1602.01E

Limitations

Requirements

Preferred Equity must:

  • not have a maturity date, redemption date, trigger date, or require repayment during the term 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. ;
  • have a fixed rate of return without escalations during the term 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. ;
  • not include cash flow sweeps above the stated return;
  • not be cross-collateralized with multiple assets;
  • for a deal that has both a Hard Preferred Equity return and Soft Preferred Equity return, be underwritten using the total combined preferred return to calculate the 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 Preferred Equity payments. per Form 4660;
  • not have intercreditor or recognition agreements between you and the Preferred Equity holder; all rights of the Preferred Equity holder that you recognize must be contained in the Loan DocumentsLoan DocumentsAll Fannie Mae-approved documents evidencing, securing, or guaranteeing the Mortgage Loan. ;
  • not have side letters; all information, terms, and conditions relating to the Preferred Equity must be contained in the organizational documents; and
  • for Hard Preferred Equity, not be less than $1 million.

You must underwrite the Preferred Equity as Hard Preferred Equity, if any of the following apply:

  • the organizational documents do not explicitly state that the preferred return may accrue if cash flow from operations is insufficient to pay the preferred return;
  • there are remedies associated with operating benchmarks such as 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…, NOINOIAnnually or for any specified period, the total Effective Gross Income minus the Property’s operating expenses. , or other operating thresholds;
  • there are reserves to ensure the payment of the preferred return; or
  • the holder of Preferred Equity benefits from a
    • pledge of the general partner’s or managing member’s interest in the BorrowerBorrowerPerson who is the obligor per the Note. , or any direct or indirect owner of the BorrowerBorrowerPerson who is the obligor per the Note. , or
    • guaranty or indemnity from the general partner, managing member, or manager of the BorrowerBorrowerPerson who is the obligor per the Note. (or any parent or other 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). ControllingControllingPossessing, 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). any of them) with respect to the preferred payment or returns.  If a guaranty or indemnity is executed by 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. executing a GuarantyGuarantyPayment Guaranty, Non-Recourse Guaranty, or other guaranty by a Guarantor for the Mortgage Loan. 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. , the guaranty or indemnity of the preferred payment or returns must be expressly subordinate to the GuarantyGuarantyPayment Guaranty, Non-Recourse Guaranty, or other guaranty by a Guarantor for the Mortgage Loan. 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. .