Section 504

Seniors Housing Property Income

504.01	Underwritten NCF

Requirements

You must use the following table to calculate Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. .

REQUIRED UNDERWRITTEN NCF (SENIORS HOUSING PROPERTY)
Item	Function	Description
CALCULATION OF NET RENTAL INCOME
1		GROSS RENTAL INCOME per Item 1 in Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).
2	PLUS	Medicaid income (does not include Medicare, which is included in Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. income).
3	PLUS	Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. income – actual trailing 12-month collections for Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units (if 12-month collections are not available, then actual trailing 6-month collections (annualized)).¹
4	PLUS	To the extent deducted as an operating expense, rents for other non-revenue units (e.g., model units deducted in the “model apartment” operating expense in the “general and administrative” category, or actual rent from employee units deducted in the “employee” operating expense in the “payroll and benefits” category).
	EQUALS	GROSS POTENTIAL RENT (GPR)
5	MINUS	Physical vacancy – market rents for vacant units based on a current rent roll (multiplied by 12).²
6	MINUS	Concessions – the aggregate amount of forgone residential rental income from incentives granted to tenants for signing leases, such as free rent for 1 or more months, move-in allowance, etc.²
7	MINUS	Bad debt – the aggregate amount of unpaid rental income determined to be uncollectable, including any adjustments to other income for bad debt.²
	EQUALS	NET RENTAL INCOME (NRI)¹
1 Skilled Nursing income must not be grossed up to 100% before the 20% deduction is applied. An additional 20% is taken off the Skilled Nursing income. 2 The total of Items 5, 6, and 7 must equal the greater of: the difference between the trailing 3-month net rental collections (annualized) and the GPR; or the following percentages: Independent Living: if the percentage of Independent Living units is greater than 50%, then use 5% of GPR. Assisted Living (60 total units or more): if the percentage of Assisted Living units or the combined percentage of Assisted Living and Alzheimer’s/Dementia Care units is 50% or greater, then use 5% of GPR. Assisted Living (less than 60 total units): if the percentage of Assisted Living units or the combined percentage of Assisted Living and Alzheimer’s/Dementia Care units is 50% or greater, then use 10% of GPR. Alzheimer’s/Dementia Care: if the percentage of Alzheimer’s/Dementia Care units is 100%, then use 10% of GPR. Skilled Nursing units: use 20% of collections based on the trailing period used in determining Skilled Nursing income in Item 3. You must determine if NRI declined per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and adjust Underwritten NRI as required.
CALCULATION OF ASSISTED LIVING SERVICE INCOME AND OTHER INCOME
8	PLUS	Trailing 12-month nursing/medical income (includes Assisted LivingAssisted LivingSeniors Housing Property offering services limited to non-medical personal care, including ADL assistance, which are typically licensed and regulated by a state or local governmental authority. service income).
9	PLUS	Trailing 12-month ancillary income attributable to Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units, if applicable.
10	PLUS	Trailing 12-month other income for second resident fees, meals, tray service, laundry, special transportation, community fees, parking revenue, and any other income.
CALCULATION OF NET ENTRANCE FEE INCOME
11	PLUS	Net entrance fee income associated with CCRCsCCRCsSeniors Housing Property that provides a continuum of care on a single campus, including any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. – resident entrance fee collections minus entrance fee refunds, but not more than the annualized average of the trailing 60-months of net entrance fee income.
CALCULATION OF COMMERCIAL INCOME
12	PLUS	Actual income from leased and occupied commercial space per Part II, Chapter 1: Attributes and Characteristics, Section 109: Commercial Leases.
13	MINUS	10% of the actual commercial space income.³
14	PLUS	Commercial parking income (e.g., public parking) that does not exceed actual trailing 12-month collections.³
	EQUALS	EFFECTIVE GROSS INCOME (EGI)
3 If net commercial income is greater than 20% of EGI, then reduce to 20% of EGI.
CALCULATION OF OPERATING EXPENSES
15	MINUS	Line-by-line stabilized operating expenses. Stabilized operating expenses are the expenses during normal ongoing PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). operations, not affected by a lease-up, rehabilitation, or other short-term positive or negative factors. Non-recurring, extraordinary operating expenses must not be included. You must assess: past operating history; the Appraiser’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. expense analysis; all information available to you (including PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). contracts, utility bills, real estate tax assessments, insurance policies, and comparable assets); and the Borrower'sBorrower'sPerson who is the obligor per the Note. budget (in the case of an acquisition). You must: analyze historical operations at the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; and apply an appropriate increase over the prior year’s operations in determining an estimate.
16	MINUS	PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). management fee equal to the greatest of: 5% of EGIEGIOn an annual basis or any specified period, the total of Net Rental Income plus other income per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. ; actual property management fee (exclude any portion of a non-arm’s-length property management fee that is subordinated to the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. ); or market property management fee.
17	MINUS	Real estate taxes per Item 17(b) in Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).
18	MINUS	Insurance equal to: the quoted expense, for insurance policies with a bona fide written quote from a reputable broker for a new 12-month policy; or 110% of the current expense, for insurance policies with a remaining term less than 6 months.
19	MINUS	Room expense – housekeeping, if applicable.
20	MINUS	Meals expense, if applicable.
21	MINUS	Utilities, water and sewer, repairs and maintenance, payroll and benefits, advertising and marketing, professional fees, general and administrative, ground rent, and all other expenses per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.
	EQUALS	UNDERWRITTEN NET OPERATING INCOME (UNDERWRITTEN NOI)
22	MINUS	Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense per Part III, Chapter 5: Seniors Housing Properties, Section 505: Replacement Reserve.
	EQUALS	UNDERWRITTEN NCF

