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 allowances;^{1, 2}
• rents permitted under the Affordable Regulatory AgreementAffordable Regulatory AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, or similar agreement or restriction that is imposed by a Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property, but which does not include a HAP Contract. , any Private Affordability AgreementPrivate Affordability AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, agreement, or restriction that is imposed by any non-Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property. , or any Third-Party FinancingThird-Party FinancingAny loan to, or indebtedness of, a Borrower that: is not a Supplemental Mortgage Loan or Pre-Existing Mortgage Loan; and either: requires repayment by the Borrower; or is forgiven (over time or at maturity) subject to Borrower compliance with certain covenants or conditions. … documents; or
•  based on a current rent roll:
  • actual rents in place for occupied units; and
  • for vacant units, the lowest of: 
    • actual rents in place for comparable occupied units;
    • market rents; and
    • permitted rents, described above (multiplied by 12).

For MAHMAHProperty that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. 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 units occupied by tenant-based Housing Choice Voucher (HCV) holders, you may underwrite the excess of the annualized HCV unit income over Gross Rental Income up to 5% of GPRGPROn an annual basis or any specified period, the total actual and potential rent for a Property per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. , when 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). current and average 3-year physical occupancy is at least 95%; and
• MAH PropertyMAH PropertyProperty that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. is located in a Strong Market or an Eligible MSA.

For 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 both a HAP ContractHAP ContractAn agreement providing a HUD Section 8 rental subsidy for the Property in the form of a: project-based voucher contract (PBV), or project-based rental assistance contract (PBRA). and LIHTCLIHTCFederal program offering tax credits to owners of eligible properties that contain low-income occupants and rent restrictions. , you must include incremental HAP ContractHAP ContractAn agreement providing a HUD Section 8 rental subsidy for the Property in the form of a: project-based voucher contract (PBV), or project-based rental assistance contract (PBRA). 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 that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. unit type (e.g., 20% @ 50%, 40% @ 60%, or HAP ContractHAP ContractAn agreement providing a HUD Section 8 rental subsidy for the Property in the form of a: project-based voucher contract (PBV), or project-based rental assistance contract (PBRA). ) 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
• not use rents based on
  • an agreement to enter into a HAP Contract (AHAP),
  • a commitment to enter into a Housing Assistance Payment contract (CHAP), or
  • a "comfort letter".

2 If a Property has a HAP Contract expiring after the Maturity Date, and current and average 3-year physical occupancy is at least 95%, and the Property’s most recent HUD REAC or NSPIRE score is passing, you may underwrite HAP Contract rents up to:

• 5% above market rents, by unit type, if located in an Eligible MSA; 
• 10% above market rents, by unit type, if located in a Strong Market; or 
• 20% above market rents, by unit type, if:
  • located in a Strong Market; and
  • the HAP Contract type is:
    • Option 4 renewal;
    • Low-income Housing Preservation and Resident Homeownership Act (LIHPRHA); or
    • Emergency Low-Income Housing Preservation Act (ELIHPA).

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

• the GPR, including any permitted HAP Contract rent increases per Footnote 1, multiplied by the percentage difference between the trailing
  • 3-month net rental collections (annualized), and
  • GPR, but 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 per Footnote 1; or
  • less than 5%, but no less than 3% of GPR, including any permitted HAP Contract rent increases per Footnote 1; if:
    • the Property is located in an Eligible MSA, Strong Market, or Nationwide Market per Form 4660;
    • for a Property with 95+% of the units restricted per the Affordable Regulatory Agreement and 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 of no less than the actual vacancy.

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 111: 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 in 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 EGIEGIFor any specified period, the Property's total Net Rental Income, plus commercial income, plus other income, all calculated 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
• the Appraiser'sAppraiser'sPerson engaged to estimate a Property’s market value per USPAP. concluded market property management fee, based primarily on
  • asset type,
  • operational complexity, and
  • market standards.

7 You may underwrite the minimum management fee using 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:
  • include any known contractual fee increases scheduled to occur over the next 24 months; and
  • exclude any portion of a non-arm's length property management fee that is subordinated to the Mortgage Loan; and
• Appraiser’s concluded market management fees, based primarily on asset type, operational complexity, and market standards, support the underwritten management fee.

If the original Mortgage Loan amount is greater than $9 million, you may underwrite the minimum management fee using 3% of EGI (rather than 4% of EGI) if the:

• underwritten management fee is at least $450 per unit;
• actual management fee is equal to or less than the underwritten management fee, provided you:
  • include any known contractual fee increases scheduled to occur over the next 24 months; and
  • exclude any portion of a non-arm's length property management fee that is subordinated to the Mortgage Loan;
• Appraiser’s concluded market management fees, based primarily on asset type, operational complexity, and market standards, support the underwritten management fee; and
• the Affordable Regulatory Agreement does not terminate before the Mortgage Loan term.

