknowledges that these CLT Terms and
Conditions are applicable and binding.

IN WITNESS WHEREOF, the lessee has executed this agreement
at\_\_\_\_\_\_\_\_\_\_\_\_\_,

on the\_\_\_\_\_\_\_\_\_day
of\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, 20\_\_\_\_\_.

LESSEE:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME ON THIS
\_\_\_\_\_\_DAY OF
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, 20\_\_\_\_\_\_.

STATE OF MICHIGAN )

) SS.
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

COUNTY OF ) SIGNATURE OF NOTARY PUBLIC

OFFICIAL SEAL

**EXHIBIT A**

**United States Department of Agriculture**

**Rural Development, Rural Housing Service, Single Family Housing**

**USDA Uniform Community Land Trust Ground Lease Rider**

THIS COMMUNITY LAND TRUST GROUND LEASE RIDER ("Rider") is made

\_\_\_\_\_\_\_day of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, \_\_\_\_\_\_\_, and
is incorporated into, and shall be

deemed to amend and supplement the community land trust ground lease
("CLT Ground

Lease") dated \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_by and
between \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

as lessor (the "Lessor") and
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, as lessee (the
"Lessee").

The CLT Ground Lease covers the leased premises at
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(the "Leased Premises"), as further described therein. The CLT Ground
Lease, as

amended by this Rider, shall hereafter be referred to as the "Lease,"
unless otherwise

indicated.

This Rider amends the CLT Ground Lease for the purpose of enabling the
Lessee to

Secure Rural Development financing in the form of a mortgage or deed of
trust given this

day of \_\_\_\_\_\_\_\_\_\_, \_\_\_\_\_\_\_\_\_\_, by Lessee to
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ (the

"Specified USDA Mortgage"). The Specified USDA Mortgage is recognized by
Lessor

as a "Permitted Mortgage" (or as such concept is otherwise defined)
under the CLT

Ground Lease, and the holder of the Specified USDA Mortgage (the
"Specified

Mortgagee") is recognized as a "Permitted Mortgagee" (or as such concept
is otherwise

defined) under the CLT Ground Lease.

**ADDITIONAL COVENANTS.** Notwithstanding anything to the contrary
contained in the CLT Ground Lease, and in addition to the covenants and
agreement made in the CLT Ground Lease, the Lessor and the Lessee
further covenant and agree, so long (but only so long) as the Specified
Mortgagee, its successors and assigns shall have an interest in the
Leased Premises, as a holder of the Specified USDA Mortgage or as an
owner of the Lessee's interest pursuant to any sale after or in lieu of
foreclosure the following provisions shall apply to the CLT Ground Lease
as modifications thereof:

**A. [No Assignment or Transfer.]{.underline}** The making of the
Specified USDA Mortgage shall not be deemed to constitute an assignment
or transfer of the Lease or leasehold estate so as to require the
Specified Mortgagee to assume the performance of any of the Lessee's
obligations under the Lease.

**B. [Status of the Fee Estate.]{.underline}** The Lessor represents and
warrants that, except as specified and approved by Rural Development,
there is no existing mortgage on the fee estate, and so long as the
Specified USDA Mortgage shall remain on the Leased Premises, the Lessor
and the Lessee shall not subordinate the Lease to any mortgage or lien
that may hereafter be place on the fee estate. Notwithstanding the
foregoing, a state- or local-government entity ("Government Entity") may
hold a prior recorded interest (represented by recorded covenants, a
mortgage or deed of trust, other lien) on the fee estate
**[if]{.underline}** the Government Entity has entered into an agreement
(which agreement has been approved in writing by the Specified
Mortgagee) that provides, among other conditions, in the event the
Government Entity (including its successors and assigns) succeeds to the
interest of the Lessor under the Lease by any remedy available to the
Government Entity by law or pursuant to its lien, the Government Entity
and the Lessee agree to recognize one another under all the terms of the
Lease and this Rider. Such recognition must include, but is not limited
to, the provisions of this Rider whereby all provisions of the Lease
regarding (a) occupancy of the Leased Premises as a primary residence by
the Lessee, (b) limitation on assignment of, or sublease under, the
Lease, (c) the price at which the leasehold estate may be transferred,
and (d) the income of successive transferees, assignees or successors,
shall, in the event of foreclosure or assignment in lieu of foreclosure
of the Specified USDA Mortgage, be of no further force or effect with
respect to such Specified Mortgagee or its successive transferees,
assignees or successors. The Specified USDA Mortgage shall, unless
otherwise pre-approved in writing by rural Development, constitute a
first leasehold lien on the Leased Premises, and shall have priority
over the lessor's reversionary interest. If the Lessor conveys title to
the fee estate while the Specified USDA Mortgage remains on the Leased
Premises, the Lease shall remain in effect with the same priority
thereto.

