This document discusses risk analysis and asset management for affordable housing projects. It outlines key risk factors like market, financial, development, and operational risks. It also provides a risk rating criteria that analyzes factors such as debt coverage ratio, economic vacancy rates, compliance issues, and physical condition to assess operational risk levels from 1 to 6.

1. RISK ANALYSIS & ASSET MANAGEMENT Jaime Avery Senior Asset Manager National Equity Fund Stuart Kritzer Senior Risk Assessment Officer Arizona Department Of Housing

2. AGENCY VS SYNDICATOR RISK FLOWCHART ADOH KEY RISK FACTORS MARKET FINANCIAL DEVELOPMENT OPERATIONAL ASSET MANAGER INITIAL INPUT ASSET MANAGER ONGOING MONITORING & INPUT FUNDED – OPERATIONAL PROJECT SYNDICATOR ADOH - RISK ASSESSORS REVIEW & ANALYIZE INITIAL SUBMISSION ADOH – COMPLIANCE TEAM MONITORS FOR SECT 42 COMPLIANCE

3. MARKET RISK ANALYSIS Analyze Location/Site Feasibility Visibility, Access, Parking, Transport, Services, etc, etc Analyze Supply & Demand Dynamics Vacancy, Absorption & Concessions & CAPTURE RATE Determine Appropriate Market Area Analyze Demographic Trends – Do they match project concept?

4. FINANCIAL RISK ANALYSIS Review contingencies in development budget Analyze GAP/subordinate loans Determine if project’s O/E assumptions are appropriate Analyze CF & DSCR, stress test, review CF waterfall Determine if project revenue assumptions are appropriate Review Const & Perm loan sources, terms, TC pay-in, sizing, etc

5. DEVELOPMENT RISK ANALYSIS Cost increases. Value engineering. Structured finance alternatives Delays in materials, labor, weather, etc - Lease up Experienced Team: New/rehab, historic, Davis-Bacon, etc Construction Phase Risks Quality design, plans & project planning Coordinated & focused Project management (too many concurrent jobs?) HELP REDUCE NIMBYISM

6. OPERATIONAL RISK ANALYSIS Compliance Risks: Tenant income qualifications, next avail unit rule, overlapping subsidy Recapture of credits, penalty adjusters, litigation, refi, etc. Weak market, slow lease up, concessions Physical condition of property Sponsor/Management Capacity Higher than expected Operating Expenses

7. No reports have been provided Several quarters are missing and/or submissions are questionable Consistently late and has missing or inaccurate information Fails to meet NEF deadlines but remains reliable May be delayed but are accurate Timely and accurate Reporting None exists or the current firm needs to be replaced Ineffective and warrants a replacement Weak with no apparent plans for improvement Basic services are provided but financial resources or personnel may be weak Reputable firm or affiliate in place Strong firm or affiliate in place Property Management No oversight is observed; GP replacement is warranted Lacks effective asset management oversight, may need to be removed as GP Sponsor is a weak asset manager Sponsor's practices are generally acceptable but may require improvement Sponsor demonstrates acceptable oversight Sponsor demonstrates sound practices Asset Management The sponsor is on the brink of bankruptcy or dissolution Capacity is weak, efforts to intervene have not been successful. Capacity has deteriorated due to financial constraints or staff turnover Financial and personnel resources may be modest but remain effective Sufficient financial and managerial strength to effectively manage portfolio Financially secure and maintains solid staff Sponsor Capacity Sponsor and Management Capacity Depleted; sponsor is no longer supporting operations Depleted and guaranty obligations have expired Balance is insufficient to meet anticipated needs Current balances are adequate to cover projected needs through disposition Sufficiently funded Fully funded Reserves Lenders have initiated foreclosure actions or the municipal body has publicized the property for tax sale NOI is negative; debt service, taxes, and/or insurance may be in arrears. Lender may have filed a default notice NOI is insufficient to cover debt service and required reserve contributions Greater than 1.0x, or if less, reserves (or sponsor financial commitments) are sufficient to cover current and projected deficits Greater than 1.10x Greater than 1.15x DCR Sponsor is making no attempts at collections Tenant AR balances are uncollectible Exceeds 7.5% Less than 7.5% Less than 5% Less than 3% Collection Losses Sponsor is making no attempts at marketing Exceeds 15% with no plausible explanation Exceeds 10% Less than 10% Less than 7.5% Less than 5% Economic Vacancy Financial Operations Rating Level 6 Rating Level 5 Rating Level 4 Rating Level 3 Rating Level 2 Rating Level 1 Operational Risk Rating Criteria

8. Uncorrectable 8823s will result in recapture Filing may be difficult or costly to cure Recent filing and NEF has no record of corrections Previous filings have been addressed and await approval from the HFA None None 8823 Filings Uncorrectable compliance issues exist. Units have been "off line" for over 90 days. Numerous compliance issues exist at the property that will require significant intervention to correct. Overall quality of tenant files found to be deficient. Several issues require immediate attention. Issues that need to be corrected found. NEF waiting for sponsor's response. Minor issues found but are easily corrected No issues found File Review Compliance Severe code violations exist that could force public action against the property Current conditions are poor with some deficiencies requiring immediate attention Capital improvements are required but funding is insufficient Sponsor has a capital needs plan and sufficient funding to address needs Capital improvements are addressed as needed Capital needs are addressed in a timely manner Capital Improvements Significant physical needs exist that exceed the economic benefit of the partnership Considerable deterioration is present with no funding available to address. Units have been "off-line" for more than 60 days Property has witnessed further decline since last site inspection. Units were temporarily "off-line" Noted deficiencies but the sponsor has plans/funding to address in the near future Acceptable condition although minor deferred maintenance issues were identified Excellent condition with no deferred maintenance Most Recent Site Inspection Physical Condition Surrounding area has witnessed significant decline Crime has increased along with disinvestment in surrounding real estate Neighborhood conditions have begun to impact project performance Project operates sufficiently despite signs of neighborhood instability Stable and attractive environment Strong with new investment underway Neighborhood Conditions Project is no longer seen as a viable housing alternative Competing units have had a negative impact on project performance Area completion challenges project occupancy Occupancy is currently sufficient but area is gaining new product Remains competitive with area comparables Remains superior against area comparables Competition Property is deemed unmarketable in its current condition Vacancy threatens project viability Marketing activity is not sufficient to overcome vacancy issues Fairly matched to supply; sponsor actively markets units Exceeds supply but project wait list may need updating Exceeds supply; project has a healthy wait list Demand Market

9. RISK ANALYSIS & ASSET MANAGEMENT Q&A Jaime Avery Senior Asset Manager National Equity Fund Stuart Kritzer Senior Risk Assessment Officer Arizona Department Of Housing