New Jersey Housing and Mortgage Finance Agency | Small Rental Project Loan Program Guidelines

Site Inspection	Within twenty (20) business days of receipt of a complete application, HMFA shall conduct a site inspection. The site inspection team may include staff from the Technical Services, Multifamily and Regulatory Affairs Divisions.

Proforma Review	Within twenty (20) business days from the completion of the site inspection, HMFA staff will review the application for preliminary financial feasibility and also make a determination as to any development and/or project operations funding gaps.

Eligible Sponsors/ Borrowers	Qualified housing sponsors are defined as qualified for-profit and non-profit housing sponsors, preferably with experience in providing housing; or, associations of persons organized under the New Jersey Statutes; or any corporation having for one of its purposes the improvement of realistic opportunities for low- and moderate-income housing, and appearing capable, by virtue of past activities, qualifications of staff or board, or other features, to develop and operate housing projects. Sponsoring entity must be formed for the sole purpose of owning and operating the project and shall own no other assets unrelated to the project.

Eligible Project	Projects eligible for this program must be located in a Smart Growth location in New Jersey. To determine if your project is in a Smart Growth location, visit www.nj-hmfa.com and then, click on the Smart Growth Locator tab. The Sponsor must obtain a resolution from the municipality in which the project will be located reciting that there is a need for the particular housing project in the municipality. Projects can be all residential or a mix of commercial and residential. Both existing and new construction projects are eligible.

Tax Abatement	The developer should obtain a municipal resolution granting a real estate tax abatement and authorizing an agreement for payments in lieu of taxes ("P.I.L.O.T.") for the project under the HMFA's statute, N.J.S.A. 55:14K-37, during the mortgage term. Furthermore, it is beneficial to the project if a tax abatement is pursuant to the HMFA's statute rather than the Long Term Tax Exemption Statute. In general, the HMFA has found that a project without tax abatement or a project with a tax abatement under the Long Term Tax Exemption statute has trouble demonstrating financial feasibility. Lack of a tax abatement pursuant to the HMFA's statute may raise the risk to the HMFA and therefore may require additional security in the form of increased debt service coverage or the escrow of additional funds.

General Contractor in Lieu of Architect	Depending on the extent of the rehabilitation, HMFA may consider a general contractor’s services in lieu of engaging a professional architect as long as municipal requirements such as building permits are met. In these instances, detailed work write-ups and cost estimates will be obtained from the general contractor directly.

Eligible Financing	The Program may be used to fund the acquisition, rehabilitation, or new construction of housing projects, which contain 5-25 units.. Refinancing for the purpose of taking out equity is prohibited. The developer may obtain construction financing from an outside entity with the HMFA providing the permanent financing.

Maximum Loan Amount	For non-profit developers, the maximum loan amount may not exceed the lesser of (a) 100% of the total project costs, (b) the amount that can be amortized by the project, as determined by the HMFA. For profit-motivated developers, the maximum loan amount may not exceed the lesser of (a) 90% of the total project costs, (b) the actual appraised value at stabilization and/or (c) the amount that can be amortized by the project, as determined by the HMFA. The 90/10 ratio of loan amount to project cost must be maintained on a cumulative basis for each construction draw when using HMFA construction financing. For all loans, whether to non-profit or profit-motivated developers, the HMFA reserves the right to set the actual loan amount in accordance with the HMFA’s overall program goals, and determination of acceptable risk. Accordingly, the actual loan amount may be less than the maximum amount permitted above.

Secondary Mortgage Financing Subsidy	The HMFA will provide a subsidy in form of a second mortgage in an amount not to exceed $25,000 per one or more bedroom units and $10,000 for studio units if RENTS are restricted under the Small Rental Loan Program. The secondary loan will be subordinate only to the HMFA first mortgage loan. The aggregate first and second mortgage loan amounts may not exceed 90% of the total project cost, or 100% for non-profits. The payment of secondary loan will be in an amount equal to 25 percent of the project’s available cash flow after the funding of escrows and debt service as required by the HMFA, but prior to the distribution of Return of Equity on rent restriction. Secondary financing can be increased to up to $50,000 per unit if the developer agrees to INCOME restrict units up to 80% of median income under the Home Express Program. Repayment on the Home Express loan shall occur annually and shall equal 25% of cash flow remaining after the payment of operating expenses, required reserves and amortized mortgage debt. Upon maturity of the loan or upon expiration of the affordability controls, whichever comes first, the balance of any unpaid principal balance, together with all accrued interest thereon, shall become due and payable.