C.  **[Termination, Forfeiture and Modification of Lease.]{.underline}**
    There shall be no

termination, forfeiture, or modification of the Lease, except as
provided in this Rider, without the prior written consent of the
Specified Mortgagee. The Lessor and Lessee shall amend the Lease from
time to time as reasonably requested by the Specified Mortgagee, as long
as the requested changes do not change the periodic fee, charge or
payment due the Lessor for the rights accorded the Lessee under the
Lease (the "Ground Lease Fee"), and do not materially or adversely
affect the rights of Lessor or Lessee or their respective interests in
the Leased Premises. An adjustment of the Ground Lease Fee may be made
by the Lessor as provided in the

Lease, without prior approval of the Specified Mortgagee, so long as
written notice has been

delivered to the Specified Mortgagee at least 60 days prior to the
effective date of such adjustment with respect to adjustments other than
those (i) that were scheduled at the time the Specified USDA Mortgage
was given, and (ii) reflecting routine, periodic updates to variable
expenses such as property taxes and liability insurance premiums;
provided, however, that the Specified Mortgagee shall have the right to
arbitrate (as provided herein) any dispute as to an adjustment of the
Ground Lease Fee.

D.  **[New Lease.]{.underline}** In the event the Lessee's interest in
    the Lease has been terminated,

> forfeited, or surrendered as provided in the Lease, and the Specified
> USDA Mortgage remains outstanding, a new Lease shall automatically be
> created between the Lessor and the Specified Mortgagee, which Lease
> shall be for the remainder of the term of the Lease, with the same
> priority thereto, and shall be subject to the same terms of the Lease
> as would be applicable pursuant to Section E.1, below where the
> Specified Mortgagee had accelerated its note, foreclosed on the
> Specified USDA Mortgage, taken an assignment in lieu of foreclosure,
> or exercised its other remedies for default.

E.  **[Mortgage Default or Foreclosure.]{.underline}** Subject to the
    following, upon the occurrence of

> an event of default under the Specified USDA Mortgage (as determined
> by the Specified Mortgagee---an "Event of Default"), and without the
> consent of the Lessor, the Specified Mortgagee shall be permitted to
> accelerate its note, foreclose on the Specified USDA Mortgage, take an
> assignment in lieu of foreclosure, or exercise its other remedies for
> default. Further:

1.  Upon the occurrence of an Event of Default under the Specified USDA
    Mortgage,

> the Lessee shall immediately notify the Lessor of such Event of
> Default and shall submit to Lessor copies of all notices the Lessee
> received from the Specified Mortgagee relating thereto. The Specified
> Mortgagee and the Lessor shall endeavor to communicate and cooperate
> in efforts to deal with the circumstances of the Event of Default and
> the actions the parties may take relating thereto: provided, however,
> the Specified Mortgagee shall have no obligation to give formal legal
> notice of the Event of Default to the Lessor.

2.  The Lessee and the Specified Mortgagee agree that the Lessor shall
    have the right,

> but not the obligation, to cure an Event of Default in the Lessee's
> name and on the Lessee's behalf. If such cure is not effective and
> continuing, nothing herein shall be construed to prevent or delay the
> Specified Mortgagee from its pursuit of foreclosure and any other
> available remedies. The Lessee shall be responsible to the Lessor for
> all payments made, and expenses incurred, by the Lessor in curing such
> default.

