# Construction Lending for New Multifamily Properties, 1981 to 1997

## Billions of Dollars

<table><thead><tr><th></th><th>Banks</th><th>Thrifts</th><th>Credit</th><th>Other</th></tr></thead><tbody><tr><td>1981</td><td>5.675</td><td>2.029</td><td>1.607</td><td>1.130</td></tr><tr><td>1982</td><td>5.969</td><td>3.113</td><td>2.015</td><td>0.971</td></tr><tr><td>1983</td><td>7.747</td><td>8.081</td><td>2.759</td><td>0.759</td></tr><tr><td>1984</td><td>11.835</td><td>8.046</td><td>2.402</td><td>0.562</td></tr><tr><td>1985</td><td>15.386</td><td>9.550</td><td>4.046</td><td>0.823</td></tr><tr><td>1986</td><td>20.735</td><td>8.761</td><td>7.218</td><td>0.797</td></tr><tr><td>1987</td><td>22.884</td><td>8.469</td><td>3.454</td><td>0.697</td></tr><tr><td>1988</td><td>23.184</td><td>8.247</td><td>1.370</td><td>1.004</td></tr><tr><td>1989</td><td>29.327</td><td>5.278</td><td>1.717</td><td>0.514</td></tr><tr><td>1990</td><td>20.317</td><td>2.921</td><td>1.613</td><td>0.392</td></tr><tr><td>1991</td><td>20.064</td><td>1.475</td><td>3.122</td><td>0.404</td></tr><tr><td>1992</td><td>14.107</td><td>0.696</td><td>1.390</td><td>0.173</td></tr><tr><td>1993</td><td>16.326</td><td>1.195</td><td>0.723</td><td>0.261</td></tr><tr><td>1994</td><td>12.254</td><td>1.378</td><td>0.763</td><td>0.120</td></tr><tr><td>1995</td><td>15.406</td><td>1.240</td><td>0.847</td><td>0.212</td></tr><tr><td>1996</td><td>18.066</td><td>1.341</td><td>0.681</td><td>0.309</td></tr><tr><td>1997</td><td>17.368</td><td>1.347</td><td>0.585</td><td>1.511</td></tr></tbody></table>

Source: U.S. Department of Housing and Urban Development, Survey of Mortgage Lending Activity, 1997.

# THE ECONOMY

## Housing Busts and Hedge Fund Meltdowns: A Spectator's Guide

**H**OMEOWNERS may be dimly aware that their mortgage is held by someone other than the bank that lent them the money. But who is that someone?

Possibly an institution other than last week's owner. Mortgages, once held by banks over their life spans, are now pieces of elaborate and esoteric investments that are sold and resold over and over again.

This "securitization" of mortgages began in 1968 with government-backed loans. More recently, Wall Street banks embraced the securitization process, making a lot of

investors a lot of money.

So what's gone wrong in the last few months? An unfortunate combination: more loans in default (many borrowers were never in a position to pay them off), risky bets worth billions made by some investors (deals now gone sour), and the reversal of the housing boom.

Last week a large lender, American Home Mortgage, closed up shop, the latest among several such failures. Stocks tumbled over mortgage worries.

Here is a simplified look (really!) at what led to the troubles.

BILL MARSH

### 2 Lenders Offload Their Loans, Both the Good and the Bad

Traditionally, banks made loans to home buyers and held on to the loans until they were paid off. But increasingly since 2000, private lenders have sold most of their loans to investment banks, which make money by turning the loans into mortgage-backed securities for large investors.

Now, only about **one in five** mortgages is retained by the original lender.

The rest — **four out of five**, roughly — are sold off. The money from those sales goes to finance new mortgages.

The lenders also make money on mortgage fees.

This sea change in the mortgage industry has made some lenders, and some brokers who funnel customers their way, less vigilant against risky loans. After all, their **risks are quickly transferred** to the loans' new owners.

About one in four mortgages sold to investors is a **subprime** loan.

### 1 New Rules of Home Buying Mean Riskier Borrowers, Riskier Loans

In the early 1990s, home ownership rates were stagnant. To extend its business, the mortgage industry pushed loans with more generous terms. Combined with low interest rates, those loans made home-buying more affordable. But for some people, it only seemed affordable.

#### MORE LOANS TO MORE PEOPLE

Prime loans
go to borrowers with good credit.

Subprime loans

were given to people with weak credit histories. About 15 percent of all loans outstanding are subprime.

#### MORE MORTGAGE PRODUCTS

Increase in adjustable-rate mortgages, where a low introductory interest rate can rise sharply later, along with payments.

**Computer-automated underwriting:** less rigor in determining a borrower's income and ability to pay. Loans grew in proportion to the borrower's income.

**No money down — and more.** Many more down payments were reduced, from typically 20 percent of the home price to as little as zero. Buyers could borrow their closing costs. And some loans even exceeded the home's price.

**Serial refinancing** could reduce mortgage payments but also increase the life span of loans.

**Home equity loans** let owners tap into their equity, adding to their debt.

#### MORE PEOPLE IN ON THE ACTION

The mortgage process became fragmented, with numerous players reaping lucrative fees from home buyers:

* New mortgage companies, with looser lending standards.

* Real estate agents.

* Brokers.