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, you may underwrite the minimum management fee using the greatest of:

• 2.5% of EGI;
• $500 per unit;
• the actual management fee, provided you:
  • include any known contractual fee increases scheduled to occur over the next 24 months; and
  • exclude any portion of a non-arm's length property management fee that is subordinated to the Mortgage Loan; or
• the Appraiser’s concluded market management fees, based primarily on asset type, operational complexity, and market standards.

14

MINUS

Real estate taxes calculated per Lines 17(b) of Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF), provided that every unit benefiting from the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. is subject to either a rent restriction or an income restriction per an Affordable Regulatory AgreementAffordable Regulatory AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, or similar agreement or restriction that is imposed by a Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property, but which does not include a HAP Contract. with a Public EntityPublic EntityA federal, state, or local government entity, or an entity that: is created by state statute, or one or more governmental entities acting pursuant to applicable statutory authority; has a governing body that is elected by voters in the applicable jurisdiction, or ….

Notwithstanding the requirements of Lines 17(b) of Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF), provided you comply with the specified requirements below, you may use a reduced real estate tax payment if the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. :

• is not in place on the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. per written documentation from the state or local tax assessor; or
• would 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),….

If the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. is not in place on the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , you must:

• confirm the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. is listed in Form 4164; and
• comply with Form 4164.

If the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. would 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),…, you must confirm:

• when reapplying for the original underwritten Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. , or an alternative Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. with equivalent benefits, Fannie Mae or another 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;
• 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). rent and income are maintained; and
• if the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. requires a qualified non-profit entity in the MAH PropertyMAH PropertyProperty that: complies with Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 702: MAH Property Eligibility; and is underwritten per Part III, Chapter 7: Multifamily Affordable Housing Properties. ownership:
  • a sufficient number of qualified non-profits exist in the market (i.e., at least 3 if the MSA’sMSA’sGeographic delineation for a metropolitan area determined by the U.S. Census Bureau. population is less than 1 million, and at least 5 if the MSA’sMSA’sGeographic delineation for a metropolitan area determined by the U.S. Census Bureau. population is 1 million or more) who could become part of the ownership structure to qualify for the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. ;
  • the original, or an alternative Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. with equivalent benefits, has been
    • established in the state’s statutes, and
    • in effect for at least 10 years; and
  • based on your due diligence, no material risk exists of the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. legislation
    • sunsetting,
    • being repealed, or
    • being revised such 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). would no longer qualify.

14

continued

If the timeframe for the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. 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 AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. , the Modifications to Multifamily Loan and Security Agreement (Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. or Exemption) (Form 6251) must be executed even if you do not underwrite the Tax AbatementTax AbatementAny abatement, reduction, lessening, exemption, or deferral of real estate or other taxes levied against a Property, including any PILOT. .

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, supportive services, mandatory and ongoing fees payable per the Affordable Regulatory AgreementAffordable Regulatory AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, or similar agreement or restriction that is imposed by a Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property, but which does not include a HAP Contract. , and Private Affordability AgreementPrivate Affordability AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, agreement, or restriction that is imposed by any non-Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property. , or Third-Party FinancingThird-Party FinancingAny loan to, or indebtedness of, a Borrower that: is not a Supplemental Mortgage Loan or Pre-Existing Mortgage Loan; and either: requires repayment by the Borrower; or is forgiven (over time or at maturity) subject to Borrower compliance with certain covenants or conditions. … documents, 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); 
• any mandatory and ongoing Partnership Agreement or Operating Agreement reserve; and
• any mandatory and ongoing reserve not already included in the Loan Agreement for
  • the Affordable Regulatory AgreementAffordable Regulatory AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, or similar agreement or restriction that is imposed by a Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property, but which does not include a HAP Contract. ,
  • any Private Affordability AgreementPrivate Affordability AgreementRecorded or unrecorded regulatory, land use, extended use, restrictive covenant, agreement, or restriction that is imposed by any non-Public Entity, placing rent, income, or other affordability restrictions on the use or occupancy of the Property. , or
  • Third-Party FinancingThird-Party FinancingAny loan to, or indebtedness of, a Borrower that: is not a Supplemental Mortgage Loan or Pre-Existing Mortgage Loan; and either: requires repayment by the Borrower; or is forgiven (over time or at maturity) subject to Borrower compliance with certain covenants or conditions. … documents.

EQUALS

UNDERWRITTEN NCF