3.  Should the Lessor not choose to cure an Event of Default as
    specified above, the Lessor shall

> nevertheless have the option to purchase the leasehold estate from the
> Specified Mortgagee for the full amount owing to the Specified
> Mortgagee under the Specified USDA Mortgage as of the date of closing
> of the purchase, upon written notice given by the Specified Mortgagee
> (the "Mortgagee Option Notice") not later than 60 days following
> acquisition of title to the leasehold estate by the Specified
> Mortgagee by foreclosure or by an assignment in lieu of foreclosure;
> provided, however, the Specified Mortgagee may give such written
> notice following the occurrence of an Event of Default under the
> Specified USDA Mortgage and prior to the completion of foreclosure
> proceedings. If the Lessor elects to exercise such option to purchase,
> the Lessor shall give written notice to the Specified Mortgagee of the
> Lessor's intent to purchase
>
> the leasehold estate (the "Lessor Option Notice") within 45 days
> following the Specified
>
> Mortgagee's giving of the Mortgagee Option Notice; provided, however,
> at the option of the Lessor, in the even the Mortgagee Option Notice
> is given prior to the completion of foreclosure proceedings by the
> Specified Mortgagee, the Lessor shall, within such 45-day period, be
> able to give a written notice to the Specified Mortgagee that it will
> delay giving the lessor Option Notice until a date that is not later
> than 30 days following written notice from the Specified Mortgagee of
> its acquisition of title to the leasehold estate.
>
> The Lessor shall within 30 days of giving the Lessor Option Notice
> issue a commitment by
>
> Way of a Letter of Intent to Purchase the Leasehold Estate and the
> Lessor shall complete the
>
> purchase of the leasehold estate within 60 days of giving such Lessor
> Option Notice. If the
>
> Lessor does not complete the purchase within the allotted 60 days, the
> Specified Mortgagee
>
> shall be free to sell the leasehold estate to another person or
> entity. Further, if the Lessor
>
> does not complete the purchase within the allotted 60 days, the Lessor
> agrees to pay to the
>
> Specified Mortgagee its costs of holding the property from the date of
> the Lessor Option
>
> Notice until the expiration of such 60-day period. If the Lessor does
> not purchase the
>
> leasehold estate as described herein, the leasehold estate may be
> transferred, mortgaged and
>
> sublet an unlimited number of times, and the Lessor shall not require
> a credit review or
>
> impose other qualifying criteria on any such transferee, mortgagee or
> sublessee.

4.  In the event of foreclosure or assignment in lieu of foreclosure,
    which results in the

> conveyance of the leasehold estate from the Lessee, any adjustment of
> the Ground Lease Fee to reflect then current fair market rental value
> as provided in the Lease, shall be subject to the approval of the
> Specified Mortgagee. The Specified Mortgagee and the Lessor shall
> attempt to resolve any dispute concerning such adjustment of the
> Ground Lease Fee, through the normal interaction of the parties, or
> through formal mediation as the case may warrant. If the dispute
> remains unresolved, the Specified Mortgagee and the Lessor shall
> submit the dispute as to the fair market rental value to binding
> arbitration.

5.  In the event the Specified Mortgagee acquires title to the leasehold
    estate through

> foreclosure or assignment in lieu of foreclosure of the Specified USDA
> Mortgage, all provisions of the Lease regarding (a) occupancy of the
> Leased Premises as a primary residence by the Lessee, (b) any
> limitation on the assignment of, or sublease under, the Lease, (c) any
> obligation to target certain populations in marketing the leasehold
> estate to potential transferees, (d) the price at which the leasehold
> estate may be transferred, and (e) the income of successive
> transferees, and their successors and assigns, shall be of no further
> force or effect with respect to such Specified Mortgagee or its
> successive transferees, assignees or successors. The foregoing
> sentence shall not be construed to invalidate other Lease provisions
> regarding permitted use of the Leased Premises. Any transfer or
> assignment of the property encumbered by the Specified USDA Mortgage
> as provided for in this paragraph shall be deemed a permitted sale,
> transfer or assignment of the Lease and the leasehold estate. Further,
> in such event, the leasehold estate may be transferred, mortgaged and
> sublet an unlimited number of times, and the Lessor shall not require
> a credit review or impose other qualifying criteria on any such
> transferee, mortgagee or sublessee.

