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DOUGHERTY MORTGAGE LLC May 25, 2010 Mr. Charles Riesenberg Lino Lakes Housing Limited Partnership c/o Community Capital Financial Advisory Service, Inc. 162 Mississippi River Boulevard South, Suite One St. Paul, MN 55105 Re: Cottage Homesteads of Willow Pond Lino Lakes, Minnesota Dear Chuck: It is our understanding that you have been communicating with the City of Lino Lakes (the "City ") regarding the subordination of the Contract for Private Redevelopment and Declaration of Covenants which is part thereof to the first mortgage loan to be made by Dougherty Mortgage LLC to Lino Lakes Housing Limited Partnership, which loan is insured by the United States Department of Housing and Urban Development. You have requested clarification as to the HUD insurance claim process and potential outcomes for housing projects following a default under a HUD - insured loan. The following is a brief summary of the claims process and the potential outcomes based on our experience with HUD and our knowledge of the multifamily industry. As you know, if a borrower defaults on a HUD - insured loan, the lender has the option to make an insurance claim to HUD for repayment to the lender of all outstanding indebtedness. Upon payment to the lender of the indebtedness, the loan and all loan documents, including the promissory note, mortgage and security agreements, are assigned by the lender to HUD. HUD steps into the place of the lender and may continue as lender in the loan transaction. As lender, HUD may exercise any options or remedies available to commercial lenders, including but not limited to, modifying the loan terms to reflect the borrower's and project's ability to make payments, extending the term of the loan, or bring a foreclosure action to gain ownership of the project. While these options are available to HUD, in most instances, HUD will choose to sell the loan to another lender through a public note sale. The purchase price for the loan is usually substantially less than the actual outstanding indebtedness and HUD takes a loss on nearly every loan it sells. Upon payment of the note purchase price, HUD assigns the loan and all of the loan documents executed in connection therewith to the purchasing lender, other than the regulatory agreement entered into by the borrower and HUD at the initial loan closing. The regulatory agreement is terminated upon the assignment of the loan from HUD to the purchasing lender. 90 SOUTH SEVENTH STREET • SUITE 4300 • MINNEAPOLIS, MINNESOTA S5402.4108 612.317.2100 • 866.922.0786