* Appraisers (once independent and randomly assigned, many are now picked by brokers or real estate agents, creating a possible conflict of interest: inflating home valuations for the benefit of all three).

More people took on second mortgages during the boom in investment properties and second homes, piling on debt.

## Who's Minding The Store (Or Not)

#### BAD LOANS AND LOAN FRAUD

Where local bankers once gauged a customer's creditworthiness, automated software now does this to national standards. The result is often less scrutiny. Also, lenders who make half of subprime loans are state-regulated, where enforcement is uneven.

#### FEDERAL HANDS OFF

Regulators have been slow to rein in aggressive lending practices. Mortgage securities, unlike stocks and other bonds, are not as regulated by the federal government.

#### JUDGING THE SAFETY OF BONDS

Investors rely on ratings agencies to tell them how risky bonds are. But the agencies have a conflict: they are paid by investment banks — and they may be less likely to steer investors away from those bonds.

### 3 Turning Mortgages Into Investor Gold

The bulk of U.S. mortgages are purchased by Wall Street investment banks and other financial industry players. Large numbers of mortgages, often collectively worth billions, are **pooled into mortgage-backed securities**.

This security — an investment trust — now owns the pooled mortgages.

Investors buy **bonds** issued by the trust.

The homeowners' combined interest and principal payments are used to pay the investors' interest on the bonds they buy.

The risks posed by the bonds are rated by agencies like Moody's and Standard & Poor's. In this example, **AAA** is the safest. It is also the largest portion of the trust.

#### Inside a mortgage-backed security

POOL OF MORTGAGES

BOND RATING:

AAAA

Safest investment; lowest yield paid.

INTEREST AND PRINCIPAL PAYMENTS

AA

Riskier ...

A

... and riskier ...

BBB

Riskiest. Highest yield paid to investors.

#### Inside a collateralized debt obligation

BOND RATING:

AAAA

AA

A

BBB

BB

Ratings agencies assign risk categories to the new bonds inside the C.D.O. Many get the top safety rating, AAA —

even though the C.D.O. is created from lower-rated bonds.

C.D.O.s can beget more C.D.O.s. And so on.

Some investors do not fully research bond risks, a costly and complex task, relying instead on ratings agencies or mathematical risk models.

### 6 What to Watch For In the Coming Months

**Adjustable-rate mortgages spiking.** Many will see their rates rise through next year. How many will default?

**Effects of overbuilding.** In many areas, supply outstrips demand, so **prices are falling**. This could cause defaults by owners unable to sell for what they paid.

**A credit squeeze** may make it harder to get home mortgages, or to refinance them.

**Wall Street reaction.** Investors are pulling out of mortgage securities because of expected losses. How great will the actual losses from defaults be?

### 5 The Unraveling: Defaults Rise, And Billions Are in Jeopardy

The number of home buyers defaulting on mortgages, mostly the subprime variety, is rising. At the end of March, nearly **one in five** subprime mortgages were past due or in foreclosure.

As defaults mounted, questions arose about the riskiest mortgage-backed securities. Several hedge funds, heavily invested in risky securities **with mostly borrowed money**, collapsed when wary investors wanted to pull their money out. That money may be gone.

Sources: Josh Rosner of Graham Fisher, Mark H. Acleron; Moody's Investors Service; Mortgage Bankers Association

Bill Marsh and Vikas Bajaj/ The New York Times; photographs by Tony Conicola/ The New York Times

TABLE XIV

UNIT CONSTRUCTION COSTS PER SQUARE FOOT BY HOUSE

<table><thead><tr><th>House</th><th>Gross Floor Area<br>in square feet</th><th>Rehabilitation<br>Construction<br>Costs<sup>1</sup></th><th>Rehabilitation<br>Construction Costs<br>per gross square foot</th></tr></thead><tbody><tr><td>1</td><td>3,754</td><td>$47,797</td><td>$12.70</td></tr><tr><td>2</td><td>4,380</td><td>49,059</td><td>11.20</td></tr><tr><td>3</td><td>3,835</td><td>48,154</td><td>12.50</td></tr><tr><td>4</td><td>4,220</td><td>52,021</td><td>12.30</td></tr><tr><td>5A</td><td>3,690</td><td>45,756</td><td>12.40</td></tr><tr><td>5B</td><td>3,690</td><td>45,756</td><td>12.40</td></tr><tr><td>6A</td><td>3,835</td><td>47,078</td><td>12.30</td></tr><tr><td>6B</td><td>3,835</td><td>47,078</td><td>12.30</td></tr><tr><td>7A</td><td>3,835</td><td>45,534</td><td>11.90</td></tr><tr><td>7B</td><td>3,835</td><td>54,968</td><td>14.30</td></tr><tr><td>7C</td><td>5,570</td><td>64,230</td><td>11.30</td></tr></tbody></table>

¹See Table XII

the work and had to be replaced. The result was that SECD adopted on its later projects a policy of stripping out nearly all existing plaster and replacing all existing wood doors and trim. This more complete renovation job cost more money but produced a more satisfactory product.