F.  **[Lease Default.]{.underline}** There shall be no forfeiture or
    termination of the Lease except for (i) the

> nonpayment of amounts due under the Lease, and (ii) violation of one
> or more provisions of the Lease addressing the following: (a)
> prohibition or restrictions on the sale or transfer of the
>
> Lessee's interest (however, non-sale transfers resulting from
> marriage, divorce, death of a spouse, or a transfer otherwise
> permitted by applicable federal law, may not constitute a basis for
> default under the Lease, though the Lessor may require such transferee
> to agree to assume the transferor's obligations under the Lease), and
> (b) requirement that the Lessee occupancy the Leased Premises as
> primary residence. Provided, however, such forfeiture or termination
> shall be subject to the Specified Mortgagee's right to cure a monetary
> default, or otherwise foreclose or take an assignment of the Leasehold
> estate in lieu of foreclosure with respect to the Lessee's monetary or
> non-monetary default. Notwithstanding the foregoing, nothing herein
> shall be construed to require the Specified Mortgagee to cure any
> non-monetary default. Further, the Specified Mortgagee shall become
> subrogated to any and all rights of the Lessee with respect to such
> curing of a default. If the Lessee's default shall be cured as
> provided in the Lease, and the Specified Mortgagee shall discontinue
> its foreclosure or assignment in lieu of foreclosure proceedings, the
> Lease shall continue in full force and effect as if the Lessee had not
> defaulted. A default by the Lessee under the Lease shall constitute a
> default under the Specified USDA Mortgage.

G.  **[Lease Default Notice.]{.underline}** Notwithstanding the notice
    requirements provided in the Lease, no

> default notice by the Lessor shall be deemed to have been given unless
> and until a copy thereof shall have been so given to the Specified
> Mortgagee.

H.  **[Insurance.]{.underline}** All insurance policies covering the
    Improvements shall be endorsement name of

> the Specified Mortgagee as an additional insured and loss payee, and
> provide the Specified Mortgagee with 30 day's cancellation notice.

I.  **[Casualty and Condemnation.]{.underline}** If the Leased Premises
    are destroyed or taken to such an

> extent that the Lease is to be terminated, the insurance proceeds or
> condemnation award, as the case may be, shall be applied first in an
> amount sufficient to satisfy the Specified USDA Mortgage. Upon the
> termination of the Lease as a result of a partial destruction or a
> condemnation of less than the entire Leased Premises, the total
> insurance proceeds or condemnation award, as the case may be, shall be
> paid to an appointed trustee, who shall first apply such insurance
> proceeds or condemnation award in accordance with the Specified USDA
> Mortgage for restoration of the Improvements (if such trustee
> determines that the Improvements may reasonably be restored to a
> residential use consistent with the Lease), with the balance of such
> insurance proceeds or condemnation award to be allocated between the
> Lessor and Lessee as otherwise provided in the Lease. The Specified
> Mortgagee shall be entitled to participate in (i) the adjustment of
> all casualty losses and (ii) all condemnation proceedings and
> settlement discussions. Any insurance proceeds or condemnation award
> shall be applied in accordance with the Specified USDA Mortgage. The
> Specified Mortgagee shall also be entitled to participate in the
> adjustment of the Ground Lease Fee as a result of a partial
> destruction of taking.

J.  **[Force Majeure.]{.underline}** The Lessee shall not be in default
    where performance is delayed or

> prevented by "Acts of God," war, civil commotion, strikes, labor
> disputes or the like.

K.  **[Easements and Alterations.]{.underline}** Additions to and
    alternations in the Improvements may be

> made as provided in the Lease, as long as the value of the Leased
> Premises and the Improvements is not diminished. The Lessor, as owner
> of the Leased Premises only, shall join in all easements, permits and
> applications necessary for such development of the Leased Premises and
> the Improvements as is permitted under the Lease, provided that the
> Lessor shall have no liability or obligation under such easement,
> permit or application.

L.  **[Arbitration.]{.underline}** The Specified Mortgagee is to be
    notified an any arbitration or legal

> proceedings between the Lessor and the Less. Any arbitration
> proceedings shall be conducted in accordance with arbitration statutes
> applicable in the state where the Leased Premises are located.

M.  **[Merger.]{.underline}** If the estates of the Lessor and Lessee
    are at any time owned by the same person,

> so long as the Specified Mortgagee has any interest in the security or
> in the Specified USDA Mortgage, such person shall take all necessary
> steps to ensure that the Specified USDA Mortgage constitutes a first
> lien on the combined estate. If the Specified USDA Mortgage is a Rural
> Development leveraged or participation loan, then such person shall
> take all necessary steps to ensure that the Specified USDA Mortgage
> retains the same or better lien position on the combined estate as it
> did before merger.