504.02	Skilled Nursing NCF Test

Requirements

Fannie Mae will not purchase any Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. if the Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and… is more than 20% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and….

You must:

Calculate the Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and… at underwriting to determine if the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). will meet this Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and… test.
Retest all PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). with Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units annually after closing to ensure compliance.
Contact the Fannie Mae Deal TeamFannie Mae Deal TeamTeam responsible for reviewing Pre-Review Mortgage Loans, waivers, etc. to ensure the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. for any transaction with Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units include appropriate modifications.

The Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and… test is a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). -specific test. You must separately test a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). with Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units, if the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. is

secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). , or
cross-defaulted or cross-collateralized with another Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. .

You must use the following table to calculate the Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and….

REQUIRED SKILLED NURSING NCF AND PERCENTAGE (SENIORS HOUSING PROPERTY)
Item	Function	Description
SKILLED NURSING EFFECTIVE GROSS INCOME
1		SKILLED NURSING INCOME – actual trailing 12-month collections for Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units (if 12-month collections are not available, then actual trailing 6-month collections (annualized)).
2	MINUS	20% of collections based on the trailing period used in determining the Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. income.
3	PLUS	Ancillary income attributable to Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.
	EQUALS	SKILLED NURSING EFFECTIVE GROSS INCOME (EGI)
SKILLED NURSING EXPENSES
4	MINUS	Fixed expenses – greater of actual or allocated fixed expenses (e.g., real estate taxes, liability insurance, etc.) for Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.
5	MINUS	Variable operating expenses for Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.
	EQUALS	SKILLED NURSING NCF
6	DIVIDED BY	Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. per Part III, Chapter 5: Seniors Housing Properties, Section 504.01: Underwritten NCF.
	EQUALS	SKILLED NURSING NCF PERCENTAGE

504.03	Operating Lease Ratios

Requirements

If the Seniors Housing Operator

does not have any direct or indirect ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. or the Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , or
is not a PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). ControlledControlledPossessing, directly or indirectly, the power to direct or cause the management and operations of an entity (e.g., through the ownership of voting securities or other ownership interests, or by contract). by, under common ControlControlPossessing, directly or indirectly, the power to direct or cause the management and operations of an entity (e.g., through the ownership of voting securities or other ownership interests, or by contract). with, or which ControlsControlsPossessing, directly or indirectly, the power to direct or cause the management and operations of an entity (e.g., through the ownership of voting securities or other ownership interests, or by contract). , the BorrowerBorrowerPerson who is the obligor per the Note. or Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , then you must ensure that the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). meets the following ratios:

