CREA Edge Newsletter

CREA Edge Newsletter

EDGE Communications from the

Portfolio Management Frontline

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October 30, 2020

LEADERSHIP Q & A WITH CHARLES ANDERSON As it’s been the case for businesses across the world, CREA has had to pivot in multiple areas to ensure the safety of employees and residents, as well as continue its mission to make affordable housing a realty. We “sat down” with Charles Anderson, Co- President, to discuss changes and challenges in light of COVID-19.

year, we look at around four billion of equity and close around 20-25% of that amount. Through July of this year, we had looked at less than a quarter of that amount. Over the last 60 days or so, we have experienced a more optimistic trend in investor behavior and are cautiously optimistic that that trend will continue into 2021. Accordingly, we have started looking at new transactions nationally with a heavy emphasis on sponsorship and structure/liquidity. One thing is certain, how we conduct business prospectively is being shaped by what we learned during the global pandemic.

time is the universal component of every transaction that we do not control. COVID-19 required us to reassess our underwriting standards with respect to construction timelines and our budget expectations. We are experiencing delays in obtaining approvals at every level of the transaction, and periodic work stoppages are occurring due to reported positive COVID-19 cases at a number of properties. You have heard the old adage that “time is money,” but I think of time as the opportunity cost. We are constantly tasking ourselves with improving the efficacy of our processes in an effort to eliminate wasted opportunities...

How has COVID-19

impacted

business operations? When COVID initially hit and we moved to a “shelter in place” strategy organizationally, the decision was made to halt all new “unspecified” business until we had a better sense of how the global pandemic would impact the national economy and corporate tax liability. In a typical PROPERTY IMPACT STORY: SOUTH PARK APARTMENTS PROVIDE HOMES TO THE HOMELESS In the heart of San Francisco, Mission Housing Development Corporation is actively rehabilitating three existing properties to create 105 affordable homes in the South Park neighborhood. The existing properties include the Gran Oriente Filipino Hotel, Hotel Madrid and The Park View...

What has been impacted the most? It has always been understood that

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By: Brooke Solis SVP, Asset Management COVID-19 CREA PORTFOLIO TRENDS

EMPLOYEE SPOTLIGHT: JAMIE IRWIN

Jamie Irwin recently moved into her role as Manging Director of Account Management. However, Jamie joined CREA in November 2006 and has been a key player for the Acquisitions team since that time, with focused efforts on preparing and analyzing financial projections and reviewing and coordinating due diligence for LIHTC transactions. Read more about Jamie and her new role...

The past seven months have shown us the resilience of the team at CREA and our general partners and on-site property managers. By the end of March, our Asset Management team was beginning to receive various requests from investors with specific property-level information...

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P2 LEADERSHIP Q&A, CONT. P2 CONSTRUCTION UPDATE P3 PROPERTY IMPACT STORY, CONT.

P4-5 CONSTRUCTION UPDATE, CONT. P6-7 PORTFOLIO TRENDS CONT. P8 EMPLOYEE SPOTLIGHT: JAMIE IRWIN

P9 NEW HIRES P10 AWARDS, DEADLINES & GOOD-TO- KNOWS

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Q & A WITH CHARLES ANDERSON, CONT.

...Closing variances and average closing time frames remain the number one metric(s) of performance for me. In what ways has CREA made adjustments to continue serving partners? Microsoft Office Teams and other virtual meeting platforms have been a huge part of the success. Don’t get me wrong, a virtual meeting is certainly not a face-to-face discussion and I can empathize with virtual meeting fatigue as much as anyone, but I anticipate this platform will continue to be a material part of how we do business prospectively. My current focus and priority with the Information Technology team is the deployment of the various resources essential to a more permanent shift to a virtual environment. What has been your biggest takeaway from the last 6 months? Very few industries rally in the face of adversity the way the affordable

housing industrydoes. I amconstantly amazed by how resilient the industry is and, over the last six months, how effectively its participants persevered in spite of COVID-19. We do our best to anticipate potential enterprise risks, but I would be surprised if anyone had a global pandemic on their radar for 2020. Most

be restructured during that time and, for an organization that prides itself on integrity above all else, those restructurings were among the more challenging experiences we had encountered. Fast forward to 2020 where we are heading into month seven of working from home/ sheltering in place/socially distant

e n c o u r a g i n g has been the c o n t i n u e d commitment of the investors in our space and how quickly they adapted their investment behavior to the new norm we found ourselves in.

e n v i r o n m e n t and we have been able to honor all of our c omm i t me n t s with no transactions lost due to the global pandemic. This is a significant success for CREA’s residents, d e v e l o p e r s , investors, and

“...heading into month seven of working from home / sheltering in place / socially distant environment and we have been able to honor all of our commitments with no transactions lost due to the global pandemic. ”

Any notable stories of success or unique anecdotes? The election of 2016was a particularly difficult period of disruption for our industry. Many transactions had to

the overall health of the affordable housing industry. These are also the types of achievements that make me proud to call myself an affordable housing professional.