N.  **[Sublease.]{.underline}** There shall be no modification,
    cancellation, or surrender of any subleases, or

> prepayment of rent thereunder without the consent of the Specified
> Mortgagee. If the Specified Mortgagee forecloses on the Lease
> Premises, or takes an assignment in lieu of foreclosure, all
> subtenants shall attorn to such Specified Mortgagee or its assignee.

O.  **[Estoppel Certificate.]{.underline}** The Lessor shall, from time
    to time, with 10 days written notice

> from the Specified Mortgagee, certify by written instrument, duly
> executed and acknowledged, to such Specified Mortgagee that the Lease
> has not been amended, the Lease is in full force and effect, that
> neither party is in default thereunder, and shall certify as to the
> existence of any offsets, counterclaims or defenses on the part of the
> Lessee.

P.  **[Conflict.]{.underline}** In the event of a conflict between the
    terms and provisions of this Rider and the

> terms and provisions of the Lease, the terms and provisions of this
> Rider shall control. In the event that another Ground Lease Rider is
> in force and effective as to the Lease, the terms and provisions of
> this Rider are intended to supplement the terms and provisions of that
> other Rider. To the extent that the terms and provisions of this Rider
> conflict with those of another Rider, the terms and provisions of this
> Rider shall apply only to Rural Development.
>
> BY SIGNING BELOW, the Lessor and the Lessee accept and agree to the
> terms and

conditions of this Rider.

IN WITNESS WHEREOF, the parties have executed this Rider
at\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, on the day and year first
written above.

LESSOR:

By:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Title:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

LESSEE:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS \_\_\_\_\_\_\_
DAY OF \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,
\_\_\_\_\_\_\_\_\_\_.

STATE OF MICHIGAN )

) SS.
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

COUNTY OF ) SIGNATURE OF NOTARY PUBLIC

OFFICIAL SEAL

**EXHIBIT B**

**Rural Development Guidelines on the Valuation of a Property**

**Subject to a Leasehold Interest and/or Community Land Trust (CLT)**

**Leasehold Interest**

Leasehold interest is the right to the use and occupancy of real
property by the existence of a lease agreement. The lessee (tenant or
renter) enjoys these rights for a stipulated period of time, subject to
the payment of rent and other conditions. The valuation of a leasehold
interest may require complex analysis, so the appraiser should be
prepared to develop a thorough, clear, and detailed narrative for the
addendum section that describes the lease agreement's terms and
conditions and discusses their impact, if any on value and
marketability.

The leasehold box should be checked if the house being appraised is on
leased land or is subject to what is termed a "ground rent." In brief,
ground rent is the rent paid for the right to use and occupy land
according to the terms of a ground lease. Although this is uncommon in
most areas, there are areas of the United States where ground rents are
very common. The terms of the ground lease should be identified and the
effect of the lease analyzed in a narrative discussion attached as an
addendum to the report.

The appraiser should use sales of properties that have similar leasehold
interests. When adequate, closed leasehold comparables are available,
the appraiser will report them in the sales comparison section of our
report forms to arrive at an opinion of the market value of the
leasehold estate for the subject.

However, the appraiser may not have sales available which have the same
lease terms. In such cases, the appraiser may use the most similar sales
available with different lease terms or even fee simple sales. The
appraiser must make an appropriate adjustment (if any), on the sales
comparison grid, to reflect the market reaction to the different lease
terms or property rights appraised. The appraiser should explain why the
use of these sales was appropriate.

**Community Land Trust Properties**

**Note:** Community Land Trust Mortgage Loan Transactions are eligible 7
C.F.R., 3550.72. In all cases the land records relating to the subject
property must include adoption of the terms and conditions incorporated
in the Rural Development approved *Uniform Community Land Trust Ground
Lease Rider.*

Community Land Trust ("CLT"), typically, are non-profit organizations
that acquire land for a variety of purposes including, but not limited
to, facilitating homes ownership amount lower income individuals and
families. Similar to other leasehold properties, CLT's retain ownership
of the land. CLT's offer a long-term (typically 99-year term), renewable
ground lease to the owner of the improvements. By removing the cost of
the land from the transaction, the home may be purchased at a lower
cost, thereby increasing affordability, CLT's are established in
communities to offer home ownership opportunities and to create and
maintain a permanently affordable housing stock. Therefore, the CLT
ground lease may contain restrictions on purchaser eligibility and
restrictions on the resale of the property.

