B. Exceptions:

1. The credit investigation or other circumstances may warrant more current financial statements.

   • Assess the adequacy of each Active Principal’s liquidity and its ability to provide immediate and ongoing support to the property, as well as to any asset that is in financial difficulty. For those properties in financial difficulty, consider that property’s strength as well as liquidity sources outside the property, such as the Principals and/or the Sponsor, as applicable. The Lender must look for likely future events that may drain cash resources from the Principals (e.g., loans held by an Active Principal that mature within five years).

   • The Lender may include other sources of Principal cash flow in the analysis, if the source and stability of the cash flow has been verified by reviewing historical tax returns. It is not necessary to include interest income from notes receivable, real estate investment income, dividend income and Principal salaries in the analysis.

2. Audited or reviewed financial statements prepared by a CPA or IPA may be up to 1 year old. The audited or reviewed statements must be supplemented with year-to-date financial statements and supporting documentation, which may be Management Agent-prepared if more than 6 months have elapsed since the closing date of the audited statement.

C. A Borrower that is fully funded with adequate capital in an account in the name of the Borrower must still provide financial statements for the Active Principals.

D. Make a working capital determination for the Borrower, its Active Principals and the General Contractor based upon a review of their financial statements and projects currently planned or in the

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Chapter 8 Mortgage Credit 8.5 Evaluating Financial Capacity

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development process/construction stage as applicable. Adjust the net working capital for the effect of contingent liabilities, pledged financial requirements and the financial needs of other projects in the planning stage or under construction, adjusted by the percentage of completion.

E. Net worth in lieu of working capital (hypothecation of fixed assets) occurs when existing assets can secure loans or lines of credit to cover the project’s financial requirements and such loans or lines of credit are confirmed as being available. In this case, the Underwriter should recommend approval based on “true net worth” rather than on working capital; and require the Active Principal to provide a commitment letter from a lending institution that states:

1. The rate, amount, term and conditions, if any, of the loan or line of credit that the lending institution is willing to provide. (See Section 8.5.1.4.F below)

2. The date by which the commitment letter must be exercised. The date must extend at least to the anticipated date for initial endorsement.

3. The party that will be responsible for repayment of the loan or line of credit, if the commitment is exercised.

Repayment may not be an obligation of the Borrower entity.

• A certification from the Lender affirming that the lending institution will not make any claim against the mortgaged property, mortgage proceeds, any reserve or deposit required by HUD, or against the rents or other income from the mortgaged property for payment of the loan or line of credit. This certification must contain the criminal certification found in Appendix 8, Section A.8.1.

F. Funds provided by a parent company/Sponsor or affiliate of the Principals will require a certification from the Board of Directors or authorized agent that specifies the funds the parent company/Sponsor or affiliate will commit. Establish the availability of funds from the parent company/affiliate. Consider whether:

1. Individual corporations have any excess operating capital (e.g. restricted assets);

2. Laws under which they are incorporated or their banks permit:

   • Withdrawals, loans or advances to owners or Sponsors.

• Stock investment in affiliated corporations.

• Guarantee of debts of associated corporations.