Ratios	Requirements
Operating Lease Coverage Ratio	The minimum underwriting ratios for Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. to current year operating lease payments are: 1.10 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where more than 50% of the units are Independent LivingIndependent LivingSeniors Housing providing limited programs of assistance for domestic activities (e.g. meals, housekeeping, activities, transportation, etc.), and typically resembles market rate units. units; and 1.15 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where 50% or more of the units are Assisted LivingAssisted LivingSeniors Housing Property offering services limited to non-medical personal care, including ADL assistance, which are typically licensed and regulated by a state or local governmental authority. , Alzheimer’s/Dementia CareAlzheimer’s/Dementia CareSeniors Housing Property with units and beds for residents with significant cognitive impairment resulting from Alzheimer’s disease or other dementia, which are typically licensed and regulated by a state or local government authority. , or Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.
Operating Lease Payment to Debt Service Payment Ratio	The minimum underwriting ratios of the current year operating lease payments to the underwritten fixed rate debt service payments are: 1.15 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where more than 50% of the units are Independent LivingIndependent LivingSeniors Housing providing limited programs of assistance for domestic activities (e.g. meals, housekeeping, activities, transportation, etc.), and typically resembles market rate units. units; and 1.20 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where 50% or more of the units are Assisted LivingAssisted LivingSeniors Housing Property offering services limited to non-medical personal care, including ADL assistance, which are typically licensed and regulated by a state or local governmental authority. , Alzheimer’s/Dementia CareAlzheimer’s/Dementia CareSeniors Housing Property with units and beds for residents with significant cognitive impairment resulting from Alzheimer’s disease or other dementia, which are typically licensed and regulated by a state or local government authority. , or Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.

Ratios

Requirements

Operating Lease Coverage Ratio

The minimum underwriting ratios for Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. to current year operating lease payments are:

1.10 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where more than 50% of the units are Independent LivingIndependent LivingSeniors Housing providing limited programs of assistance for domestic activities (e.g. meals, housekeeping, activities, transportation, etc.), and typically resembles market rate units. units; and
1.15 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where 50% or more of the units are Assisted LivingAssisted LivingSeniors Housing Property offering services limited to non-medical personal care, including ADL assistance, which are typically licensed and regulated by a state or local governmental authority. , Alzheimer’s/Dementia CareAlzheimer’s/Dementia CareSeniors Housing Property with units and beds for residents with significant cognitive impairment resulting from Alzheimer’s disease or other dementia, which are typically licensed and regulated by a state or local government authority. , or Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.

Operating Lease Payment to Debt Service Payment Ratio

The minimum underwriting ratios of the current year operating lease payments to the underwritten fixed rate debt service payments are:

1.15 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where more than 50% of the units are Independent LivingIndependent LivingSeniors Housing providing limited programs of assistance for domestic activities (e.g. meals, housekeeping, activities, transportation, etc.), and typically resembles market rate units. units; and
1.20 for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. where 50% or more of the units are Assisted LivingAssisted LivingSeniors Housing Property offering services limited to non-medical personal care, including ADL assistance, which are typically licensed and regulated by a state or local governmental authority. , Alzheimer’s/Dementia CareAlzheimer’s/Dementia CareSeniors Housing Property with units and beds for residents with significant cognitive impairment resulting from Alzheimer’s disease or other dementia, which are typically licensed and regulated by a state or local government authority. , or Skilled NursingSkilled NursingSeniors Housing Property with units that are highly regulated and provide 24-hour resident supervision and registered nursing care services. units.

504.04	Operating Lease Analysis

Requirements

Before finalizing the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. , you must:

Obtain a copy of each management agreement, operating lease, master lease, and sublease including all exhibits and amendments.
Upload into DUS GatewayDUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. a completed Seniors Housing Operating Lease Review Checklist (Form 6487.SRS) that analyzes the
- underwriting and legal aspects of each lease and its impact on the operations of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). , and
- obligations of the BorrowerBorrowerPerson who is the obligor per the Note. , each GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , and the Seniors Housing Operator under the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. .

Seniors Housing Property Income

Underwritten NCF

Skilled Nursing NCF Test

Operating Lease Ratios

Operating Lease Analysis