Debt Service Coverage Rate	The debt service coverage ratio is the relative cash flow available to meet the annual interest, principal and HMFA servicing fee payments on debt. A project’s cash flow analysis must achieve and maintain a projected minimum debt service coverage ratio of 1.15 for the initial 15 years of the loan to be eligible for financing. The establishment of an Operating Deficit Escrow Account (ODEA) account may be required if a project negatively trends below a 1.15 debt service coverage ratio for the term of the mortgage.

Repayment Term	Standard term is 30 years. Sponsors may request a term of less than 30 years or may request a term of more than 30 years; however, the Agency reserves the right to request mortgage insurance and/or credit enhancements upon HMFA’s assessment associated with risk of providing a mortgage in excess of 30 years. The subsidy loan is coterminous with the Agency first mortgage loan.

Lien Status	All loans will be secured by a first mortgage lien on the land and improvements if the borrower owns both in fee simple. If the borrower occupies the property pursuant to a ground lease, the HMFA will require a first leasehold mortgage secured by the borrower’s interest in the lease and the improvements; the term of the ground lease must at a minimum be for the term of the Agency’s first mortgage, and affordability restrictions and be in all respects satisfactory to the HMFA. To further protect the Agency's interests, the parties shall enter into a non-disturbance agreement with the HMFA wherein the lessor will promise, among other things, not to terminate the ground lease during the term of the Agency's mortgage(s) and affordability restrictions except by reason of default of the borrower, and in no event without first giving the Agency notice and opportunity to cure that default, and, if required by the HMFA and/or the Attorney General’s Office, amending the ground lease when curing a default by the borrower. The form and substance of the non-disturbance agreement must be acceptable to the HMFA and the Attorney General’s Office.

Security/Collateral	HMFA loans are secured or collateralized by a lien on the land, improvements, project revenues and escrows. There is generally no recourse to other assets of the borrower except in the case of fraud or other acts with regard to the project.

Mortgage Interest Rates	The Mortgage interest rate is a fixed rate for the term of the mortgage and will be determined based upon the HMFA’s actual cost of funds and allowable spread. At the earlier of execution of rate lock or loan closing the rate will be locked. The interest rate on the subsidy loan is one (1) percent simple interest per annum.

Interest Rate Lock Product	The Agency offers a rate lock product. Additional information can be obtained by contacting the Multifamily Programs and Credit Division at 609-278-7519.

Commitment Term	Construction and permanent loan commitments will expire 90 days after the anticipated construction start date. In case of permanent only loans, the commitment will expire 90 days after the anticipated construction completion date. The Executive Director is authorized to extend the commitment for two additional consecutive 90 day periods, if deemed appropriate in their sole discretion. A written request for extensions must be made.

Return on Investment	The HMFA limits the return on investment that the owners receive annually and upon sale of a project, pursuant to N.J.A.C. 5:80-3. The base amount of the investment will be determined after the project costs are audited and thereafter periodically adjusted. The return on the base amount of the investment will be determined by, the percentage of low (50% of median and below), moderate (50% to 80% of median) and market rate units in the project. The following rates of return shall apply. The base rate is the 30-year Treasury bond rate at the time of the mortgage closing. Base rate + 6% for percentage of low-income units Base rate + 4% for percentage of moderate-income units Base rate + 2% for percentage of market rate units

Sale or Prepayment	The HMFA prohibits the sale of the project or any interest therein without prior HMFA approval. If the project's mortgage term exceeds 20 years, it may be prepaid after year 20; however, the low-income housing and other HMFA restrictions remain in place through the original mortgage term pursuant to N.J.A.C. 5:80-5.10.

Maximum Rental Rates	Rental rates may not exceed those affordable to families earning 80% of the area median income using HUD or COAH Median Incomes.