As the development of CLT properties expands in the United States, the
question about how to appraise these individual properties has arisen.
Chapter V, of the Fannie Mae Selling Guide, details general appraisal
requirements for analyzing the property appraisal aspects of
conventional, conforming, one to four family properties. That section
provides additional guidance to the appraiser on the appraisal process
for properties located on land held by a CLT.

Like other non-profit affordable housing developers, CLT's use grant,
gift and subsidy dollars to acquire the land and otherwise write down
development cost to an affordable level. The CLT structure is unlike
traditional affordable homeownership programs where the subsidy is (a)
included in the selling price, (b) secured by "soft second" liens on the
homebuyer's property (although Rural Development leveraged and
participation loans may hold junior lien positions) and (c) due on
resale. The selling price of a CLT home typically does not include the
subsidy amount used to acquire the land. Therefore, the sales price to
the CLT homebuyer may be less than the leasehold interest in the
property.

**Selection of Appraiser**

As is the case for all mortgages delivered to Rural Development, Rural
Development is responsible for the accuracy of both the appraisal and
its assessment of the marketability of the appraisal. The applicant is
responsible for the cost of that appraisal. Rural Development is
responsible for the selection of appraisers, is accountable for their
performance, and must take appropriate steps to ensure that the
appraiser is qualified to perform appraisals for the particular types of
property that the Rural Development intends to refer to the appraiser.
It follows that an appraiser that is to appraise a CLT property must
have knowledge and experience with the tools that are necessary to value
this type of property (such as direct capitalization and market
derivation of capitalization rates).

**Appraisal Methodology**

The appraisal of a CLT property requires the appraiser to analyze the
CLT property, subject to the ground lease (i.e. leasehold estate) as
security for the mortgage. Fannie Mae and the Institute for Community
Economics have reached an agreement on a Uniform Community Land Trust
Ground Lease Rider, to be attached to a CLT ground lease for mortgages.

Rural Development adopts that form and all CLT ground lease mortgages
accepted by Rural Development will utilize this form.

This rider amends the CLT ground lease to provide for the removal of
resale and other restrictions that would hinder the mortgagee's ability
to dispose of the property upon foreclosure.

Since the CLT typically subsidizes the sales price to the CLT homebuyer,
that price may well be less than the market value of the leasehold
interest in the property. Since the *Uniform Community Land Trust Ground
Lease Rider* removes these resale and other restrictions for the
mortgagee, it is important that the appraised value of the leasehold
interest in the property be well supported and correctly developed.

The appraiser must develop an opinion of value for the leasehold
interest under the hypothetical condition that the property rights being
appraised are the leasehold interest without the resale and other
restrictions that the *Uniform Community Land Trust Ground Lease Rider*
removes if the mortgagee must dispose of the property upon foreclosure.
The lender is required to advise the appraiser that the appraisal report
must contain the following statement:

**This appraisal is made on the basis of a hypothetical condition that
the property**

**rights being appraised are the leasehold interest without resale and
other**

**restrictions that are removed by the Uniform Community Land Trust
Ground**

**Lease Rider.**

Because of the dynamics of CLT properties, the appraiser's first step
should be to determine the fee simple value for the subject property
using the sales comparison analysis. The second step is to determine the
leased fee value of the ground lease. The final step involves deducting
the leased fee value from the fee simple value to arrive at the
leasehold value.

**Determining the Property's Fee Simple Value**

The first step in the valuation process requires the appraiser to
develop an opinion of the fee simple value of the subject. Therefore, it
is expected that the appraiser will use sales of fee simple ownership of
similar properties.

Use of sales without a ground lease (fee simple) is preferable. However,
the appraiser may use sales of leasehold properties but they will
require adjustment based on their lease to reflect a fee simple
interest. CLT sales may be available in the community and, if so, they
should be specifically discussed in the appraisal report. However, CLT
sales may not be appropriate in developing value since the prices are
normally limited by restrictions in the ground lease and would therefore
not be comparable to the hypothetical condition of the appraisal, which
assumes a leasehold interest without resale and other restrictions.

**Determining the Capitalization Rate**

The most direct method for determining the capitalization rate is by
extraction from the market. This normally requires an active market with
sales of fee simple ownership properties and sales of comparable non-CLT
properties subject to a ground lease.