Estimating Costs

SECD had difficulty in accurately estimating the cost of the work for the initial projects. The quantities of studding and plaster were underestimated, partly because salvage of existing work was over estimated. A number of carpentry items were underestimated such as the rebuilding of the winder stairways and the repair of exterior trim. Only with experience could the Corporation learn to anticipate the kinds of problems that would be encountered and to accurately allow for these in construction estimates. Over the course of the

4-

TABLE XIX

COMPLETION DATES IN CONNECTION WITH FHA LOAN PROCESSING

<table><thead><tr><th>Project</th><th>FHA 2012<sup>1</sup><br>submitted</th><th>Commitment<br>Application<br>requested</th><th>FHA 2013R<sup>2</sup><br>submitted</th><th>FHA<br>Feasibility<br>completed</th><th>Revised<br>FHA 2013R<br>submitted</th><th>Commitment<br>issued</th><th>Initial<br>closing</th><th>Start of<br>construction</th><th>Occupancy</th><th>Final<br>Closing</th></tr></thead><tbody><tr><td>1</td><td>11/2/64<sup>3</sup></td><td>12/1/64<sup>4</sup></td><td>12/17/64</td><td>7/6/65</td><td>7/9/65<sup>5</sup></td><td>10/8/65</td><td>1/14/66</td><td>10/27/65</td><td>6/3/66</td><td>1/30/67</td></tr><tr><td>2</td><td>11/2/64<sup>3</sup></td><td>12/1/64<sup>4</sup></td><td>12/17/64</td><td>7/15/65</td><td>7/30/65<sup>5</sup></td><td>10/8/65</td><td>1/14/66</td><td>10/27/65</td><td>8/25/66</td><td>1/30/67</td></tr><tr><td>3</td><td>11/2/64<sup>3</sup></td><td>12/1/64<sup>4</sup></td><td>12/17/64</td><td>7/15/65</td><td>7/30/65<sup>5</sup></td><td>10/22/65</td><td>1/12/66</td><td>1/13/66</td><td>10/24/66</td><td>8/7/67<sup>6</sup></td></tr><tr><td>4</td><td>11/2/64<sup>3</sup></td><td>12/1/64<sup>4</sup></td><td>12/17/64</td><td>7/15/65</td><td>7/30/65<sup>5</sup></td><td>10/22/65</td><td>1/12/66</td><td>1/13/66</td><td>12/2/66</td><td>8/7/67<sup>6</sup></td></tr><tr><td>5</td><td>8/24/65</td><td>10/25/65</td><td>1/24/66</td><td>6/9/66<sup>7</sup></td><td>6/23/66</td><td>9/6/66</td><td>10/28/66</td><td>10/28/66</td><td>7/26/67</td><td>3/25/68<sup>6</sup></td></tr><tr><td>6</td><td>8/24/65</td><td>11/15/65</td><td>3/14/66</td><td>7/11/66</td><td>8/12/66</td><td>12/29/66</td><td>1/26/67</td><td>1/26/67</td><td>11/28/67</td><td>3/25/68</td></tr><tr><td>7</td><td>9/13/66</td><td>12/13/66<sup>8</sup></td><td>3/10/67</td><td>8/14/67</td><td>--</td><td>11/16/67</td><td>12/18/67</td><td>11/22/67</td><td>6/3/68</td><td>1/15/69</td></tr></tbody></table>

¹FHA 2012 – Request for Pre-Application Analysis of Multifamily Housing Proposal.

²FHA 2013R – Application for Project Mortgage Insurance.

³FHA 2012 was not submitted at FHA's request, only architectural layouts and site plans submitted.

⁴Location approved.

⁵A second revised application submitted in September 1965 after National Housing Act was amended.

⁶Reprocessing delayed final closing.

⁷Commitment issued which was not accepted by SECD.

⁸Delayed 6 weeks awaiting allocation.

TABLE I
THE IMPACT OF RENOVATION COSTS ON RENT

<table><thead><tr><th>Financing</th><th>1<br>Conventional</th><th>2<br>Conventional<br>(Balloon)</th><th>3<br>Article<br>VIII</th><th>4<br>FHA<br>236</th></tr></thead><tbody><tr><td>Development Cost<br>Per Unit</td><td>$10,000</td><td>$10,000</td><td>$10,000</td><td>$10,000</td></tr><tr><td>Mortgage</td><td>6,667</td><td>6,667</td><td>9,000</td><td>9,500</td></tr><tr><td>Debt Service</td><td>730</td><td>482</td><td>653</td><td>289</td></tr><tr><td>Taxes</td><td>393</td><td>393</td><td>0<br>(J-51)</td><td>130</td></tr><tr><td>Profit</td><td>500</td><td>500</td><td>80</td><td>30</td></tr><tr><td>5<br>Operating<br>Expenses</td><td>855</td><td>855</td><td>855</td><td>855</td></tr><tr><td>Additional<br>Rent/Yr.</td><td>2,478</td><td>2,230</td><td>1,588</td><td>1,304</td></tr><tr><td>Additional<br>Rent/Mo.</td><td>206</td><td>186</td><td>132</td><td>109</td></tr><tr><td>6<br>Additional<br>Rent/Rm./Mo.</td><td>46</td><td>41</td><td>29</td><td>24</td></tr></tbody></table>

1. 20 yrs @9%, 2/3 mort.; fully taxed; profit 15% of equity.

2. 20 yrs @9%, 2/3 mort.; 1/3 balloon; fully taxed; profit 15% of equity.

