99-002493 The Pines Of Punta Gorda, Inc. vs. Seltzer Management Group, Inc., And Florida Housing Finance Corporation Status: Closed Recommended Order on Thursday, September 16, 1999.

Summary: Threshold check of applications for mortgage funds exceeded permissible scope when it included an analysis of construction-period financing, which properly occurs in final underwriting when the developer can provide explanatory information to underwriter.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

THE PINES OF PUNTA GORDA, )

INC., )

)

Petitioner, )

)

vs. ) Case No. 99-2493

)

FLORIDA HOUSING FINANCE )

CORPORATION, )

)

Respondent. )

______________________________)

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division of

Administrative Hearings, conducted the final hearing in

Tallahassee, Florida, on September 13, 1999.

APPEARANCES

For Petitioner: Robert S. Cohen

Robert S. Cohen, P.A.

1435 East Piedmont Drive

Suite 201-B

Tallahassee, Florida 32312

For Respondent: Maureen McCarthy Daughton

Nabors, Giblin & Nickerson, P.A.

Post Office Box 11008

Tallahassee, Florida 32302-1008

STATEMENT OF THE ISSUE

The issue is whet her Respondent improperly rejected

Petitioner's application during the threshold check of

applications for bond funds in the Multifamily Mortgage Revenue

Bond Program. The case requires the identification of the

requirements of a threshold check.

PRELIMINARY STATEMENT

By Petition for Formal Administrative Proceedings dated

March 30, 1999, Petitioner requested a recommended order

determining that, during the threshold check, Respondent

improperly rejected Petitioner's application to participate in

the Multifamily Mortgage Revenue Bond Program.

On June 3, 1999, Respondent transmitted the petition and

file to the Division of Administrative Hearings and requested

that an Administrative Law Judge conduct a hearing on the

relevant issues. By Notice of Hearing dated June 22, 1999, the

Administrative Law Judge set the final hearing for September 13,

1999.

At the hearing, Petitioner voluntarily dismissed the portion

of its petition directed against Selzer Management Group, Inc.

At the hearing, Petitioner called two witnesses. Respondent

called two witnesses. The parties jointly offered 11 exhibits,

which were admitted.

Respondent ordered a transcript. However, after inquiring

of the parties as to the status of the allocation of mortgage

funds for 1999, the Administrative Law Judge directed the parties

to file any proposed recommended orders by noon, September 16,

1999, even though the court reporter would not have filed the

transcript by that date.

FINDINGS OF FACT

1. Respondent is a public corporation generally responsible

for the administration of the programs previously administered by

the Florida Housing Finance Agency. Among these programs is the

Multifamily Mortgage Revenue Bond Program (Program). This case

involves Petitioner's application for an allocation of mortgage

funds for 1999.

2. The Program provides construction and permanent mortgage

loans to developers of rental housing. Respondent offers

submarket interest rates if the developers reserve rental units

for lower-income tenants. As is relevant to this case,

Respondent funds the loans through the sale of tax-exempt

mortgage revenue bonds.

3. The allocation process is competitive because the demand

for mortgage funds exceeds their supply. The allocation process

consists of several parts. Respondent's staff first conducts a

completeness review. Respondent's staff assigns each application

that passes the completeness review to an independent

underwriter, which conducts a threshold check. Respondent's

staff comparatively ranks the applications that pass the

threshold check, and the staff submits the rankings to

Respondent's Board of Directors. After finalizing the rankings,

the Board sends the applications within the funding range to

final credit underwriting, at which point credit underwriters

closely examine each application. The underwriters make funding

recommendations to the Board, which accepts, rejects, or modifies

the recommendations in making the final funding decisions.

4. According to the 1999 Developer's Handbook (Handbook,

which is Joint Exhibit 1), the first event in the closing

schedule is the real estate closing. Joint Exhibit 1, p. F-3.

After the real estate closing, Respondent and other parties

negotiate the bond prices and mortgage interest rates. The final

event in the closing schedule is the bond closing, at which point

Respondent delivers the bonds to the bond purchasers in exchange

for the bond proceeds, which Respondent lends in the form of a

mortgage loan to the developer.