Income/Rent Restrictions	If the sponsor agrees to INCOME restrict the units to 80% of median income, the project is eligible for subsidy funding up to $50,000 per unit under the Home Express Program. If RENTS are restricted to 80% of the area median income, the projects is eligible for subsidy up to $25,000 per unit under the Small Rental Loan Program. At initial occupancy, the gross aggregate family income of the tenants in each unit may not exceed six times the annual rent or carrying charges, including the value or cost to them of heat, light, water, sewage, parking facilities, and cooking fuel or seven times those charges for tenants with three or more dependents. Sponsors may choose any combination of rent-restricted units and income-restricted units. The Program cannot be used with Federal Low Income Tax Credits.

Building Design	The HMFA discourages the use of EIFS (Exterior Insulation Finish Systems such as DRYVIT) and electric heating systems. If the use of either of these systems is contemplated, it must be disclosed at the application stage and written authorization received from the HMFA before engaging professionals to produce Design Development drawings. Developers are encouraged to make developments as energy efficient as possible by utilizing the standards provided in the DOE/EPA’s Energy Star Program Guidelines. "Green" design is also strongly encouraged. For substantial (gut) rehabilitation projects, a structural engineering report on the existing structure, acceptable to the HMFA, must be submitted. All existing mechanical, plumbing and electric systems must be replaced. If the degree of rehabilitation to be accomplished is less than substantial, an engineer's report describing the condition of these building systems, and listing their recommendations, must be submitted. The HMFA's GUIDELINES AND CHECKLIST FOR ASSESSING EXISTING BUILDING SYSTEMS describes issues and offers recommendations to follow in preparing this report. In age restricted buildings the following items are to be installed: Emergency pull cords in bathrooms and bedrooms. A grab bar to facilitate entering and exiting a bathtub or shower. Handrails on both sides of common corridors.

Wage Rates	If the HMFA is providing construction financing, the contractor and subcontractors must pay prevailing wages as determined by the N.J. Department of Labor except that prevailing wages determined by the U.S. Department of Labor under the Davis Bacon Act shall be used if the HMFA construction loan is subject to direct or indirect federal assistance.

Environmental Review	If applicable, a Preliminary Assessment Report as described in N.J.A.C. 7:26E-3.2 is required. Additional assessments, such as a Site Investigation described in N.J.A.C. 7:26E-3.3 et. seq. or DEP environmental remediation measures may also be warranted. Rehabilitation projects must provide a plan for asbestos removal and remediation of lead-based paint and radon.

Professional Liability Insurance	For Contractor and/or Architect an Errors and Omissions insurance issued by a firm with an A.M. Best Rating of B+ or better is required for construction costs of $250,000 or more.

Payment and Performance Bond	Sponsors are required to provide construction completion guarantees. In an effort to offer flexibility in meeting these requirements, projects may either submit a 100% Payment and Performance Bond or provide a Letter of Credit equal to 10% of hard costs, a maintenance or warranty bond equal to 30% of construction cost or some other form of guaranty which is acceptable to the HMFA.

Construction Contingency	The contingency may be used to cover increases in both hard and soft costs. The budgeted contingency for new construction projects is 5% of the construction costs. The contingency for rehabilitation projects could be up to 10% of the construction costs. This may be adjusted based upon an acceptable engineering report submitted to the HMFA. The budgeted contingency for soft costs must be at a minimum of 1% of the budgeted expenses.

Developer's Fee	The amount of the developer's fee allowed is limited to 15% of total development cost excluding land, working capital, marketing expenses, escrows, operating deficit reserves, step-in-the-shoes costs and costs associated with syndication as determined by HMFA. This fee may be increased to 20% of the allowable costs when projects that are located on scattered sites, are single-family or duplex style or are designated for a special needs population. In addition, the non-deferred portion of the developer fee for all projects shall not exceed 8% of the aforementioned development cost. The deferred portion of the developer fee shall be achieved from cash flow by way of Return on Equity after payment of debt service, operating expenses and funding of all required escrows and reserves. The developer fee does not include fees paid to the architect, engineer, lawyer, accountant, surveyor, appraiser, professional planner, historical consultant, and environmental consultant. Executed contracts for these professionals shall be submitted to the HMFA before being recognized as a separate line item expense. All other consultant fees shall be included in the developer fee. Developers may pledge their fee toward meeting the equity requirement. The amount allowable will be determined at the sole discretion of the HMFA. The developer's fee is earned on a pro-rata basis during the construction period based upon the percentage of construction completion. The unpledged portion of the developer's fee is payable only when earned and is earned only after the entire pledged portion has been earned.