3. 30 yrs @6%, tax abated (J-51); profit 8% of equity (varies widely in Article VIII).

4. 40 yrs @1%, 95% mort.; tax 10% shelter rent; profit 6% of equity.

5. Computed @ $190 per room per year.

6. 4.5 rms. = 1 dwelling unit.

figure 2-3

Multifamily Residential Project Pipeline

<table><thead><tr><th></th><th>Project</th><th>Units</th><th>Status</th></tr></thead><tbody><tr><td><strong>Market Area</strong></td><td></td><td></td><td></td></tr><tr><td>Sacramento (N/N or 80)</td><td>Apartment Building A</td><td>89</td><td>Construction</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building B</td><td>296</td><td>Construction</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building C</td><td>280</td><td>Approved</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Mixed-Use Building A</td><td>180</td><td>Preapproval</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building D</td><td>208</td><td>Approved</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building E</td><td>319</td><td>Pending</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building F</td><td>450</td><td>Pending</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building G</td><td>239</td><td>Pending</td></tr><tr><td>Sacramento (N. Natomas)</td><td>Apartment Building H</td><td>250</td><td>Pending</td></tr><tr><td><strong>Other Sacramento</strong></td><td></td><td></td><td></td></tr><tr><td>Sacramento (Southwest)</td><td>Apartment Building I</td><td>170</td><td>Pending</td></tr><tr><td>Sacramento (Downtown)</td><td>Mixed-Use Building B</td><td>154</td><td>Pending</td></tr><tr><td>Sacramento (Downtown)</td><td>Mixed-Use Building C</td><td>72</td><td>Pending</td></tr><tr><td>Sacramento (Downtown)</td><td>Warehouse Lofts A</td><td>26</td><td>Pending</td></tr><tr><td>Sacramento (Downtown)</td><td>Apartment Building J</td><td>266</td><td>Pending</td></tr><tr><td>Sacramento (Downtown)</td><td>Apartment Building K</td><td>272</td><td>Approved</td></tr><tr><td>Sacramento (Downtown)</td><td>Warehouse Lofts B</td><td>87</td><td>Approved</td></tr><tr><td><strong>Sacramento CMSA</strong></td><td></td><td></td><td></td></tr><tr><td>Woodland</td><td>Apartment Building L</td><td>136</td><td>Approved</td></tr><tr><td>Woodland</td><td>Apartment Building M</td><td>173</td><td>Approved</td></tr><tr><td>West Sacramento</td><td>Apartment Building N</td><td>218</td><td>Approved</td></tr><tr><td>West Sacramento</td><td>Apartment Building O</td><td>170</td><td>Approved</td></tr><tr><td>Roseville</td><td>Apartment Building P</td><td>236</td><td>Approved</td></tr><tr><td>Roseville</td><td>Apartment Building Q</td><td>161</td><td>Pending</td></tr><tr><td>Roseville</td><td>Apartment Building R</td><td>200</td><td>Pending</td></tr><tr><td><strong>Area Totals</strong></td><td></td><td></td><td></td></tr><tr><td><strong>Market Area</strong></td><td></td><td></td><td></td></tr><tr><td>Under Construction</td><td></td><td>385</td><td></td></tr><tr><td>Approved</td><td></td><td>488</td><td></td></tr><tr><td>Pending/Preapproval</td><td></td><td>1,438</td><td></td></tr><tr><td>Total</td><td></td><td>2,311</td><td></td></tr><tr><td><strong>Sacramento (Market Area + Other)</strong></td><td></td><td></td><td></td></tr><tr><td>Under Construction</td><td></td><td>385</td><td></td></tr><tr><td>Approved</td><td></td><td>847</td><td></td></tr><tr><td>Pending/Preapproved</td><td></td><td>2,126</td><td></td></tr><tr><td>Total</td><td></td><td>3,358</td><td></td></tr><tr><td><strong>Sacramento CMSA</strong></td><td></td><td></td><td></td></tr><tr><td>Under Construction</td><td></td><td>0</td><td></td></tr><tr><td>Approved</td><td></td><td>933</td><td></td></tr><tr><td>Pending/Preapproved</td><td></td><td>361</td><td></td></tr><tr><td>Total</td><td></td><td>1,294</td><td></td></tr></tbody></table>

Sources: Sacramento, Woodland, West Sacramento, and Roseville Planning Departments; Economics Research Associates.

figure 12-8

Billions of Dollars

Figure 4-1

City of Long Beach, California,
Development Fee Schedule

School Fee

Commercial: $0.31 per square foot

Residential: $1.93 per square foot

Sewer Capacity Fee

$59.52 per equivalent fixture unit per Sections 107 and Table 10-1 of the Uniform Plumbing Code

Commercial: Applicable to all added plumbing fixtures

Residential: Applicable to new units only

Park and Recreation Facilities Impact Fee

Commercial: No fee

Residential:

Single-Family Dwelling Unit: $2,680 per unit

Multiunit Development: $2,070 per unit

Mobile Home Dwelling Unit: $1,522 per pad

Secondary Housing Unit (granny flat): $1,522 per unit

Accessory Residential Unit (artist studio, caretakers unit, personage): $1,015 per unit

Transportation Improvement Fee

Commercial (citywide)

