Underwritten NCF

1

GROSS RENTAL INCOME – the least of:

• rents permitted under any federal, state, or local subsidy program applicable to 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). , as adjusted for AMI, family size, and number of bedrooms in a unit, and reductions for the applicable utility allowances¹;
• rents permitted under any restrictive covenants, subordinate financing requirements, or an Affordable Regulatory AgreementAffordable Regulatory AgreementRegulatory, land use, extended use, or similar agreement or recorded restriction limiting rents, imposing maximum income restrictions on tenants, or placing other affordability restrictions on the use or occupancy of the Property (whether imposed by a government entity or self-imposed by a Borrower… recorded on 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). ; or
•  based on a current rent roll,
  • actual rents in place for occupied units, plus
  • for vacant units, the lowest of: 
    • actual rents in place for comparable occupied units;
    • market rents; and
    • permitted rents, described above (multiplied by 12).²

Rent from non-project based Housing Choice VouchersHousing Choice VouchersAny rental assistance payment or voucher to an eligible tenant under Section 8 of the United States Housing Act of 1938, 42 U.S.C. § 1437f, as amended. must not exceed the average rent for comparable units without non-project based Housing Choice VouchersHousing Choice VouchersAny rental assistance payment or voucher to an eligible tenant under Section 8 of the United States Housing Act of 1938, 42 U.S.C. § 1437f, as amended. .

You must include incremental HAPHAPHUD project-based Section 8 rental subsidy in the form of a Housing Assistance Payment contract. contract income per Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 707.01: Properties with Both HAP Contracts and LIHTC Units.

2

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)¹

3

MINUS

Physical vacancy – applicable actual rents for vacant units and MAHMAHProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. unit type (e.g., 20% @ 50%, 40% @ 60%, or HAPHAPHUD project-based Section 8 rental subsidy in the form of a Housing Assistance Payment contract. contract) based on a current rent roll (multiplied by 12).³

4

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.³

5

MINUS

Bad debt – the aggregate amount of unpaid rental income determined to be uncollectable, including any adjustments to other income for bad debt.³

EQUALS

NET RENTAL INCOME (NRI)^{2, 3, 4}

1 For Properties with HAP contracts, you

• may use newly approved rents if they are effective by the first day of the month after the Mortgage Loan Origination Date, even if the rents exceed trailing GPR, but
• may not use rents based on
  • an agreement to enter into a HAP contract (AHAP),
  • commitment to enter into a Housing Assistance Payment contract (CHAP), or
  • a "comfort letter".

2 You may underwrite HAP contract rents up to:

• 5% above market rents if the MAH Property is located in an Eligible MSA; or
• 10% above market rents if the MAH Property is located in a Strong Market, provided the Property's
  • HAP contract expires after the Maturity Date, and
  • current and average 3-year physical occupancy is greater than or equal to 95%.

3 The total of Items 3, 4, and 5 must equal the greater of

• the GPR including any permitted HAP contract rent increases multiplied by the percentage difference between
  • the trailing 3-month net rental collections (annualized), and
  • trailing GPR excluding any HAP contract rent increases not in effect before the Mortgage Loan Origination Date; and
• either
  • 5% of GPR, including any permitted HAP contract rent increases, or
  • 3% of GPR, including any permitted HAP contract rent increases, if:
    • the Property is located in a Strong or Nationwide Market per Form 4660;
    • for a Property without a HAP contract, the actual rents for restricted units are at least 10% below comparable market rents; and
    • the economic vacancy (i.e., the total of Items 3, 4, and 5) is supported by current and 3 years of historical economic vacancy data.

4 You must assess the NRI, including any declines, and make adjustments per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.

CALCULATION OF OTHER INCOME⁵

6

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 months (annualized).

If there are fluctuations, you may use other income that exceeds the trailing 3-month other income (annualized), provided it does not exceed the highest 1-month other income used in the trailing 3-month other income calculation.

5 If premiums or corporate premiums are applicable for a particular MAH Property, inclusion of premium income is permitted consistent with Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.

CALCULATION OF COMMERCIAL INCOME

7

PLUS

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

9

MINUS

10% of the actual commercial space income.⁶

10

PLUS

Commercial parking income (e.g., public parking) that does not exceed actual trailing 12-month collections.⁶

11

PLUS

Laundry and vending, parking, and all other income per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.

EQUALS

EFFECTIVE GROSS INCOME (EGI)

CALCULATION OF OPERATING EXPENSES

12

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:

• the 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 (for AcquisitionsAcquisitionsAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. ).

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 n their respective expense line items, including
  • cleaning,
  • furnishing, and
  • repairs.

13

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:

• 4% 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. ⁷;
• actual property management fee, provided you
  • 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. , and
  • include any known contractual fee increases occurring over the next 24 months; or
• Appraiser'sAppraiser'sPerson engaged to estimate a Property’s market value per USPAP. concluded market property management fee.

7 Minimum management fee may be 3.5% of EGI (rather than 4% of EGI) if the:

• underwritten management fee is at least $400 per unit;
• actual management fee is equal to or less than the underwritten management fee (provided you exclude any portion of a non-arm's length property management fee that is subordinated to the Mortgage Loan); and
• market management fees support the underwritten management fee for similarly sized MAH properties.

If the MAH Property is located in a Strong Market or Eligible MSA and the Mortgage Loan's original UPB is greater than $9 million, the minimum management fee may be the greatest of

• 2.5%,
• $500 per unit,
• the actual management fee, or
• market management fees for similarly sized MAH properties.