To extract the capitalization rate, (all things being equal) the
appraiser divides the non-CLT annual ground rent by the difference in
sales price of the comparable fee simple and leasehold properties.

There is another method for determining the capitalization rate that is
especially applicable when no sales of comparable non-CLT properties
subject to a ground lease are available. This method compares
alternative low risk investment rates such as long term bond rates. The
appraiser should select a rate that best reflects a "risk-less" rate
(safe rate), loss of liquidity, management compensation, and
compensation for investment risks assumed.

**Determining the Property's Leasehold Value**

Direct capitalization of the ground rent is used t convert the annual
income from the CLT ground lease into an indicated leased fee value by
dividing the income by a market-derived capitalization rate. Subtracting
this leased fee value from the estimated fee simple value of the subject
property leaves the leasehold value. This method does not require
documentation of the actual land value, as do other methods.

The appropriate steps would be:

**Step 1.** Determine the annual contract rent due under the terms of
the ground lease;

**Step 2.** Determine the appropriate market capitalization rate for the
ground rent;

**Step 3.** Divide the annual rent by the market derived capitalization
rate to indicate the

leased fee value; and

**Step 4.** Subtract the leased fee value from the estimated fee simple
value to indicate the

subject property's leasehold value.

Example (for illustrative purposes only):

-   Annual rent due the CLT for ground lease: \$300

-   The market divided capitalization rate: 5.75%

-   \$300 divided by 5.75% equal \$5,217.39 (\$5,200 rounded)

-   If the fee simple property value were \$100,000; the indicated
    leasehold value of the property would be \$100,000 minus \$5,200 or
    \$94,800. The final opinion of value reported is \$94,800.

**Appraisal Reporting**

The CLT appraisal should be reported in a form acceptable to Rural
Development. "Leasehold" property rights appraised should be indicated
in a section of the report entitled "SUBJECT."

The CLT ground rent should be reported in a subsection of that section
entitled "Special Assessment." The appraisal should also indicate "Prop.
Rights" as a "FEATURE" and "Fee Simple" as a "DESCRIPTION" for the
"SUBJECT" in an adjustment grid of a section entitled "SALES COMPARISON
ANALYSIS." The adjustment grid should then estimate the fee simple value
for the subject property. In a section entitled "Summary of sales
comparison and value conclusion," the following items need to be present
in addition to the normally required discussion (many times this area
will have to continued on the addendum for CLT appraisals)

1.  Indicated fee simple value for the subject property

2.  Indicated leasehold value of the subject property (fee simple less
    the leased fee)

3.  The statement "See attached addendum for development of
    capitalization rate and expanded discussion of sales used and
    considered."

At the bottom of the form, the statement "see attached addendum for
hypothetical condition" must be added. If the subject property is not
completed, the appraisal must state that it is "subject to completion
per plans and specifications."

The leasehold value should be indicated as the value on the bottom line
of page one and again on the last page of the report.

**Subsidy Repayment Agreement Addendum**

United States Department of Agriculture

Rural Housing Service, Single Family Housing Division

The fee simple market appraisal for property located at
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ is calculated
according to the appraisal guidelines at Exhibit B of the USDA Community
Land Trust Terms and Conditions at
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. The borrower has a leasehold
interest in this property. The leasehold interest is subordinate to the
Rural Housing Service mortgage. Under this agreement, the borrower
agrees to restrict market value equity in future transfers, and Rural
Housing Service agrees to use the restricted price in calculating value
appreciation for Payment Assistance Recapture. For this Subsidy
Repayment Agreement, the fee simple market value appraisal is reduced by
any grant used to reduce the borrower's property acquisition costs,
which grant is described below and attached to this agreement:

Grantor:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Amount:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Date:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BY SIGNING BELOW, the Lessor and the Lessee accept and agree to the
terms and conditions of this rider.

IN WITNESS WHEREOF, the parties have executed this Rider at
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, on the day and year first written
above.

Rural Housing Service:

By:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Title:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

LESSEE/BORROWER:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS\_\_\_\_\_DAY OF
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, \_\_\_\_\_\_\_\_\_\_\_.

STATE OF MICHIGAN )

) SS.

COUNTY OF )

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

SIGNATURE OF NOTARY PUBLIC

OFFICIAL SEAL