Working Capital	Working capital shall be funded at the time of construction and/or permanent loan closing and is generally used to cover necessary operating expenses, debt service and HMFA fees until the project has reached sustaining occupancy for a period of six months. The amount of working capital needed will be determined on a case-by-case basis depending on level of vacancy.

Operating Expenses	Sponsor submissions should adhere to the following criteria, if applicable: (a) Vacancy rates will be determined on a case-by-case basis; (b) Management Fee should be budgeted at Four Hundred Twenty Dollars ($420) per unit; and (c) Reserve for Repairs and Replacement shall be determined by the HMFA Property Management Division but in no event will the reserve exceed Three Hundred Fifty Dollars ($350) per unit.

Management Oversight	Sponsor submissions should adhere to the following criteria: (a) Submission of Annual Budget; (b) Submission of Annual Certified Audited Financial Statements or a compilation report; (c) Consent to Annual Property Site Inspections by HMFA.

Escrow Requirements	Initial escrows will be funded from the capital budget at the time of closing on the HMFA loan and will be held and administered by the HMFA. These escrows will include the following: (a) Insurance: One-Half Year’s Premium; (b) Taxes: One-Quarter of Real Estate Taxes or Payments In Lieu of Taxes (If Applicable); and, (c) Debt Service: One Month’s Principal and Interest.

Fees and Charges
Application Fees	A $100 per unit (not to exceed $1,000) non-refundable fee is due at time of application.

Commitment Fee	The Sponsor will be required to pay a commitment fee in an amount equal to one (1) percent of the estimated mortgage amount projected at mortgage commitment but not to exceed $10,000. This fee may be paid in cash or posting an unconditional and irrevocable letter of credit acceptable to the HMFA. The commitment fee is refundable at the later of the issuance of bonds or mortgage closing. In the event that the project does not proceed to mortgage and/or bond closing, the fee shall not be refunded.

Re-Commitment Fee (non-refundable	A $1,000 re-commitment fee will be charged. This fee is due prior to the Board issuance of a re-commitment.

Pass Through Costs	The HMFA will order the appraisal, market study, and, if one has not been already ordered, an environmental assessments, as well as any updates that are needed. The costs for the aforementioned will be passed through to the sponsor.

If Applicable

Cost of Bond Issuance	The cost of issuance is the Developer's allocable portion of the costs incurred by the HMFA for the issuance of bonds which include, but are not limited to, underwriter's fee, bond counsel’s fee, rating agency’s fee, printing costs, trustee and trustee's counsel fee, bond insurance premiums, and auditors' fee. The cost of issuance is included in the mortgage interest rate. The costs associated with the issuance vary dependent upon the overall size of the bond issue and will be allocated based upon the percentage each participating loan represents to the total bonds issued. Developers may reduce the interest rate by paying the cost of issuance out-of-pocket, which is presently anticipated to result in an approximate 15-basis point-reduction in rate. This election must be made two weeks prior to the date of the bond pricing. The payment of same must be made at least one week prior to bond pricing if not earlier.

Negative Arbitrage Escrow	A negative arbitrage escrow will be created which represents the difference between the rate the HMFA pays on the bond and the rate realized by the HMFA on the investment of the bond proceeds. The payment of same must be made prior to one week of bond pricing.

Financing Fees

Construction Servicing Fee	A 25 basis points servicing fee on the principal loan amount must be budgeted. This fee is incurred annually and billed monthly in equal installments throughout the anticipated construction term and is based on the original note amount.

Annual Servicing Fees	A 25 basis points servicing fee of the first mortgage amount will be charged.