CONSTRUCTION IN THE TIME OF COVID-19

industry has endured various work stoppages throughout each state in varying capacities. Within a matter of days, General Contractors found themselves scrambling to figure out how to perform work while complying with social distancing and other new safety measures, or wondering if they could work at all under state and local shelter-in-place

restrictions. As of March 31, 2020, CREA’s active construction portfolio had approximately (126) projects under construction. Fortunately, most states considered the construction of affordable housing an essential business activity and permitted many of the projects within our portfolio to continue with construction, albeit at a slower rate...

By: Brandon Bowling SVP, Construction Management

Like many construction sectors across the United States, COVID-19 has impacted the affordable housing construction industry. Since the first executive stay-at-home order was issued by the state of California on March 20, 2020 the construction

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PROPERTY IMPACT STORY: SOUTH PARK, CONT. ... Rich in history, the next chapter for these buildings will include serving as affordable homes for formerly homeless and very low-income individuals and families with units set aside at 25%, 30%, 50%, 60% and 80% of the average median income. it’s rehabilitation, it is a primary goal to preserve these Filipino roots and eventually get the property designated as a historic site.

There were a handful of financial partners who came together to make South Park Apartment possible, even in the midst of a global pandemic. In addition to 4% LIHTC equity through CREA California Tax Credit Fund 75, LP and investors: Ally Bank, CIT Bank, CharlesSchwab,PacificWesternBank, Silicon Valley Bank, and one other, the tax exempt bonds and a construction loan will be financed with JP Morgan Chase Bank, N.A. The Preservation and Seismic Safety (PASS) program will also provide funding through the following three notes from the Mayor’s Office of Housing and Community Development (MOHCD): a $6.6MM market rate note, a $4.2MM below market rate note, and a $695k deferred note. In addition, the project will benefit froma$11.8MMcommunity development block grant/small sites program loan, a $3.1MM gap loan from MOHCD, and a $9.3MM sponsor loan from Mission Housing. South Park will also continue to benefit from a shelter + care (S+C) subsidy.

“Mission Housing and the City of San Francisco saw the need and acted on it, spending years to put this project together and providing the support and funding to make it possible,” said Shea. Current families and individuals at all properties are a priority and have been considered when making decisions on what services will best serve them. At South Park Apartments, residents will have supportive services made available through Mission Housing and the University of California San Francisco. These services will include: case management, health and wellness advocacy referrals, employment coaching and resources, tenant lease education, well-being workshops, weekly food pantry onsite, as well as group walks.

“South Park Apartments is one of the most meaningful, impactful projects I have had the privilege to be a part of,” said Richard Shea, SVP – Originator. “…This project will provide housing for the most needy and vulnerable, in a city where housing costs are the highest in the country.” Originally acquired and rehabbed by Mission Housing in 1987, Hotel Madrid and Park View currently offer single room occupancy and services to residents and will be adding additional units as part of the project’s rehabilitation. For their recent efforts and presence in the affordable housing space, they have been the recipients of a National Association of Housing and Redevelopment Officials’ (NAHRO) Merit Award for “Program Innovation: Direct Client and Resident Services.” In 2018, Mission Housing took part in the preservation of the historic Grand Oriente Filipino Hotel and officially added it to their portfolio in June of 2020. The Gran Oriente was first built in 1907 and became one of the first Filipino-owned businesses in the area in 1920 when it was purchased by members of The Gran Oriente Filipino Masonic fraternity. During

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CONSTRUCTION IN THE TIME OF COVID-19, CONT. By April 30, 2020 CREA’s active construction portfolio only had full work stoppages in-place on (11) total projects located in California, Michigan, and Pennsylvania. That is a pretty marginal impact to our overall portfolio given more than 90% of our projects were able to continue with onsite improvements. This was made feasible by both ownership and builder sides quickly rallying together to adapt to the new environment. Throughout our industry, both sides collaborated to create and implement new forward-thinking safety protocols, which will likely impact the way affordable housing is constructed for the foreseeable future. While these are not the only subcontractor bases to be impacted by COVID-19, they are certainly several of the key trades at play in ensuring project delivery timelines are met. Due to local onsite building inspection processes varying in each state, city, township or county, it has become increasingly difficult to identify potential municipal impacts on each deal. Developers and General Contractors have tried various ways to accommodate inspections while following CDC guidelines. CREA has seen various creative ways in the industry to tackle this problem, including virtual inspections and the clearing out of entire buildings for inspectors to complete their respective walk-throughs. ...continued from page 2