Industrial: $1.10 per square foot

Office: $2.00 per square foot

Retail: $3.00 per square foot

Hotel: $750 per guest room

Movie: $140 per seat

Commercial (downtown CBD)

Office: $3.00 per square foot

Retail: $4.50 per square foot

Hotel: $1,125 per guest room

Movie: $90 per seat

Residential

Residential: $1,125 per unit

Senior Citizen: $663.75 per unit

Source: City of Long Beach, Department of Planning and Building Web
site: http://www.ci.long-beach.ca.us/plan/develop.htm.

figure 5-9

Final Development Cost Summary

<table><tbody><tr><td colspan="2"><strong>Capital Costs</strong></td></tr><tr><td>Total Development Cost, Excluding Interest</td><td>$7,158,008</td></tr><tr><td>Interest Accrued during Construction</td><td>286,671</td></tr><tr><td>Total Capitalized Costs</td><td>$7,444,679</td></tr><tr><td colspan="2"><strong>Depreciable Basis</strong></td></tr><tr><td>Land Cost</td><td>603,350</td></tr><tr><td>Depreciable Basis (capital cost minus land)</td><td>$6,841,330</td></tr><tr><td colspan="2"><strong>Operating Reserve</strong></td></tr><tr><td>Operating Loss during Lease-up</td><td>$59,210</td></tr><tr><td>Interest Accrued during Operating Period</td><td>330,466</td></tr><tr><td>Total Operating Reserve during Lease-Up</td><td>$389,676</td></tr><tr><td><strong>Total Project Cost (capital costs plus operating reserve)</strong></td><td><strong>$7,834,355</strong></td></tr></tbody></table>

figure 5-9

**Final Development Cost Summary**

figure 5-4

Pro Forma NOI

<table><thead><tr><th></th><th>Annual Revenue/Cost</th></tr></thead><tbody><tr><td><strong>Income</strong></td><td></td></tr><tr><td>Gross Potential Rent</td><td>$1,340,200</td></tr><tr><td>Less: Vacancy and Collection Loss (5%)</td><td>(67,010)</td></tr><tr><td>Plus: Other Income</td><td>25,000</td></tr><tr><td><strong>Effective Gross Income</strong></td><td><strong>$1,298,190</strong></td></tr><tr><td></td><td>($9.73 per square foot)</td></tr><tr><td><strong>Expenses</strong></td><td></td></tr><tr><td><strong>Payroll</strong></td><td></td></tr><tr><td>Manager</td><td>$24,000</td></tr><tr><td>Assistant Manager/Bookkeeper</td><td>15,600</td></tr><tr><td>Maintenance</td><td>24,000</td></tr><tr><td>Porter for Grounds</td><td>14,400</td></tr><tr><td>Subtotal</td><td>$78,000</td></tr><tr><td>Payroll Taxes and Insurance (20% of payroll)</td><td>15,600</td></tr><tr><td>Advertising and Promotion</td><td>24,016</td></tr><tr><td>Maintenance Supplies (5% of effective gross income)</td><td>64,041</td></tr><tr><td>Administration, Management, Telephone<br>(5% of effective gross income)</td><td>64,041</td></tr><tr><td>Utilities for Common Area (5% of effective gross income)</td><td>64,041</td></tr><tr><td>Real Estate Taxes</td><td>77,384</td></tr><tr><td>Insurance</td><td>38,692</td></tr><tr><td><strong>Total Expenses</strong></td><td><strong>$425,815</strong></td></tr><tr><td></td><td>($3.19 per square foot)</td></tr><tr><td><strong>Net Operating Income</strong></td><td><strong>$872,375</strong></td></tr><tr><td></td><td>($6.54 per square foot)</td></tr></tbody></table>

Figure 5-5

Maximum Debt Calculation

<table>
  <tbody>
    <tr>
      <th colspan="2">Pro Forma NOI and Value</th>
    </tr>
    <tr>
      <td>Pro Forma NOI (from Figure 5-4)</td>
      <td>$872,375</td>
    </tr>
    <tr>
      <td>Capitalization Rate</td>
      <td>9.5%</td>
    </tr>
    <tr>
      <td>Value (NOI ÷ capitalization rate)</td>
      <td>$9,182,895</td>
    </tr>
    <tr>
      <th colspan="2">Loan Terms</th>
    </tr>
    <tr>
      <td>Interest Rate</td>
      <td>8.5%</td>
    </tr>
    <tr>
      <td>Amortization (years)</td>
      <td>25</td>
    </tr>
    <tr>
      <th colspan="2">Using Loan-to-Value Ratio</th>
    </tr>
    <tr>
      <td>Maximum LTV</td>
      <td>70%</td>
    </tr>
    <tr>
      <td>Maximum Loan Based on LTV</td>
      <td>$6,428,024</td>
    </tr>
    <tr>
      <th colspan="2">Using Debt Coverage Ratio</th>
    </tr>
    <tr>
      <td>Maximum DCR</td>
      <td>1.25</td>
    </tr>
    <tr>
      <td>Maximum Monthly Payment (NOI ÷ DCR ÷ 12)</td>
      <td>$58,158</td>
    </tr>
    <tr>
      <td>Maximum Loan Based on DCR</td>
      <td>$7,222,598</td>
    </tr>
    <tr>
      <th colspan="2">Maximum Loan (Lesser of LTV or DCR)</th>
    </tr>
    <tr>
      <td>Maximum Principal</td>
      <td>$6,428,024</td>
    </tr>
    <tr>
      <td>Monthly Payment</td>
      <td>$51,760</td>
    </tr>
    <tr>
      <td>Annual Debt Service</td>
      <td>$621,122</td>
    </tr>
  </tbody>
</table>