5. The Handbook also reprints Chapter 67-21, Florida

Administrative Code. Rule 67-21.008(12), all references to Rules

are to the Florida Administrative Code, provides that the

developer shall, "prior to the requested date for funding,"

provide Respondent with, among other things, a commitment for

mortgagee title insurance subject only to the standard exceptions

and evidence as to the status of liens so as to reflect only

those liens that Respondent has permitted to remain recorded

against the mortgaged property.

6. At the start of the application process, Respondent

supplied each prospective applicant with the Handbook. The

Handbook lists numerous evaluation criteria that apply to the

overall process by which Respondent decides which applications to

fund. These criteria, of course, include "[e]vidence of economic

feasibility of the Development and repayment of the loan." Joint

Exhibit 1, p. B-3. However, this case involves only the

threshold check, which is clearly both preliminary to, and less

comprehensive than, final credit underwriting.

7. In a general discussion of the preliminary reviews that

precede final credit underwriting, the Handbook warns that the

completeness review is "quantitative" and the threshold check is

"qualitative." Joint Exhibit 1, p. E-1. The Handbook adds:

"Credit Underwriters will be looking at each Application for

thoroughness and quality of information." Id.

8. Part H of the Handbook addresses credit underwriting and

identifies nine factors, such as the value of the security,

feasibility, costs, and marketability, that are part of the

"Credit Underwriting review." Although Part H mentions the

threshold check, the text is not explicit as to whether "Credit

Underwriting review" is meant to include the threshold check.

9. A close reading of the penultimate paragraph on page H-1

of the Handbook suggests that "Credit Underwriting review," as

used on page H-1, does not include the threshold review. This

paragraph of the Handbook notes that developers may be required

to submit additional documentation during final credit

underwriting. As noted below in the discussion of the rules,

developers are prohibited from providing additional documentation

during the threshold check. Given this important distinction

between these two stages in the credit-underwriting process, the

final sentence of the penultimate paragraph reveals that "Credit

Underwriting reviews" are limited to final credit underwriting.

The sentence states: "The time required for completing Credit

Underwriting reviews is directly related to the completeness and

timing of submission of required items to the Credit

Underwriter." The Administrative Law Judge thus determines that

the identification of these nine underwriting criteria stated on

page H-1 of the Handbook apply only to final credit underwriting.

10. However, the Handbook clearly addresses the threshold

check at pages H-3 and H-4. These pages list 25 items applicable

to the threshold check. These items include statements of the

experience of the attorney and consultant, preliminary plans and

specifications, a preliminary site plan, evidence of site

control, a survey, a statement of permitting status, evidence of

infrastructure availability and concurrency, and general

construction contracts. Among the items with more direct

financial impact are "[15 -]year Pro Formas: sources and uses,

and income, expense and occupancy projection; a "[c]over letter

outlining terms of financing requested"; and a "[s]yndication

commitment letter outlining participants and the basic terms of

the agreement, if Housing Credits are required during

construction phase."

11. Several of the rules contained in the Handbook apply to

the threshold check. Most importantly, Rule 67-21.002(63)

defines the "threshold check" as the "required documentation

verification and review" by the underwriter before the Board may

submit an application to final credit underwriting.

12. Rule 67-21.003(5) provides that the Board shall rank

applications that receive a "satisfactory" threshold check, but

the rule fails to specify what is necessary to earn

"satisfactory" threshold check. Rule 67-21.003(8) refers to a

"favorable" threshold check, but also fails to specify what is

necessary to earn a "favorable" threshold check.

13. Rule 67-21.014 explains the credit underwriting

procedures. Rule 67-21.014(1) describes the threshold check, and

Rule 67-21.014(2) describes final credit underwriting. Rule 67-

21.014(1)(b) requires that a prerequisite to final credit

underwriting is a "positive recommendation as to compliance with

the Threshold Check," but the rule does not specify what is

necessary to comply with the threshold check. By contrast, Rule

67-21.014(2)(b) identifies clearly the overriding criterion of

final credit underwriting: "The Credit Underwriter shall review

the proposed financing structure to determine whether the Loan is

feasible."

14. Rule 67-21.003(1) adopts by reference the application

form, which also addresses the threshold review. The front page

of the application cautions: "If the necessary backup

information is not accurately provided the Credit Underwriter

will not unable to process your application during the Threshold

Check." The front page of the application adds that applicants

may not supplement their applications during the completeness

review conducted by Respondent's staff or the threshold check

conducted by the underwriters.