When a confirmed COVID case was reported of an onsite crew member, it required that individual to be removed from the property and complete a 14-day self-quarantine period, per CDC guidelines. Any personnel who had been in contact with that individual was also required to be removed from the site for at least seven days. These types of protocols clearly had an impact on the available workforce in many regions throughout the country. As a result, our industry started to see an influx of subcontractors, who previously had not focused on affordable housing projects, enter the marketplace given their respective construction sectors were not being considered essential within many states (i.e. market rate developments & hospitality). One- way owners and general contractors attempted to offset this setback on our new construction developments by incorporating a second shift into the construction schedules when permitted by local ordinances (predominately occurred on larger projects located in municipal areas). In regard to rehabilitation developments, CREA saw many general contractors utilizing resequencing measures to focus solely on exterior improvements while interior unit upgrades could not safely be completed. As noted in various publications throughout the last several months, some of the most heavily impacted workforces nationwide included: (Exhibit 1)

Throughout the country, general contractors were required to implement pandemic-specific safety plans for the first time, which allocated designated personnel to administer and enforce COVID-19 safety policies. These new safety protocols largely included health representatives being onsite to take temperatures prior to accessing property, mandatory face coverings, increasing worker wash stations, offering an increased number of sanitation stations, disinfecting high volume touch points regularly, developing designated stair towers for ingress / egress to allow proper social distancing, posting reminders for trades to self-regulate health, and developing continuity safety plans between general contractors & subcontractors.

In anticipation of looming supply chain disruptions, many general contractors began looking to secure building materials and equipment in advance of standard timelines to avoid potential shortages and price escalations.Asaresult,manyofCREA’s construction consultants started to see the availability of off-site storage warehouse locations decrease within larger markets. Consequentially, this started to impact contractor billing cycles and slightly inflate reported completion percentages on the monthly contractor requisitions (i.e. due to stored materials). The below chart specifically illustrates recent trends CREA and their construction consultants have started to see with their respective construction portfolios related to material and

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equipment shortages: (Exhibit 2)

has staged a staggering increase in recent months, rising roughly 80% since mid-April to an average price above $600 per thousand board feet. The prices listed below provide an overview of the behaviors within the U.S. framing lumber pricing market: (Exhibit 3) It is difficult to dispute that COVID-19 has impacted lumber pricing throughout our industry. Key contributors to this recent price surge stems from both unexpected factors on the demand side and miscalculations on the supply side. As reported throughout various publications, many lumber mills ceased production entirely due to stay-at-home orders and plummeting demand at the beginning of the pandemic. Thiswas right at the start of the typical building season for much of the U.S. (i.e. when contractors tend to begin new construction projects due to favorable weather conditions). Once stay-at-home orders started to be lifted and the economy began to bounce back, mills resumed but

at much lower rate of production. Industry reports suggest many anticipated / forecasted a sharp decline in demand of lumber, but as it turns out that was not the case, thus a huge surge in unexpected demand. Lastly, let’s not forget about the impact DIY projects for consumers are having on today’s market. During the pandemic, DIY projects became a higher priority as many homeowners started to tackle home improvements during quarantine periods (weekly consumer spending in the home supply category jumped more than 80% year-over-year. While a virus-driven downturn presents owners and general contractors with some unique challenges through nationwide shutdowns, material and equipment scarcities, shortages of skilled labor, and escalating building material costs, the affordable housing construction industry can prevail through collaborative efforts of both parties and implementation of appropriate strategic planning.

As a result of these recent trends, CREA has developed a COVID-19 Questionnaire that is sent to each developer during our pre-closing underwriting process to aid with identifying the status of subcontractor buyouts and material orders. We recently started receiving reports that general contractors are planning to consider “closing draws,” which will help with securing select building materials and equipment earlier than normal in the construction process (i.e. through deposits and/or securing off-site stored materials). This will help offset any potential delays or significant material price escalations during the procurement process. Sourcing materials sooner rather than later will help ensure the closing development budgets remain intact. The scarcity of these materials has caused rising costs at a record pace. Most notably and as reported by The National Association of Homebuilders, the price of lumber

Exhibit 3

Exhibit 1

Exhibit 2

The information is sourced each week using the Random Lengths Framing Lumber Composite, which is comprised using prices from the highest volume-producing regions of the U.S. and Canada.

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COVID-19 CREA PORTFOLIO TRENDS CONT. ... as well as fund-level and portfolio statistics. As we began reaching out to general partners and management agents, it was evident that their teams were laser focused on the core of our business: the residents. We quickly realized that our “boots on the ground” partners were being pulled in many directions with record level reporting requests, as well as quickly creating and implementing new health and safety protocols for residents and staff. As advocates, our partners were actively reaching out and providing education and resources to residents, such as local subsidy and relief programs, processing interim recertifications, and assisting with unemployment applications. CREA’s requests for information needed to be limited, organized and focused. Like many other syndicators, our external >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10

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