figure 5-7

Stage 2 Analysis—Discounted Cash Flow continued

<table><thead><tr><th>Return Measures</th><th>Investment</th><th>Year 1</th><th>Year 2</th><th>Year 3</th><th>Year 4</th><th>Year 5</th><th>Year 6</th><th>Year 7</th></tr></thead><tbody><tr><td><strong>Unleveraged IRR</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Project Cost</td><td>($7,834,355)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net Operating Income</td><td></td><td>$872,375</td><td>$894,184</td><td>$916,539</td><td>$939,452</td><td>$962,938</td><td>$987,012</td><td>$1,011,687</td></tr><tr><td>Adjusted Sale Price</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>10,478,949</td></tr><tr><td>Total Before-Tax Cash Flow</td><td>($7,834,355)</td><td>$872,375</td><td>$894,184</td><td>$916,539</td><td>$939,452</td><td>$962,938</td><td>$987,012</td><td>$11,490,637</td></tr><tr><td>Unleveraged IRR</td><td></td><td>14.9%</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net Present Value @ 12%<sup>7</sup></td><td></td><td>$1,151,030</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td><strong>Before-Tax IRR</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Equity</td><td>($1,404,216)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Before-Tax Operating Cash Flow</td><td></td><td>$251,252</td><td>$273,062</td><td>$295,416</td><td>$318,330</td><td>$341,816</td><td>$365,890</td><td>$390,565</td></tr><tr><td>Before-Tax Cash Flow from Sale</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>4,762,481</td></tr><tr><td>Total Before-Tax Cash Flow</td><td>($1,404,216)</td><td>$251,252</td><td>$273,062</td><td>$295,416</td><td>$318,330</td><td>$341,816</td><td>$365,890</td><td>$5,153,046</td></tr><tr><td>Before-Tax IRR</td><td></td><td>33.28%</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net Present Value @ 15%</td><td></td><td>$1,662,334</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td><strong>After-Tax IRR</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Equity</td><td>($1,404,216)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>After-Tax Operating Cash Flow</td><td></td><td>$229,314</td><td>$243,093</td><td>$257,095</td><td>$271,314</td><td>$285,744</td><td>$300,378</td><td>$315,206</td></tr><tr><td>After-Tax Cash Flow from Sale</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td>3,435,888</td></tr><tr><td>Total After-Tax Cash Flow</td><td>($1,404,216)</td><td>$229,314</td><td>$243,093</td><td>$257,095</td><td>$271,314</td><td>$285,744</td><td>$300,378</td><td>$3,751,094</td></tr><tr><td>After-Tax IRR</td><td></td><td>27.34%</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td><strong>Simple Return Measures</strong></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>NOI/Project Cost</td><td></td><td>11.14%</td><td>11.41%</td><td>11.70%</td><td>11.99%</td><td>12.29%</td><td>12.60%</td><td>12.91%</td></tr><tr><td>Before Tax Cash Flow/Equity</td><td></td><td>17.89%</td><td>19.45%</td><td>21.04%</td><td>22.67%</td><td>24.34%</td><td>26.06%</td><td>27.81%</td></tr><tr><td>Tax Shelter/Equity</td><td></td><td>0.00%</td><td>0.00%</td><td>0.00%</td><td>0.00%</td><td>0.00%</td><td>0.00%</td><td>0.00%</td></tr></tbody></table>

¹ Different from final depreciation as a result of variance between estimated construction interest and actual interest.

² The permanent mortgage balance was determined based on value and cash flow. During the development period, only interest will be paid on the construction loan. Amortization begins upon funding of the permanent loan, after stabilization.

³ The depreciable basis is the total project cost, excluding land costs and operating losses during the lease-up period. The remaining book value includes the land cost.

⁴ Gross rent escalates 2.5 percent per year.

⁵ Other income escalates (or inflates) 2.5 percent per year. (Other income is usually tied to adjusted gross income, as vending machine fees and parking fees are tied to occupancy.)

⁶ Operating expenses escalate 2.5 percent per year.

⁷ Net present value equals the present value of future cash flows, less the initial investment. Unleveraged net present value represents the development profit.

