Presentation to:

NHRA

WHO’S FINANCING APARTMENT DEVELOPERS TODAY

By

Merchant Capital

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Capital Markets Meltdown

• Current FOMC monetary policy actions

• Auction rate security demise

• Private Placement market is very tough

• Ugly Long-Term Fixed rates

FOMC Monetary Policy

• May 16th 2000 - June 25th 2003– 13 Consecutive cuts– All time low 1%

• June 30th 2004 – June 29th 2006– 17 consecutive 25% increases– Recent high 5.25%

• Currently– Cuts began September 18th 2007– 325 bps in 7 months– Current rate – 2.00%

• Perhaps the seeds of the global credit crisis were first sewn in the Fall of 2001. In response to recession and September 11 attacks, the Federal Reserve cut the Fed Funds Rate from 6.5% to 1.0%, and flooded the capital markets (national and international) with liquidity.

1.0%

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6.51%5.25%

Federal Funds Rate History

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LIBOR and SIFMA Yields

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SIFMA Index

LIBOR 30-day

“Irrational Apathy”

Fixed Rates

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Historical Interest Rates MMD 30-Year January 2007 - YTD

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As of 7/22/2008MMD 30-Year

"AAA"Min: 3.95%Max: 5.14%Avg: 4.41%Current: 4.74%

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Historical Interest Rates MMD 30-Year (daily) for 120 Days

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30 Year MMD

As of 7/22/2008MMD 30-Year

"AAA"Min: 4.25%Max: 5.14%Avg: 4.66%Current: 4.74%

Auction Rate Securities Disaster

• Massive failures in $330 billion auction rate markets, about half of which are auction rate munis.

• Buyers who thought paper was short term and have immediate cash needs are now owners of long-term securities.

• Auction rate munis over 5% of the $2.7 trillion of muni bonds outstanding. Bloomberg reports 70% of auctions failed in early March; yields averaged over 6.5% versus 3.5% before January ’08 market meltdown.

• These developments in short-term municipal markets affecting as much as one fifth of muni markets have roiled the tax-exempt bond market.

Derivatives Update: Using Cap & Swaps

NH&RANew MexicoJuly 25, 2008

TAMMY OFEK tammyo@capmfunding.com

phone: 917.913.9297

Fixed vs. Floating SavingsFixed vs. Variable Rate Debt

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Types of hedge vehicles:

1) Caps2) Swaps

Spot startForward start

A tool to hedge variable rate interest exposure that serves as an optional feature to fix the maximum interest rate payable by the borrower

Caps are provided by a third party in exchange for a fee paid by the borrower

Caps are typically paid for upfront (though may be financed over time)

(1) Cap Facts

Factors affecting cap pricing

Cap fundamentals:StrikeTerm

Market conditions:VolatilityInterest rate environment

Current BMA Cap Pricing with a Strike Rate of 6.00%

Term May 2007 May 2008 July 20085 Yrs 12 bps 17 bps 47 bps7 Yrs 22 bps 42 bps 89 bps10 Yrs 54 bps 86 bps 169 bps15 Yrs 125 bps 192 bps 323 bps

*includes fees

Advantages of a Cap

Allows the borrower to maintain upside through increased cash flow if variable rates remain low;

Because a cap is a hedge paid upfront, there are no collateral requirements or breakage fees.

Cap Case Study: Cashflow during construction 3.76%/yr on $10MM (save $376,000/yr)

Fee “Stack” Fixed Debt Floating Debt

Bond rate 5.60% 1.49% *

LOC 1.25% 1.25%

Guaranty & Svcg 0.31% 0.31%

Liquidity 0.00% 0.25%

Issuer & Trustee 0.15% 0.15%

Remarketing 0.00% 0.10%

Total cost during construction: 7.31% 3.55%

*Spot BMA as of 7/21/08

(2) Swaps

A trade between a borrower and a counterparty whereby one entity pays a fixed rate and the other pays a variable rate.

Another way of looking at a swap is the combined purchase of a cap and floor with the same strike rate.

