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.

Projects using tax-exempt financing are subject to restrictions under the Internal Revenue Code, which requires that either a minimum of 20% of the units must be occupied by persons earning 50% or less of median income or a minimum of 40% of the units must be occupied by persons earning 60% or less of median income.

The HMFA can issue federally tax-exempt bonds and use the proceeds to fund mortgages. For projects using HMFA's tax-exempt bond financing, the HMFA further requires a minimum of 23% of the units must be occupied by persons of low- and moderate-income at all times during the term of the deed restriction except in the case of federal target area projects where at least 18% of the units shall be occupied by low- and moderate-income individuals. A determination as to whether a project is in a target area will be made at the time of application.

The HMFA may finance projects utilizing tax-exempt bonds with the intention of being eligible for credits on 100% of the projects eligible basis by satisfying the requirements established by the Internal Revenue Service 50% (the HMFA uses 55% as a safe harbor) of aggregate basis test.

Meeting the 55% test is often achieved through the provision of two first mortgage notes. The first note is sized based upon the amount of debt that can be amortized in accordance with the HMFA's underwriting standards. The second note is sized based upon the difference between the first note and that amount of funding needed to achieve 55% coverage of the aggregate costs. The sponsor must demonstrate a source of funds to pay off the second note, which must be collateralized in a form satisfactory to the HMFA. The determination that a project meets the 55% test and the term of the debt to be retired is subject to HMFA bond counsel opinion. See Typical HMFA Fee and Transaction Cost section.

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.

Debt Service Coverage Ratio Calculation is as follows:

Net Operating Income______ = Debt Service Coverage Ratio
Agency Debt Service + Servicing Fee*

*See servicing fee at Typical HMFA Fee and Transaction Cost

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

An independent appraisal will be commissioned by the HMFA to determine project valuation for both the site and building. Where applicable, the value of the federal low income housing tax credit must be provided. The cost will be passed through to the developer.

(Also see Typical HMFA Fee and Transaction Cost section)

A market study or a supply and demand analysis is generally included in the appraisal. Under certain circumstances, the HMFA may require a more detailed market study to determine the overall vacancy rates, absorption periods, penetration rates, rental comparable, marketing plan, and budget. The HMFA will order the study. The cost will be passed through to the Developer.

(Also see Typical HMFA Fee and Transaction Cost section)

* If at the time of bond sale or recommitment the appraisal and/or market study report are more than 6 months old, an update will be ordered. The reports should demonstrate, to the satisfaction of the HMFA, that the appraised value of the project still meets the HMFA's underwriting requirements and that the rent-up and/or operational feasibility of the project has not been jeopardized. If the updated appraisal and/or market study demonstrates that the appraised value is reduced or the rent-up and/or operational feasibility of the project has been jeopardized, the HMFA is not required to extend the mortgage commitment, include the project in its bond sale and/or make the permanent loan. If the HMFA extends the mortgage commitment, and/or includes the project in its bond sale, the HMFA may adjust the amount of its mortgage loan and the other terms of its commitment, as it deems necessary to address changes arising from the updated appraisal and/or market study.

Where the HMFA is making both the construction and permanent loan, the plan must be submitted prior to closing on the construction loan. Where the HMFA is providing only the take-out financing, the project must submit its marketing plan prior to construction start.

In certain cases of rehabilitation where there is an existing occupancy, the sponsor and/or the managing agent should submit documentation that a full marketing plan is not needed and give the reasons the HMFA should accept a lesser marketing analysis.

Once construction has begun, monthly progress reports should be provided to the Director of the Management Division of the HMFA or his designee.

The HMFA does not allow the use of EIFS (Exterior Insulation Finish Systems such as Dryvit) and discourages electric heating systems for new construction projects. It is recommended that the use of these systems be disclosed at the application stage and the HMFA authorize the use of these systems in writing before engaging professionals to embark upon completing design development drawings.

Developers must endeavor to make developments as energy efficient as possible by meeting the standards established in the DOE/EPA's Energy Star Program.

A structural engineering report, acceptable to the HMFA, must be submitted for rehabilitation projects.

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. A letter of "no further action" from DEP may be required.

A transaction update from the consultant, indicating that no further pollutants have been introduced to the site, will be required on all assessments or investigations prepared more than six months prior to construction start.

(See Typical Fee section)

Contractor

-General liability
- Workmen's compensation
- Contractor's public liability in the sum of $1,000,000/$3,000,000 and property insurance of $250,000/$500,000

Architect

- Architects must have Errors & Omission Insurance, of 10% of the construction costs or $250,000, whichever is greater.

*All insurance must be issued by a firm with an A.M. Best Rating of B+ or better.

Where HMFA construction is not used, the developer must provide one of the following for a term of 2 years from the date of issuance of the Certificate of Occupancy or Architect's Certification of Substantial Completion, whichever is later:

-100% Payment & Performance Bond equal to the construction cost.
-Letter of Credit equal to 10% of the construction cost.
-Warranty Bond equal to 30% of construction cost.

*All bonding companies must be rated with an A.M. Best Rating of B+ or better.

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 is 10% of the construction costs. This may be adjusted based upon an acceptable engineering report submitted to the HMFA.

The amount of the Developer's fee allowed is limited to 15% of total development cost excluding land, working capital, marketing expenses, escrows, and operating deficit reserves. 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. For projects seeking Low Income Housing Tax Credits, the allowable developer's fee set forth above may be reduced in order for the developer to receive an award of tax credits pursuant to N.J.A.C. 5:80-33.

The Developer fee does not include fees paid to the architect, engineer, lawyer, accountant, surveyor, appraiser, professional planner, historical consultant, and environmental consultant. 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 is funded at construction 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. For more information, refer to the working capital funds policy #5006 in the Management Policies and Procedure Manual. The formula for computing working capital is as follows:

Operating Exp + Debt Service + Agency Fee x 75% X # of months of rent
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(A) Management Fee for Project

• Fifty (50) or More Units Should be Budgeted at a Minimum of Six Percent (6%) of Gross Rents;
• Under Fifty (50) Units should budget the greater of six percent (6%) of gross rents or
  Four Hundred Seventeen Dollars ($417) per Unit and;

(B) Reserve for Repairs and Replacement Should Be Budgeted as Follows:

• Fifty (50) units at four hundred twenty-five dollars ($425) per unit
• Projects of fifty (50) units or more at three hundred dollars ($300) per unit for senior construction
• Three hundred and fifty dollars ($350) per unit for senior rehabilitation and family new construction
• Four hundred ($400) per unit for family rehabilitation

The escrows listed below must be funded from the capital budget at the time of closing on the initial Agency loan whether a construction and/or permanent loan and must remain in place for the term of the mortgage.

*Insurance - one-half year's hazard insurance premium

*Taxes - one-quarter of taxes - this may be on real property and/or a payment in lieu of taxes

Debt Service - one-month's principal, interest and servicing fee payment.

Risk Share Premium - one- year's insurance premium plus one-quarter of the following year's premium (if applicable).

Other Credit Enhancements-as per program requirements

* Additional escrows may be required at closing for the Agency to make the next payment or renewal.