<table><thead><tr><th rowspan="2"></th><th rowspan="2">Total</th><th rowspan="2">Time Zero</th><th colspan="2">Development Period</th><th colspan="4">Lease-Up Period</th></tr><tr><th>Year 1 Total</th><th>Year 2 Total</th><th>Quarter 1</th><th>Quarter 2</th><th>Quarter 3</th><th>Quarter 4</th><th>Quarter 5</th><th>Quarter 6</th><th>Quarter 7</th><th>Quarter 8</th></tr></thead><tbody><tr><td>Vacancy Loss ($)</td><td>($633,096)</td><td></td><td></td><td>($633,096)</td><td></td><td></td><td></td><td></td><td>($288,716)</td><td>($198,061)</td><td>($107,407)</td><td>($38,912)</td></tr><tr><td>Adjusted Gross Rent</td><td>707,104</td><td></td><td></td><td>707,104</td><td></td><td></td><td></td><td></td><td>46,334</td><td>136,989</td><td>227,643</td><td>296,138</td></tr><tr><td>Other Income</td><td>13,884</td><td></td><td></td><td>13,884</td><td></td><td></td><td></td><td></td><td>910</td><td>2,690</td><td>4,470</td><td>5,815</td></tr><tr><td>Total Revenue</td><td>$720,989</td><td></td><td></td><td>$720,989</td><td></td><td></td><td></td><td></td><td>$47,244</td><td>$139,679</td><td>$232,113</td><td>$301,953</td></tr><tr><td>Operating Expenses</td><td>425,815</td><td></td><td></td><td>425,816</td><td></td><td></td><td></td><td></td><td>106,454</td><td>106,454</td><td>106,454</td><td>106,454</td></tr><tr><td>Net Operating Income</td><td>$295,173</td><td></td><td></td><td>$295,173</td><td></td><td></td><td></td><td></td><td>($59,210)</td><td>$33,225</td><td>$125,659</td><td>$195,499</td></tr><tr><td>Combined Cash Flow during Development Period</td><td>($6,862,835)</td><td>($894,731)</td><td>($6,225,477)</td><td>$257,373</td><td>($1,587,239)</td><td>($1,535,579)</td><td>($1,535,579)</td><td>($1,567,079)</td><td>($78,110)</td><td>$14,325</td><td>$125,659</td><td>$195,499</td></tr><tr><td>Construction Loan Balance and Interest Calculation</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Maximum Loan Balance (from financing calculation)</td><td>$6,428,024</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Equity (total project cost, less construction loan)</td><td>$1,406,331</td><td>$894,731</td><td>$511,600</td><td>0</td><td>$511,600</td><td>0</td><td>0</td><td>0</td><td>0</td><td>0</td><td>0</td><td>0</td></tr><tr><td>Construction Loan Account</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Beginning Balance</td><td></td><td></td><td></td><td>$6,000,548</td><td>0</td><td>$1,089,757</td><td>$2,674,096</td><td>$4,300,025</td><td>$6,000,548</td><td>$6,236,420</td><td>$6,386,049</td><td>$6,428,024</td></tr><tr><td>Loan Draw</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Construction Draw</td><td>$5,751,677</td><td></td><td>$5,713,877</td><td>37,800</td><td>1,075,639</td><td>1,535,579</td><td>1,535,579</td><td>1,567,079</td><td>18,900</td><td>18,900</td><td>0</td><td>0</td></tr><tr><td>Operating Deficit</td><td>59,210</td><td></td><td>0</td><td>59,210</td><td>0</td><td>0</td><td>0</td><td>0</td><td>59,210</td><td>0</td><td>0</td><td>0</td></tr><tr><td>Interest (10.5%)</td><td>944,757</td><td></td><td>286,671</td><td>658,086</td><td>14,118</td><td>48,761</td><td>90,350</td><td>133,444</td><td>157,762</td><td>163,954</td><td>167,634</td><td>168,736</td></tr><tr><td>Interest Accrued during Construction Period</td><td>286,671</td><td></td><td>286,671</td><td>0</td><td>14,118</td><td>48,761</td><td>90,350</td><td>133,444</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest Accrued during Operating Period</td><td>330,466</td><td></td><td></td><td>330,466</td><td>0</td><td>0</td><td>0</td><td>0</td><td>157,762</td><td>130,729</td><td>41,975</td><td>0</td></tr><tr><td>Interest Paid from Operations</td><td>327,620</td><td></td><td></td><td>327,620</td><td>0</td><td>0</td><td>0</td><td>0</td><td>0</td><td>33,225</td><td>125,659</td><td>168,736</td></tr><tr><td>Ending Balance</td><td>$6,428,024</td><td></td><td>$6,000,548</td><td>$6,428,024</td><td>$1,089,757</td><td>$2,674,096</td><td>$4,300,025</td><td>$6,000,548</td><td>$6,236,420</td><td>$6,386,049</td><td>$6,428,024</td><td>$6,428,024</td></tr></tbody></table>