14

MINUS

Real estate taxes based on the greatest of:

• actual future tax bill(s) covering a full calendar year;
• prior full year’s taxes multiplied by 103%; or
• in California, the sum of:
  • any special assessments; plus
  • the millage rate multiplied by the greater of 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, or
    • assessed value.

You must:

• consider any automatic reassessment upon AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. in the next 12-month period; and
• for any tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. expiring within 36 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , underwrite fully assessed real estate taxes.

14

continued

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). has real estate tax abatements, exemptions, deferrals, or PILOTsPILOTsPayment In Lieu Of Taxes. , they must:

• be in effect at closing (or at conversion in the case of a Forward CommitmentForward CommitmentCommitment to purchase a permanent Mortgage Loan for a to-be constructed or rehabilitated Property. ), per written documentation from the state or local tax assessor;
• survive a foreclosure on 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. such that Fannie Mae or a subsequent owner will retain the abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. as long as the rent, income, or other restrictions are maintained (i.e., it is tied to 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 not the owner); and
• if governed under the California Welfare Tax Exemption Program, meet the following:
  • if a refinance, the BorrowerBorrowerPerson who is the obligor per the Note. must be in and remain in compliance with the California Welfare Tax Exemption program; or
  • if an AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. or a Transfer/AssumptionTransfer/AssumptionTransaction changing the ownership of the Borrower or Property. where the AffiliateAffiliateWhen referring to an affiliate of a Lender, any other Person or entity that Controls, is Controlled by, or is under common Control with, the Lender. When referring to an affiliate of a Borrower or Key Principal: any Person that owns any direct ownership interest in Borrower or Key… with 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). of the BorrowerBorrowerPerson who is the obligor per the Note. (which is typically a non-profit entity), or the non-profit entity itself, is changing you must:
    • escrow at least 6 months of full real estate taxes at closing which will be released after confirming that the California Welfare Tax Abatement is approved and in place 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). ;
    • ensure that the BorrowerBorrowerPerson who is the obligor per the Note. has demonstrated experience with the California Welfare Tax Abatement Program; and
    • ensure that the BorrowerBorrowerPerson who is the obligor per the Note. is and remains eligible for the California Welfare Tax Abatement Program.

14

continued

If governed under the Florida affordable housing property exemption (per Sections 196.1978(1) and (2) of the Florida Statutes),

• for a refinance, the BorrowerBorrowerPerson who is the obligor per the Note. must initially be in compliance, and remain in compliance, with the Florida affordable housing property exemption; or
• for an AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. or a Transfer/AssumptionTransfer/AssumptionTransaction changing the ownership of the Borrower or Property. , you must:
  • confirm the BorrowerBorrowerPerson who is the obligor per the Note. applies to the county taxing authority within 60 days after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. ;
  • escrow full taxes until you confirm the Florida affordable housing property exemption is approved and in place 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
  • after confirmation, refund the escrowed taxes to the BorrowerBorrowerPerson who is the obligor per the Note. .

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). benefits from real estate tax abatements, exemptions, deferrals, or a PILOTPILOTPayment In Lieu Of Taxes. that will not survive a Foreclosure EventForeclosure EventAny of the following: Foreclosure per the Security Instrument; Fannie Mae's exercise of rights and remedies per the Security Instrument or applicable law (including Insolvency Laws) as holder of the Mortgage Loan and/or the Security Instrument, where Fannie Mae (or its designee or nominee),…, then you may use a reduced real estate tax payment only if:

• upon reapplying for the original underwritten tax abatement or an alternative tax abatement, Fannie Mae or a subsequent PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). owner would qualify for the tax abatement;
• the rent or income restrictions 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). are maintained; and
• you have ensured that:
  • if a qualified non-profit entity is required to participate in the ownership structure of the MAH PropertyMAH PropertyProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. in order to qualify for the tax abatement, exemption, or deferral, a sufficient number of qualified non-profits currently operate in the market (at least 3 for an MSAMSAGeographic delineation for a metropolitan area determined by the U.S. Census Bureau. with a population of less than 1 million and at least 5 for an MSAMSAGeographic delineation for a metropolitan area determined by the U.S. Census Bureau. with a population of 1 million or greater), and in the event of a foreclosure, could serve in the replacement ownership structure to qualify for the tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. ; and
  • the original or alternative tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. has
    • been established in the state’s statutes,
    • been in effect for at least 10 years, and
    • the LenderLenderPerson Fannie Mae approved to sell or service Mortgage Loans. conducted all appropriate due diligence and confirmed that there is no material risk that the tax abatement, exemption, or deferral legislation will be repealed or revised in a manner that would affect 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). ability to continue to qualify for the tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. .

14

continued

If the timeframe for the real estate tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. is shorter than 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. term, or begins phasing out or expires within 5 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. , you must consider:

• a Bifurcated Mortgage LoanBifurcated Mortgage LoanSingle Senior Mortgage Loan that is evidenced by 2 Notes with the same payment and collateral priority. structure (i.e., 2 notes secured by a single first LienLienLien, mortgage, bond interest, pledge, security interest, charge, or encumbrance of any kind. Security InstrumentSecurity InstrumentInstrument creating a lien or encumbrance on 1 or more Properties and securing the Loan Document obligations. );
• an amortization schedule that accommodates the elimination of the abatement; or
• providing clear justification and support in the refinance analysis.

For 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 a tax abatement, the Modifications to Multifamily Loan and Security Agreement (Tax Abatement or Exemption) (Form 6251) must be executed even if you do not underwrite the tax abatement.

15

MINUS

Insurance per Item 17(c) in Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).

16

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)

17

MINUS

Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense per Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).

EQUALS

UNDERWRITTEN NCF