Swaps – AdvantagesSwaps allow borrowers to fix the interest rate on variable rate debt efficiently for any length of time –often at a cost savings over straight fixed rate debt;

Swaps can be structured on a forward basis to allow developers to borrow at a variable rate during construction and lease up.

Swapping to fixed rate during the tax credit benefit period may result in better equity pricing.

Current BMA Swap Rates

Term May 2007 April 2008 July 2008

15 yrs 3.85% 3.61% 3.82%

17 yrs 3.90% 3.67% 3.87%

2+15 yrs 3.90% 4.13%

Assumes mid-market; no credit charges

Forward Starting Swap (VRDB) – Rate Stack

(2yr fwd 15yr = 17yr total term)Spot Swap Rate*: 3.82%Remarketing fee: 0.10%Credit Enhancement fee: 0.68%Liquidity fee: 0.25%Swap credit enhancement: 0.13%2 yr forward premium: 0.31%Credit charge: 0.10%Issuer & Trustee: 0.15%Total Debt Service: 5.54%

*Midmarket swap rate

Fixed Rate Analysis (post construction)

Synthetic Fixed RateTotal Bond Rate w/Swap: 5.54%

Fixed Rate Bond RateBase Bond Rate (30 year): 5.60%Issuer & Trustee: 0.15%Credit Enhancement Fee: 1.08%Total Bond Rate 6.83%

Savings 01.29%

Savings AnalysisNegative Arbitrage During Construction Period

Fixed Rate Floating Rate

Loan Proceeds: $10,000,000 $10,000,000

Construction: 5.60% BMA flatCosts: 1.71% 2.06%

COF during Construction: 7.31% BMA + 2.06%Investment Rate: 3.00% BMA + .80%

Negative Arbitrage: 4.31% 1.26%

negative arbitrage costs of fixed vs floating: (457,500)

Savings Analysis (cont’d)

Cost of Carry During Construction PeriodFixed Rate Floating Rate

Construction: 5.60% BMA flatCosts: 1.71% 2.06%

COF during Construction: 7.31% BMA + 2.06%BMA assumption: 1.49%

Annual Cost of Carry cost of fixed vs floating: (3.76%)$ Cost: (376,000)

Total costs of fixed rate debt during construction period (vs floating):2yrs cost of carry @ $752,000Negative arbitrage @ $457,500= $1,209,500 cost differential over VRD

Savings Analysis (cont’d)Present Value of debt service savings (129bps/yr) upon the effective date of the swap (2 years forward) through the term of the swap:– $1,158,358

Savings during the construction period (negative arbitrage, cost of carry savings during the construction period): – $1,209,500

Utilizing the swap results in savings of $2,367,858 – or almost 24% of the bond issue.

Affordable Debt Markets Freddie Mac, Fannie Mae, FHA

Timothy R. LeonhardManaging Director

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Current Developments at Freddie Mac and Fannie Mae

• Intense speculation about stability of GSEs led to significant decrease in stock prices and ability to attract capital

• U.S. Treasury and Federal Reserve to provide access to Fed discount window to gain access to capital

• Unprecedented request to Congress to allow the Fed to purchase equity in GSEs “if necessary”

• Both GSEs are open for business and achieving record loan volumes year to date in 2008

• Both GSEs have widened spreads significantly in reaction to higher cost of capital and diminished market competition

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Freddie Mac/Fannie Mae – Bonds with LIHTC

Loan Type: Permanent credit enhancement for new or existing bonds

Loan Sizing: 1.15 – 1.20 DSCR85 – 90% LTV as restricted

Amortization: 30 - 40 years

Rates: 6.25 – 6.50% for fixed rate bonds 2.85 – 3.10% for variable rate bonds5.15 – 5.40% for variable rate bonds with swap

Fees: 0.75% – 1.25% BPS financing fee$50,000 – $75,000 legal fee for MMA and agency counsel

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Freddie Mac/Fannie Mae – Bonds with LIHTC

