Section 905

Property Income Analysis

905.01

Small Mortgage Loan Underwritten NCF (Underwritten NCF)

Requirements

You must 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. as follows:

REQUIRED UNDERWRITTEN NET CASH FLOW
(SMALL MORTGAGE LOANS)

Item

Function

Description
CALCULATION OF NET RENTAL INCOME

1

  

GROSS RENTAL INCOME – the lesser of

 

  • actual rents in place, or
  • market rents for occupied units, plus market rents for vacant units based on a current rent roll (multiplied by 12).1

2

PLUS

To the extent deducted as an operating expense, rents for other non-revenue units.  For example:

 

  • model units deducted in the “model apartment” operating expense in the “general and administrative” category;
  • owner-occupied units2 deducted in the “general and administrative” category; and
  • employee units3 deducted in the “employee” operating expense in the “payroll and benefits” category.
 

EQUALS

GROSS POTENTIAL RENT (GPR)

3

MINUS

Premiums and corporate premiums.

4

MINUS

Physical vacancy – market rents for vacant units based on a current rent roll (multiplied by 12).4

5

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.4

6

MINUS

Bad debt – the aggregate amount of unpaid rental income determined to be uncollectable, including any adjustments to other income for bad debt.4
 

EQUALS

NET RENTAL INCOME (NRI)

1 (a) In the New York-Northern New Jersey-Long Island, NY-NJ-PA MSA, you may use actual rents in place plus projected increases for rent-regulated units that have rent increases scheduled before, or through, the first 12 months of the loan term.  Any units subject to rent regulation on the Commitment Date must be treated as rent-regulated for this calculation even if converting to market rate after origination.

 

(b) For Properties located in New York City that are currently subject to the J51 Tax Incentive Program, you must ensure that the Gross Rental Income is calculated per Item 1 in Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.

 

2 You must deduct owner-occupied units as an expense unless

 

  • the Mortgage Loan is Tier 3 or Tier 4, or
  • the Property contains 24 or more units.

 

    3 You must deduct as an expense the portion of the market rent used as employee compensation.

     

    4 The total of Items 4, 5, and 6 must be greater than or equal to

     

    • 3% of GPR for the New York-Northern New Jersey-Long Island, NY-NJ-PA and San Francisco-Oakland-Fremont, CA, Metropolitan Statistical Areas (MSAs), if supported by market and property operations, or
    • 5% of GPR for all other MSAs.

    CALCULATION OF OTHER INCOME

    7

    PLUS

    Actual other income (except premiums and corporate premiums) generated through ongoing operations.  The income must:

     

    • be stable;
    • be common in the market;
    • exclude one-time extraordinary, non-recurring items; and
    • be supported by prior years.

    You must assess the individual month's other income within the prior full-year operating statement; or at a minimum, an operating statement covering at least the trailing 6 month's (annualized).

    CALCULATION OF COMMERCIAL INCOME

    8

    PLUS

    Actual income from leased and occupied commercial space per Part II, Chapter 1: Attributes and Characteristics, Section 109: Commercial Leases.

    9

    PLUS

    Actual income from STRSTRProperty permitting leases or master leases (including subleases, licenses, and other possessory interests, whether oral or written) of an individual dwelling unit where the intended occupancy of the unit is for less than 30 days, regardless of the stated lease term, such as through a peer-to-peer… units.

    10

    MINUS

    10% of the actual commercial space income (total of Items 8 plus 9).5

    11

    PLUS

    Commercial parking income (e.g., public parking) that does not exceed actual trailing 12-month collections.5

    12

    PLUS

    Laundry and vending, and all other income per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.
    5 If net commercial income is greater than 20% of EGI, then reduce to 20% of EGI.
     

    EQUALS

    EFFECTIVE GROSS INCOME (EGI)

    CALCULATION OF OPERATING EXPENSES

    13

    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). ;
    • apply an appropriate increase over the prior year’s operations in determining an estimate; and
    • include all STRSTRProperty permitting leases or master leases (including subleases, licenses, and other possessory interests, whether oral or written) of an individual dwelling unit where the intended occupancy of the unit is for less than 30 days, regardless of the stated lease term, such as through a peer-to-peer…-related expenses in their respective expense line items, including
      • cleaning,
      • furnishing, and
      • repairs.

     

    You cannot include any operating expense that reflects blanket or bulk discounts that benefit 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. (e.g., blanket property or casualty insurance policies, or utilities purchased in bulk).  Operating expenses must reflect 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). expenses on a stand-alone basis.

    14

    MINUS

    Property management fee equal to the greatest of:

     

    • 3% 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 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.

    15

    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).

     

    16

    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.

    17

    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 as detailed in Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.
     

    EQUALS

    UNDERWRITTEN NET OPERATING INCOME (UNDERWRITTEN NOI)

    18

    MINUS

    Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense equal to the greatest of

     

    • $200 per unit, if 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). overall rating is 1,
    • $250 per unit, if 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). overall rating is 2, 
    • $300 per unit, if 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). overall rating is 3, or
    • the amount required per Part II, Chapter 4: Inspections and Reserves.

    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). ratings are the ratings reported on the Comprehensive Assessment Addendum (“Comp Assmt Addendum”) tab of the MBAMBAMortgage Bankers Association Standard Inspection Form.
     

    EQUALS

    UNDERWRITTEN NET CASH FLOW (UNDERWRITTEN NCF)
    905.02

    Underwritten DSCR

    Requirements

    You must calculate Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis, as adjusted for the applicable products and… per the following table.

    UNDERWRITTEN DSCR1,2
    Item Function Description
    1   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. as calculated in Part III, Chapter 9: Small Mortgage Loans, Section 905.01: Small Mortgage Loan Underwritten NCF (Underwritten NCF).
    2 DIVIDED BY

    Annual debt service for 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. amount. 

     

    You must base debt service on a level debt service payment, including amortization, and the greater of

     

    • the actual note rate, or
    • the required Underwriting Interest Rate Floor.3

    1 For a Small Mortgage Loan secured by an MAH Property underwritten per this Chapter, you must comply with the minimum DSCR requirement for an MAH Property per Form 4660.

     

    2 For shorter amortization terms, you must

     

    • calculate the Underwritten DSCR based on the shorter period, and
    • comply with the minimum DSCR requirement per Form 4660.

    The mandatory NRI adjustments in Part II, Chapter 2: Valuation and Income, for Properties with declining NRI do not apply.

     

    3 For a Small Mortgage Loan secured by an MAH Property underwritten per this Chapter, you must comply with the required Underwriting Interest Rate Floor for an MAH Property per Form 4660.