Never Say Never Again – Bonds are Back!Texas Housing Conference

July 28-30, 2014Hilton HotelAustin, TX

Presenters

Mahesh Aiyer, Community Bank of TexasSean Cullen, RBC Capital Markets

Nicole Flores, City Real Estate AdvisorsDavid Danenfelzer, TSAHC

Ken Overshiner, JP Morgan ChaseCody Wilson, Merchant Capital, LLC

Never Say Never Again – Bonds are BackCurrent Market Update and Financing Observations

Texas Housing ConferenceTuesday, July 29, 2014Hilton HotelAustin, Texas

Cody N. WilsonMerchant Capital, LLCcody.wilson@merchantcapital.comTel: (334) 834-5100

Rates have trended lower over the past year.■ After peaking in fall 2013, tax-exempt rates have trended lower.

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3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

4.60%

4.80%

Historical Performance of 30-year MMD1,2

Source: Bloomberg. 1. Reflects market conditions as of July 18, 20142. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds

After peaking in September 2013, the 30-year MMD is down 119 basis points

Despite the recent back-up yields, rates remain below historical levels.■ Both taxable and tax-exempt rates remain well below historical averages.

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Historical Performance of 10-Year UST versus 30-year MMD1,2

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10-Year UST 30-Year MMDSource: Bloomberg. 1. Reflects market conditions as of July 18, 20142. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds

HISTORICAL OBSERVATIONS

Times below7/ 18/ 2014 7/ 18/ 2014 High Low Ave

30-Yr MMD 3.32 3% 6.96 2.79 4.9210-Yr UST 2.45 9% 8.35 1.39 4.77

Outlook for Interest Rates

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■ The Fed is winding down “QE”— The Fed is currently “tapering” $10 billion per meeting

■ Municipal yields have outperformed this year. Are we due for a correction?■ New issue supply remains low, but has spiked in recent weeks■ Risk of tax reform

MarketHeadwinds

■ Positive municipal market technicals— Supply/demand mismatch

■ Economic data remains weak■ Elevated redemptions

— June, July and August are heaviest months for interest payments/maturities■ Inflation running below Fed’s mandate

MarketSupport

OUTLOOK FOR INTEREST RATES

Short-term Cash Collateralized Bonds /Taxable Loan or Mortgage

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■ The following sets forth the typical structure on these executions.SHORT-TERM BOND EXECUTION

Bond Proceeds

Bond Proceeds Bonds Bond Proceeds Loan Proceeds

Construction DrawInterest dueon Bonds

Project Costs

Source: Bloomberg. 1. At closing, the Developer will need to deposit the interest due on the Bonds through the Mandatory Tender Date or Final Maturity Date2. You can use also use FHA-Insured Mortgage, Fannie, Freddie and USDA enhanced loans

The Project Fund and Collateral Fund will always equal the par amount of the Bonds. A draw from the Project Fund must be accompanied by depositing the same amount in the Collateral Fund. After the Project is placed in service, the Bonds will be retired with proceeds from the Collateral Fund.

Negative Arbitrage Account1

Housing Project

Developer

Bond Investor

Trustee Lender Underwriter

Collateral FundProject Fund

TAXABLE LOAN/MORTGAGE2

The short-term bonds can be structured in a variety of ways.■ The short-term bonds (the “Bonds”) can be structured in a variety of ways, including:

— Direct placement (commercial banks)— Public sale (mainly money market funds)

■ Based on the steep yield curve, we typically structure the Bonds with a two-year final maturity (or longer if needed) with a one-year mandatory tender. The one-year mandatory tender allows the Bonds to be marketed as money market eligible1.

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Notes:1 Rule 2a-7 restricts the quality, maturity and diversity of investments held by money market funds. Under Rule 2a-7, a money market fund must

invest in the highest rated debt, which matures in under 13 months2 Assumes a construction timeframe of at least 12 months. Reflects market conditions as of July 18, 2014

HYPOTHETICAL ILLUSTRATION2

On or before the Mandatory Tender Date, the Remarketing Agent will remarket the Bonds with a new interest rate and a final maturity of July 1, 2016, subject to optional redemption. The interest rate will not be known until the Mandatory Tender Date.

July 1, 2014Bond

ClosingDate

July 1, 2015

Mandatory TenderDate

July 1, 2016

Final BondMaturity

Date

0.35% _____%?

Standard & Poor’s Unenhanced Bond Program■ Underwriting assumptions include:

— 1.20x DSC constraint (HAP); 1.40x DSC constraint (non-HAP)— Vacancy loss assumptions based on historical trends

— Occupancy capped at 95% (family)— Occupancy capped at 97% (senior)

— Operating expense savings accepted, but must be validated— Repair and replacement reserves based on PNA— Emphasis placed on Sponsor and Property Manager experience

■ Financing observations include:— No credit enhancement or mortgage insurance— 35-year interest rate ~ 5.75%— 35-year amortization with 10-year par call— 75-90 days for closing— 100% debt financing— Non-recourse— Bonds priced off the MMD index1

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Source: Standard & Poor’s1. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds

Case Study – Ralston Apartments

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■ Set forth below is a summary of Ralston Apartments bond financing. TRANSACTION SUMMARY

PropertyInformation

■ Senior section-8 property in Columbus, Georgia■ 269 units■ 95% occupied■ HAP expires October 1, 2033

FinancingObservations

■ 100% debt financing / no committed equity financing■ $300 repair and replacement reserves■ Debt service reserve fund sized at 6-months debt service (principal + interest)■ $1,394 rehab per unit■ 92% LTV■ 1.20x DSC constraint (proforma DSC is 1.25x)■ 35-year amortization ■ 35-year blended rate was 5.64%■ The tax-exempt bonds were priced in three separate terms:

— Term 2025 $1,275,000 4.00%@ 97— Term 2036 $2,580,000 5.00%@97— Term 2049 $5,765,000 5.50%@97

■ The taxable bonds consisted of one term:— Term 2017 $245,000 4.25%@99