Best for:• Lowest bond rates due to AAA enhancement

• Variable rate bonds

• Credit substitutions and refunding of existing bonds

• Used with all bond issuers

• High leverage available with 1.15 DSCR and 35 - 40 year amortization (1.10 DSCR 40-year amortization in select markets)

• Acquisition/mod rehab without need for a separate construction lender

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When to use FHA Insured Bonds

• High leverage due to 1.10 DSCR, 40 year amortization (Note: effective DSCR of 1.15 or greater due to HUD replacement reserve escrow formula)

• Non recourse construction and permanent financing

• Developers without extensive track record or strong balance sheets

• Construction to permanent credit enhancement with rate lock at initial closing

• Fixed rate execution only approximately 1.25% to 1.50% higher than variable to fixed with Freddie/Fannie

• Deals that can accommodate long processing times (6-9 months to close)

• Deals that will use union labor for construction (Davis Bacon)

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Fannie Mae or Freddie Mac Taxable Forwards with LIHTC

Loan Types: 24-36 month forward rate lock commitment for permanent financing

Loan Sizing: 1.15 DSCR; 90% LTV

Amortization: 30 – 40 years (1.10 DSCR/40-year amortization is select markets)

Rate: 3.25% - 3.60% BPS over the 10-year UST

Financing Fees: 1% or $25,000 minimum

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Fannie Mae or Freddie Mac Taxable Forwards with LIHTC

Best for:• Unfunded forward rate lock with no negative arbitrage on

new construction deals

• Loan sizes of $3M or higher

• Higher leverage with 40 year amortization available in selected markets

• Availability of Supplemental Loan after initial closing

Tax Exempt Bonds What are the Financing Options?NH&RA Summer InstituteJuly 24, 2008

Elizabeth Van BenschotenSVP, Manager National Products and ProgramsCommunity Development Banking(415) 622-1010

Product & Decision Variables

Direct Placement Execution

Key Considerations

Availability of product type & experience of those offering

Pricing (index and rate stacks)

Underwriting Terms

Rate Options (Fixed vs. Floating)

Ease of execution (parties in transaction)

Fees

You’ve got the bond allocation, now which product execution do you choose?

Credit Enhanced Public Offering

Bank of America can offer both Direct Placement and Credit Enhanced execution.

Banc of America Securities leader in Bond underwriting.

Compare Financing Direct Placement Freddie Mac Credit Enhanced

Fixed Synthetic FixedProject AssumptionsNet Operating Income 750,000$ 750,000$ Capitalization Rate (market) 7% 7%DSC 1.15 1.20LTV 90% 90%Amortization (years) 30 30Term (years) 17 17Monthly PMT (estimate) ($54,300) ($44,900)Value or DSC constrained DSC LTVIndex 30 year UST 17-year SIFMA Swap

Bond Rate 5.80% 3.80%Freddie Mac Stack (Liquidity, Guaranty, Servicing, Swap Enhancement) 0.00% 1.50%Remarketing & Trustee 0.03% 0.13%

All-In Rate 5.83% 5.43%

Total Bond Proceeds 9,260,000$ 9,640,000$ Uses-Bond Costs of Issuance

Issuer Fee (100 bps) & Bond Counsel, etc. 152,600$ 156,400$ Bond Underwriting Fee (50 bps) N/A 48,200$ 1st-Year Remarketing Fee (10 bps) N/A 9,640$ Cash Flows & Verification N/A N/ARating Fee N/A 12,500.00 Subtotal 152,600$ 226,740$

Bond Origination CostsConstruction Lender (LOC) Fee (100bp) N/A 96,400$ 1st Year LC (125bp) N/A 120,500$ Construction Lender (LOC) Legal N/A 30,000$ Bond Purchaser Fee (150 bps) / Freddie Mac Lender Fee (100 bps) 138,900$ 96,400$ Bond Purchaser Legal / Freddie Mac Lender Legal 40,000$ 40,000$ Freddie Mac Legal Fee -$ 40,000$ Subtotal 178,900$ 423,300$ Total Costs 331,500$ 650,040$

Available for Transaction 8,928,500$ 8,989,960$

Other Considerations

• Does the product allow bridging of LIHTC Equity

• What Interest Rate Protection Product options do you have (cap or swap)

• If bond proceeds are fully drawn down, what re-investment vehicles are available (money market accounts or GIC accounts)

• What are the requirements for converting from construction phase financing to fixed.

