Chapter 8

Cooperative Properties

Section 801

Description

Requirements

A Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. is a multifamily residential property owned by a Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. .

Section 802

Eligible Mortgage Loans

Requirements

Fannie Mae will only purchase a CooperativeCooperativeMultifamily residential property owned by a Cooperative Organization. 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 each shareholder or other equity owner in the Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. is granted the right to occupy a unit in 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). under a proprietary lease or other occupancy agreement.

You must:

  • Examine the organizational documents of the Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. .
  • Ensure that the terms of these documents allow you to originate a Loan secured by 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). in compliance with the GuideGuideMultifamily Selling and Servicing Guide controlling all Lender and Servicer requirements unless a Lender Contract specifies otherwise. .
  • Review the composition and experience of the Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. ’s Board of Directors or managers.
802.01

Basic Conditions

Requirements

You must ensure for all the following:

  • 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. has a fixed rate.
  • Any commercial lease is determined to be a Material Commercial LeaseMaterial Commercial LeaseLease, sublease, license, concession, grant, or other possessory interest for commercial purposes comprising 5% or more of the Property's annual EGI, or relating to: solar power, thermal power generation, or co-power generation, or the installation of solar panels or any other… based on 5% or more of total gross income calculated on a Cooperative Market Rental BasisCooperative Market Rental BasisFinancial analysis or valuation of a Cooperative Property conducted as if it were operated as a conventional multifamily property subject to applicable rental restrictions. .
  • 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). is located in a Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. Eligible Market per Form 4660.
  • 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 an overall condition of 2 or better, as shown on the Comprehensive Assessment Addendum tab of the MBAMBAMortgage Bankers Association Standard Inspection Form.
802.02

Financial Conditions

Requirements

You must ensure all of the following:

  • You have reviewed at least 3 years 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). financial operations.
  • 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). financial operations achieved at least a 0.90 DSCRDSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Pay Preferred Equity payments. on an Actual Cooperative Property BasisActual Cooperative Property BasisFinancial analysis or valuation of a Cooperative Property conducted based on its actual operating performance. for 2 of the previous 3 years.
  • The Board of Directors or managers of the Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. approve any increase in the Cooperative Maintenance FeeCooperative Maintenance FeePeriodic fee assessed each shareholder or owner of a Cooperative Organization to fund costs and expenses associated with ongoing operations of the Cooperative Property. prior to closing; and any scheduled annual increase cannot exceed 10%.
  • A Cooperative Property SponsorCooperative Property SponsorPerson who invested in, converted, or is converting a residential rental apartment building to a Cooperative Property and continues to own unsold shares in the Cooperative Organization. may not own interests to occupy or lease more than 40% of the units in the Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. , unless the following criteria are met:
    • You deem the financial strength, experience, qualifications, and credit history of the Cooperative Property SponsorCooperative Property SponsorPerson who invested in, converted, or is converting a residential rental apartment building to a Cooperative Property and continues to own unsold shares in the Cooperative Organization.  acceptable, per the applicable provisions for Key PrincipalsKey PrincipalsPerson 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. in Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals or Part III, Chapter 9: Small Mortgage Loans.
    • The Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. consistently demonstrates sound financial operations and market acceptability.
    • There is no ongoing litigation between the Cooperative OrganizationCooperative OrganizationCorporation or legal entity where each shareholder or equity owner is granted the right to occupy a unit in a multifamily residential property under a proprietary lease or occupancy agreement. and the Cooperative Property SponsorCooperative Property SponsorPerson who invested in, converted, or is converting a residential rental apartment building to a Cooperative Property and continues to own unsold shares in the Cooperative Organization. .
    • The aggregate annual rental income from the Cooperative Property SponsorCooperative Property SponsorPerson who invested in, converted, or is converting a residential rental apartment building to a Cooperative Property and continues to own unsold shares in the Cooperative Organization. -owned units is greater than the aggregate annual Cooperative Maintenance FeesCooperative Maintenance FeesPeriodic fee assessed each shareholder or owner of a Cooperative Organization to fund costs and expenses associated with ongoing operations of the Cooperative Property. on those units.
802.03

Property Management Conditions

Requirements

You must ensure all of the following:

  • Except for Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. , 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). must be managed by a property management company that currently manages:
    • at least 3 other CooperativeCooperativeMultifamily residential property owned by a Cooperative Organization. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). in the same market as 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). ;
    • a minimum of 350 Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. units in the aggregate; and
    • another Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. of similar size 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). .
  • For Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. , 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 more than 25 units must be managed by a property management company with at least 3 years of experience managing a Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. of similar size.

Guidance

The BorrowerBorrowerPerson who is the obligor per the Note. may manage 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). securing a Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. with 25 units or less.