15. Page 13 of the application states:

III. Development Financing: Please respond

to the requested information below. Attach

and label the appropriate exhibits. Failure

to respond to the requested information and

provide the necessary backup information will

result in the determination that the

application is incomplete during the Florida

Housing's Staff Application Review. If the

necessary backup information is not

accurately provided the Credit Underwriter

will be unable to process your application

during the Threshold Check. All information

must be clear and directly related to your

proposed development. No additional

information can be received by Florida

Housing and the Credit Underwriter during the

Application Review and Threshold Check.

A. Financing Cover Letter: Include a

letter describing any anticipated sources of

financing other than Bonds for the proposed

development. This letter must include all

information available at the time of

application submission (such as interest

rates and any terms associated with these

sources of financing). The letter must also

include how the applicant intends to fund

construction.

The letter can be found behind Exhibit __.

B. Sources and Uses of Funds: Include

sources and uses of funds consistent with all

intended financing. The Sources and Uses of

Funds must be prepared in a format similar to

the one found behind this Application.

The Sources and Uses of Funds for the

proposed development can be found behind

Exhibit __.

C. Fifteen year income, expense, and

occupancy projection: Include a fifteen year

income, expense, and occupancy projection

consistent with all financing commitments.

It must demonstrate that the development

meets debt service coverage requirements

based on current interest rates. Please use

a format similar to the one found behind this

Application).

The fifteen year income, expense and

occupancy projection can be found behind

Exhibit __.

16. The suggested forms for reporting the sources and uses

of funds and 15-year income, expense, and occupancy projections

are contained in the Handbook. The two forms are detailed. By

contrast, the Handbook contains no suggested form for the

financing cover letter.

17. For sources of funds, the suggested form list s

Respondent's loan, any tax credit equity, any deferred

developer's fee, and any developer cash, as well as "other"

sources. For uses of funds, the suggested form lists various

acquisition costs, actual construction costs, general development

costs, financial costs, and other development costs. The 15-year

income, expense, and occupancy projection form is even more

detailed, containing over 100 line items.

18. Petitioner's application contains a financing cover

letter, sources and uses of funds, and 15-year income, expense,

and occupancy projections.

19. Petitioner's financing cover letter states in its

entirety:

[Petitioner] (borrower) credit enhancer will

be [Respondent's] Guarantee Program.

The borrower's anticipated source of funds

will be tax-exempt bonds through

[Respondent's] Bond insurance prior to

closing.

The borrower plans to syndicate tax credits

as additional sources of funds.

The Pines development shall receive a Fair

Share Impact Fee contribution from the City

of Punta Gorda within the construction time

frame.

The Pines project "does not" anticipate other

sources of financing other than tax exempt

bonds, tax credit funds and a fair share

impact fee contribution.

We appreciate your consideration in this

matter.

20. Petitioner used the suggested form for sources and uses

of funds. For sources of funds, Petitioner's completed form

shows $12,375,800 from Respondent's loan; $7,400,000 from tax

credit equity; $1,299,266 from the deferral of the developer fee;

$347,904 from developer cash; and $559,800 from Charlotte County

in the form of an impact-fee contribution. For uses of funds,

Petitioner's completed form shows a total of $21,982,770.

21. Petitioner's application also included a letter dated

January 19, 1999, from Midland Equity Corporation to Petitioner.

The letter constitutes a firm commitment from Midland Equity to

purchase the project's tax credits, through the purchase of

partnership interests, in three installments of $4,440,000,

$1,480,000, and $1,480,000, respectively. The letter describes

the due dates of the installments as follows:

First Installment: At the later of: (i)

admission of the Investment Partnership to

the Operating Partnership; or (ii) closing of

the construction loan and Project land

acquisition;

Second Installment: Within thirty (30) days

of the later of: (i) completion of the

Project; or (ii) receipt by the Investment

Partnership of the cost and credit

certification from the independent

accountants.

Third Installment: Within thirty (30) days

of the later of: (i) closing of the

permanent loan; or (ii) receipt of the Form

8609; or (iii) 90% physical occupancy for

ninety (90) consecutive days; or (iv) 1.10

Debt Service Coverage for ninety (90) days.

22. The commitment letter elaborates:

With respect to the Second Installment,

completion of the Project shall mean receipt

of permanent certificates of occupancy or

temporary certificates of occupancy with

conditions/requirements for receiving the

permanent certificates satisfactory to the

Investment Partnership.