• What are the terms surrounding yield maintenance.

• Expertise and experience of loan administration team, especially during construction!

Product: The Bank of America Special Bond Offering product is a tax-exempt, direct placement, bond product which offers a combined construction and permanent debt facility for affordable multifamily development.

Advantages: Single closing for construction and term loans

Direct placement execution is simpler, more efficient and less expensive than alternatives

Option for draw down bond structure eliminates negative arbitrage / increases effective proceeds

Variable rate during construction

Fixed or Variable rate during permanent phase

Expertise of Banc of America securities available

Direct Placement at Bank of America

Direct Placement Construction and Permanent Financing

Product ParametersTerms

Loan Size: Generally $2,000,000 to $25,000,000. May include construction phase financing of LIHTC pay in.

Loan Term: Up to 35-year amortization to a maximum 30-year term plus an interest only period for construction. 17-year remarketing required. Mandatory put at option of the lender in Year 17.

Loan-to-Value: Up to 90% of appraised value based on restricted NOI. Must be supported by underwriting.

Debt Service Coverage:

To a minimum debt service coverage of 1.15x. Must be supported by applicable underwriting.

Reserves: Repair and replacement reserve funded monthly. PNAs at 5-year intervals. Impounds for taxes and insurance.

Pricing & Costs: Fees and interest rates are negotiated on a transactional basis and are considered very competitive. Borrower pays for customary due diligence items, lender legal, and issuer costs including bond counsel.

Recourse: Full recourse during construction period. For LIHTC projects, non-recourse to borrower following conversion save for traditional fraud related carve outs.

Legal Support: Uses standardized Bank of America documentation including trust indenture, loan agreement, note, construction phase disbursement agreement, security documents and others.

Project Profile Jackson Terrace Apartments – Hempstead, NY

Issuer:The Town of Hempstead Industrial Development Agency

Developer / Sponsor:The D & F Development Group LLC

Property Type:417 unit project based Section 8 multifamily project

Total Development Costs:– $43.4 Million

Bank of America’s Commitment:– Direct Placement of $28 Million in Tax-Exempt

Bonds

Bank of America’s Impact: – Provided BMA based variable rate construction

financing– Closed project in under 30 days to mitigate loss

of volume cap allocationCertain capital markets and investment banking activities and services referred to in this profile are provided by Banc of America Securities LLC and other affiliates of Bank of America Corporation.

Project Profile First Liberty Apartments – Liberty Lake, WA

First Liberty Apartments, targeting low-income families at 60% AMI or less, is currently under construction. It represents the first phase of two affordable multi-family complexes (the other will be a comparably sized and neighboring seniors project) in the 100-acre mixed-use development known as Liberty Village, located east of Spokane, WA.

The Bank has played an integral role in the overall financing of the development, funding bridge, construction and permanent loans via tax-exempt bond financing through the State of Washington.

Developer / Sponsor:Whitewater Creek, Inc., Hayden, Idaho

Property Type:75-unit garden style, low-income family apartment complex with 10-1BR, 50-2BR and 15-3BR units including 5,900 SF of community space for tenant support services.

Total Development Costs:– $8,765,000

Bank of America’s Commitment:– $5,965M construction-to-term Special Bond

Offering execution

Bank of America’s Impact: – Facilitated the issuance and purchase of $5.1

million of tax-exempt bonds and the issuance and purchase of $865,000 of taxable bonds.

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Certain capital markets and investment banking activities and services referred to in this profile are provided by Banc of America Securities LLC and other affiliates of Bank of America Corporation.