802.04

Other Considerations

Guidance

A CooperativeCooperativeMultifamily residential property owned by a Cooperative Organization. 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. does not have to comply with the following:

Section 803

Underwriting
Section 804

Income Analysis
Section 805

Limited Equity Cooperative Properties

Requirements

In addition to the rest of this Chapter, you must ensure that Limited Equity Cooperative PropertiesLimited Equity Cooperative PropertiesCooperative Organization that has income, rent, or equity build-up restriction (not including any transfer taxes), which may be dictated by a governmental entity, a third-party capital provider, or its own organizational documents. meet the following:

  • Cooperative Maintenance FeesCooperative Maintenance FeesPeriodic fee assessed each shareholder or owner of a Cooperative Organization to fund costs and expenses associated with ongoing operations of the Cooperative Property. :  You must ensure that:
    • monthly Cooperative Maintenance FeesCooperative Maintenance FeesPeriodic fee assessed each shareholder or owner of a Cooperative Organization to fund costs and expenses associated with ongoing operations of the Cooperative Property. are not more than 90% of comparable unit market rents; and
    • if there are restrictions from the HUDHUDU.S. Department of Housing and Urban Development or others, then both HUDHUDU.S. Department of Housing and Urban Development and the Limited Equity Cooperative PropertyLimited Equity Cooperative PropertyCooperative Organization that has income, rent, or equity build-up restriction (not including any transfer taxes), which may be dictated by a governmental entity, a third-party capital provider, or its own organizational documents. ’s Board of Directors or managers must approve all Cooperative Maintenance FeeCooperative Maintenance FeePeriodic fee assessed each shareholder or owner of a Cooperative Organization to fund costs and expenses associated with ongoing operations of the Cooperative Property. increases before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .
  • Cooperative Operating ReserveCooperative Operating ReserveLiquid funds, including loan proceeds, controlled by the Cooperative Organization to cover operating and capital expenses, and comprised of unrestricted cash, less the sum of accounts payable. :  You must require a reserve equal to at least 6 months of P&IP&IPrincipal and interest  payments 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. .
  • HUDHUDU.S. Department of Housing and Urban Development IRPIRPInterest Reduction Payment Loan:  You must require an IRPIRPInterest Reduction Payment reserve equal to 2 months of IRPIRPInterest Reduction Payment payments for the life of the IRPIRPInterest Reduction Payment Loan.  The funds in the IRPIRPInterest Reduction Payment reserve may only be used to compensate for late IRPIRPInterest Reduction Payment payments.
  • Actual Cooperative Property NCF:  You must calculate Actual Cooperative Property NCF perPart III, Chapter 8: Cooperative Properties, Section 804.03: Actual Cooperative Property NCF, but the following exceptions apply:
    • Economic vacancy:  Use the greater of
      • 5%, or
      • the highest level experienced by 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). during the last 3 years.
    • Actual operating expenses:  Equal to 103% of the previous year's operating expenses.
    • Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. :  Use the greater of
      • the scheduled Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. per unit as determined by a PCAPCAAssessment of the Property's physical condition and historical operation. , or
      • $250 per unit per year.
  • Unit Turnover:  Total unit turnover must not be greater than 20%.
  • Escrows:  You must require monthly deposits for real estate taxes, insurance, and the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. .
  • Cooperative Property SponsorCooperative Property SponsorPerson who invested in, converted, or is converting a residential rental apartment building to a Cooperative Property and continues to own unsold shares in the Cooperative Organization. :  There must be no SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). -owned units.
  • 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 experience:  The property management company must have Limited Equity Cooperative PropertyLimited Equity Cooperative PropertyCooperative Organization that has income, rent, or equity build-up restriction (not including any transfer taxes), which may be dictated by a governmental entity, a third-party capital provider, or its own organizational documents. management experience.  If HUDHUDU.S. Department of Housing and Urban Development restrictions are in-place, the firm must also have a history of successfully complying with HUDHUDU.S. Department of Housing and Urban Development restrictions and reporting requirements.

Guidance

You should consider the following:

  • Cooperative Operating ReserveCooperative Operating ReserveLiquid funds, including loan proceeds, controlled by the Cooperative Organization to cover operating and capital expenses, and comprised of unrestricted cash, less the sum of accounts payable. :  You may include a similar reserve held by another independent lender if the funds are released to you.
  • Actual Cooperative Property NCF:  3% trending is not required for trailing 12-month or year-to-date annualized operating expenses.
  • Unit Turnover:  Unit turnover occurs when a shareholder or tenant chooses to vacate a unit or terminate a lease during the past 3 years.