23. Petitioner's application contained a copy of an

agreement between Petitioner, as owner, and a general contractor.

The contract is for $13,328,435 and calls for the payment of 95

percent of the total contract price upon the substantial

completion of work. The value of the five percent retainage is

thus $666,421. Substantial completion is the date on which the

Building Department issues a certificate of occupancy for each

building.

24. City of Punta Gorda Ordinance 946-89 provides th at a

landowner shall pay impact fees. The ordinance authorizes

landowners to pay the impact fee not later than the issuance of a

certificate of occupancy.

25. In conducting the threshold check, the underwriter

completed a "threshold review checklist." This form states that

the "threshold check" is the "review and verification of this

information by the Credit Underwriter . . .." The form adds:

"The following items must be satisfactorily addressed." In

explanation, the form states: "'Satisfactory' means that the

Applicant has met the minimum threshold requirements pursuant to

the Application but the items will be further reviewed and

analyzed during Final Credit Underwriting."

26. The underwriter noted that Petitioner's application

satisfied each of the 25 items required on pages H-3 and H-4 of

the Handbook, except for the cover letter outlining the terms of

the requested financing. As for this item, the underwriter

noted: "The financing cover letter does not explain how the

construction period will be funded. Based on the other

information in the application, [the underwriter] calculates a

$1,375,546 construction period funding gap."

27. In determining that Petitioner's application contained

a construction period financing gap, the underwriter constructed

a table entitled "Construction Period Funding Analysis."

28. For uses of funds, the underwriter inserted $21,982,770

for total development costs. The underwriter obtained this

figure from the uses and sources of funds that accompanied

Petitioner's application.

29. For "construction sources of funds," the underwriter

listed six items totaling $20,607,224, leaving a "construction

funding gap" of $1,375,545. The six items were Respondent's loan

of $12,375,800; the first installment of $4,440,000 from the

syndicator of the tax credits; the deferred developer fee of

$1,299,288; developer cash of $347,904; Charlotte County's impact

fee contribution of $559,800; and an additional developer fee

available for deferral of $1,584,454. As to the failure to

include the second installment, the underwriter noted that the

"second capital contribution is not paid until both construction

and the final cost certification are complete."

30. This was the first time that Respondent required a

threshold check in the Program. Respondent arranged for several

underwriters to conduct threshold checks. The underwriter who

performed the threshold check of Petitioner's application

testified at the hearing. His testimony was credible and

established him as a capable credit underwriter with experience

in projects of the type proposed in Petitioner's application.

31. However, the underwriter was limited in his ability to

explain the source of the requirements of the threshold check.

Rather than rely on the available documentation, he explained

that he relied on conversations with Respondent's staff and

mostly common sense. As noted below, there is good reason why

the underwriter did not rely on documentation of the contents of

the threshold check.

32. The underwr iter did not clearly explain the objective

of the threshold review, again understandably. However, he

explained in detail his reasoning in determining that

Petitioner's application left a construction-period financing gap

of $1.375 million. He was not asked how this analysis differs

from the construction financing analysis that presumably is part

of final credit underwriting, but the available record permits no

finding of such a difference.

33. After examining the record, the Administrative Law

Judge is unable to define adequately the scope of review entailed

by the threshold review. Clearly, the threshold review requires

more than the completeness review, but less than final credit

underwriting. Although it is impossible to specify much more

about what the threshold review requires, it is possible to find

that nothing in this record informed Petitioner that its

application would undergo a construction-period financing

analysis, of the type performed by the underwriter in this case,

during the threshold check, rather than during final credit

underwriting.

34. The finding that the analysis that resulted in the

rejection of Petitioner's application exceeded the scope of the

threshold check eliminates the necessity of findings concerning

Petitioner's challenge to the conclusions of the underwriter who

performed this analysis.

35. In light of the adverse finding on the scope of the

threshold check, Respondent would argue in the alternative that

this Recommended Order should proceed to analyze the conclusions

of the underwriter in the construction-period financing analysis.