Figure 10-2
HUD/FHA Programs for Seniors' Housing

<table><thead><tr><td>Section Number</td><td>Program Name</td><td>Program Features</td><td>Comments</td></tr></thead><tbody><tr><td>Section 8</td><td>Housing Assistance Payments</td><td>Assists low- and very-low-income households in meeting their housing costs. The subsidy equals the difference between 30 percent of the household's income and the fair market rent.</td><td>Many of the variety of programs under Section 8 have been changed or eliminated since the establishment of the Section 8 programs.</td></tr><tr><td>Section 202</td><td>Supportive Housing for the Elderly</td><td>Provides capital advances and rent subsidies for the construction and rehabilitation of supportive housing for very-low-income seniors.</td><td>Capital advances do not have to be repaid if project serves very-low-income elderly persons for 40 years. Rental assistance covers the difference between HUD-approved cost per unit and tenant's rent.</td></tr><tr><td>Section 213</td><td>Mortgage Insurance for Cooperative Units</td><td>Insures mortgages for the construction or rehabilitation of cooperative housing projects.</td><td>Cooperatives may use Section 221(d)(3) insurance instead of Section 213.</td></tr><tr><td>Section 221(d)(3)</td><td>Mortgage Insurance for Rental Housing</td><td>Insures mortgages for the construction or rehabilitation of rental and cooperative housing.</td><td>This section is used by nonprofit and cooperative sponsors. Sponsors receive an insured mortgage on the full amount of the estimated replacement cost of the project.</td></tr><tr><td>Section 221(d)(4)</td><td>Mortgage Insurance for Rental Housing</td><td>Insures mortgages for the construction or rehabilitation of rental and cooperative housing.</td><td>This section is used by for-profit sponsors. Sponsors can receive a mortgage for a maximum of 90 percent of the estimated replacement cost of the project.</td></tr><tr><td>Section 223(f)</td><td>Mortgage Insurance for Purchase or Refinancing of Existing Multifamily Housing Projects</td><td>Insures mortgage loans for purchase or refinancing of rental housing, including nursing homes and assisted-living facilities.</td><td>This section may not be used for substantial rehabilitation. Usually these projects cannot otherwise be refinanced without causing an excessive rent burden on existing residents.</td></tr><tr><td>Section 231</td><td>Rental Housing for the Elderly</td><td>Insures mortgage loans for construction or rehabilitation of rental housing for the elderly.</td><td>This section insures private lenders. In recent years, many more projects use Section 221(d)(3) and 221(d)(4).</td></tr><tr><td>Section 232</td><td>Mortgage Insurance for Nursing Homes and Assisted-Living Facilities</td><td>Insures mortgage loans for the construction or rehabilitation of nursing homes, assisted-living facilities, intermediate-care facilities, and board-and-care homes.</td><td>For new construction and substantial rehab, the insurance covers 90 percent of the value of the improvements and equipment, 95 percent for nonprofit borrowers.</td></tr><tr><td>Section 236</td><td>Interest Reduction Payments</td><td></td><td>This program is inactive.</td></tr><tr><td>Section 241(a)</td><td>Supplemental Loans for Multifamily Projects</td><td>Insures loans to finance repairs, additions, and improvements to multifamily rental housing and health care facilities.</td><td>This program applies to projects that already carry HUD-insured or HUD-held mortgages.</td></tr><tr><td></td><td>Congregate Housing Services Program</td><td>Grant funds to provide meals and other supportive services for frail elderly residents in federally assisted housing.</td><td>This program is project-based rather than tenant-based.</td></tr><tr><td></td><td>Multifamily Housing Service Coordinators</td><td>Provides three different types of assistance to support the provision of supportive services to elderly and disabled persons living in federally assisted multifamily housing.</td><td>This program intends to extend the amount of time where the elderly and the disabled may live independently.</td></tr></tbody></table>

Source: Department of Housing and Urban Development Web site: http://www.hud.gov/senior.html.

figure 12-2

Average Size of New Multifamily Units Started, 1985 to 1999

<table><thead><tr><td>Year</td><td>Square Feet</td></tr></thead><tbody><tr><td>1985</td><td>922</td></tr><tr><td>1986</td><td>911</td></tr><tr><td>1987</td><td>980</td></tr><tr><td>1988</td><td>990</td></tr><tr><td>1989</td><td>1,000</td></tr><tr><td>1990</td><td>1,005</td></tr><tr><td>1991</td><td>1,020</td></tr><tr><td>1992</td><td>1,040</td></tr><tr><td>1993</td><td>1,065</td></tr><tr><td>1994</td><td>1,035</td></tr><tr><td>1995</td><td>1,080</td></tr><tr><td>1996</td><td>1,070</td></tr><tr><td>1997</td><td>1,095</td></tr><tr><td>1998</td><td>1,065</td></tr><tr><td>1999</td><td>1,105</td></tr></tbody></table>

Source: U.S. Census Bureau, Selected Characteristics of Housing Units in New Privately Owned Buildings Completed with Two Units or More, Table 8: www.census.gov/const/C22/c22_char.txt.

Figure 12-3

Percentage of New Multifamily Units with Multiple Bedrooms or Multiple Baths, 1985 to 1999

<table><thead><tr><td></td><td>2+ Baths</td><td>3+ Bedrooms</td></tr></thead><tbody><tr><td>1985</td><td>37</td><td>7</td></tr><tr><td>1986</td><td>36</td><td>7</td></tr><tr><td>1987</td><td>39</td><td>7</td></tr><tr><td>1988</td><td>41</td><td>8</td></tr><tr><td>1989</td><td>41</td><td>10</td></tr><tr><td>1990</td><td>44</td><td>11</td></tr><tr><td>1991</td><td>43</td><td>12</td></tr><tr><td>1992</td><td>42</td><td>13</td></tr><tr><td>1993</td><td>45</td><td>17</td></tr><tr><td>1994</td><td>44</td><td>15</td></tr><tr><td>1995</td><td>49</td><td>16</td></tr><tr><td>1996</td><td>51</td><td>17</td></tr><tr><td>1997</td><td>49</td><td>16</td></tr><tr><td>1998</td><td>49</td><td>17</td></tr><tr><td>1999</td><td>54</td><td>19</td></tr></tbody></table>