36. However, the record does not permit a finding that

Petitioner's application does or does not provide adequate

assurance that Petitioner would be able to deliver a lien-free

project at the bond/mortgage closing, as is Petitioner's clear

obligation. There are some complicated timing questions in terms

of projecting, relative to the bond closing, the receipt of the

second installment from the tax-credit syndicator, the payment of

all of the impact fees, and the payment of the retainage allowed

under the general contractor's contract. The second installment

alone would eliminate the gap found by the underwriter, as would

the impact fees and retainage together.

37. The inability to make this finding at this time

reinforces the prematurity of the analysis conducted by the

underwriter. The process permits the developer to add new or

explanatory information during final credit underwriting, but not

the threshold check. A process as complicated and important as

matching, prior to bond/mortgage closing, sources and uses of

funds should be deferred until the stage in the process--i.e.,

final credit underwriting--at which the underwriter can obtain

additional information from the developer. Given the state of

the present record, this process must await final credit

underwriting because nothing adequately informed Petitioner that

his application would be subjected to construction-period

financing analysis during the threshold check.

38. The 1999 allocation cycle is nearly complete. In

August 1999, the Board reviewed the underwriters' funding

recommendations and ordered the allocation of $162 million in

mortgage funds, which, when added to a $5 million carryover from

1998, results in a total allocation of $167 million. Respondent

has allocated all of this amount, except for about $8 or $9

million.

39. However, the projects that have already been allocated

funds must close by September 30, 1999, or the funds revert to

the state pool, from which Respondent may make additional

allocations at its November 1999 meeting. If mortgage funds

become available due to unclosed deals, the Board will reconsider

approximately 10 to 12 applications that were not initially

funded, but which passed the threshold check. If Respondent

issues a final order consistent with this Recommended Order,

Respondent's Board would rank Petitioner's application among

these unfunded 10 to 12 applications.

40. It is unclear whether the 10 to 12 remaining

applications have already undergone final credit underwriting.

Clearly, Petitioner's application has not yet undergone final

credit underwriting. The construction-period financing issues

prematurely raised during the threshold check nonetheless require

analysis during final credit underwriting. If the other 10 to 12

applications have already undergone final credit underwriting,

and given the imminent year-end deadline on the 1999 allocation,

Respondent should consider allowing Petitioner, at its financial

risk, to apply for final credit underwriting, prior to the

November 1999 meeting at which Respondent's Board will consider

this Recommended Order.

CONCLUSIONS OF LAW

41. The Division of Administrative Hearings has

jurisdiction over the subject matter. Sections 120.57(1) and

420.504(2), Florida Statutes. (All references to Sections are to

Florida Statutes.)

42. As the applicant, Petitioner bears the burden of proof.

Department of Transportation v. J. W. C. Company, Inc. , 396 So.

2d 778 (Fla. 1st DCA 1981).

43. Section 420.58(1) authorizes Respondent to adopt rules

for the evaluation and competitive ranking of applications for

funding.

44. Petitioner has proved that Respondent improperly

rejected Petitioner's application during the threshold check.

Respondent has described the threshold check in several rules,

including the application form, and the Handbook, but has not

sufficiently described the threshold check so as to allow an

underwriter performing a threshold check to conduct a

construction-period financing analysis of the type that resulted

in the rejection of Petitioner's application during the threshold

check.

RECOMMENDATION

It is

RECOMMENDED that the Florida Housing Finance Corporation

enter a final order determining that Petitioner's application has

passed the threshold check, directing that Respondent incorporate

any additional information obtained by any additional review

process undertaken pursuant to the recommendation contained in

Paragraph 40 above, and directing that (subject to the outcome of

final credit underwriting) Respondent reconsider Petitioner's

application among the 10 to 12 remaining applications for any

mortgage funds that remain in the Program after the September 30,

1999, closing deadline passes.

DONE AND ENTERED this 16th day of September, 1999, in

Tallahassee, Leon County, Florida.

___________________________________

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 16th day of September, 1999.

COPIES FURNISHED:

Brad Baker, Executive Director

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32399-1329

Stephen M. Donelan, General Counsel

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32399-1329

Robert S. Cohen

Robert S. Cohen, P.A.

1435 East Piedmont Drive

Suite 201-B

Tallahassee, Florida 32312

Maureen McCarthy Daughton

Nabors, Giblin & Nickerson, P.A.

Post Office Box 11008

Tallahassee, Florida 32302-1008

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

days from the date of this Recommended Order. Any exceptions to

this Recommended Order must be filed with the agency that will

issue the final order in this case.