Section 201 | |
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Section 202 | |
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Section 203 | |
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Requirements
You must prepare an exit strategy analyzing the Borrower'sBorrower'sPerson who is the obligor per the Note. ability to refinance 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. in the year after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. (e.g., use the projected 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 202: Income Analysis and the applicable products and… in year 11 for a 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. with a 10-year term), by calculating a:
- “reversion” cap rate, which is the expected capitalization rate able to be supported per the projected 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 202: Income Analysis and the applicable products and…; and
- Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. .
203.01 | |
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Requirements
For Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 1, use the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. . For all subsequent Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , you must derive proforma 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 202: Income Analysis and the applicable products and… as follows:
Factor | For... | Use... |
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Income Growth Rate |
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2%. |
All other Mortgage LoansMortgage LoansMortgage 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 growth rates published in DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. for 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). . | |
Economic Vacancy | All Mortgage LoansMortgage LoansMortgage 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 underwritten economic vacancy rate. |
Real Estate Taxes | California PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). |
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Non-California PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). |
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Real Estate Tax Abatements, Exemptions, Deferrals, or PILOTs | All Mortgage LoansMortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. |
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Management Fee | All Mortgage LoansMortgage LoansMortgage 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 underwritten rate. |
Replacement Reserves | All Mortgage LoansMortgage LoansMortgage 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 underwritten value. |
Insurance and Other Expenses |
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3%. |
All other Mortgage LoansMortgage LoansMortgage 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 growth rates published in DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. for 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). . |
You must estimate 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. UPBUPBUnpaid Principal Balance at the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. as follows:
For... | Use... |
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Amortization |
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DSCR | The minimum TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 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. for the applicable product or features, per Form 4660. |
LTV | The maximum TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 LTVLTVRatio of the actual aggregate UPB of the Mortgage Loan, plus any Pre-Existing Mortgage Loans, plus any Hard Preferred Equity, plus any Mezzanine Financing, to the value of the Property, expressed as a percentage. for the applicable product or features, per Form 4660. |
Guidance
Since these base assumptions are indicative only, you may use more conservative estimates if warranted by circumstances particular 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). .
In most cases, the combined effect of principal amortization and 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 202: Income Analysis and the applicable products and… growth should result in a refinancing at the minimum 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. and maximum LTVLTVRatio of the actual aggregate UPB of the Mortgage Loan, plus any Pre-Existing Mortgage Loans, plus any Hard Preferred Equity, plus any Mezzanine Financing, to the value of the Property, expressed as a percentage. for TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2, using a reasonable interest rate.
You should consider the following refinance parameters:
- A target reversion capitalization rate at least 2.0% greater than the initial capitalization rate used for determining Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation. .
- A Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. at least 2.25% greater than the current 10-year Amortizing Nationwide Underwriting Floor rate, per Form 4660.
203.02 | |
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Guidance
If you determine the base assumptions do not appropriately estimate 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). 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 202: Income Analysis and the applicable products and… over 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, you may present an alternative risk analysis using assumptions that deviate from the base assumptions.
You should:
- specifically identify and support any deviations with reliable evidence and historical and projected market trends; and
- state your conclusions and discuss any mitigating factors, such as the
- strength of the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). or the submarket,
- 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). characteristics, or
- 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). operating history and performance.
Income and Expense Growth Rates: Income and expense trending should incorporate projected market rates based upon general economic, market, and submarket conditions from reliable sources. For example:
- Rents on recently signed leases should only be used for estimating income growth in Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 1 and 2.
- Rent projections greater than the Base Assumption Income Growth Rate should not be used beyond Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 4.
- When improvements in market economic occupancy or sustained market rental rate increases are widely anticipated, growth trends above the Base Assumption Income Growth Rate may be supported.
- Projections of income growth resulting from PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). renovations or improved operations should be limited to the first 3 Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. .
- When 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). is subject to a scheduled reassessment or a tax abatement phase-in period, tax expense should be adjusted appropriately.
- If a tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes.
begins phase out or expires more than 5 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents.
, consider if the increased expense within 10 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents.
may affect the Borrower'sBorrower'sPerson who is the obligor per the Note.
ability to refinance, and warrants
- a lower 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,
- faster amortization, or
- a reduced interest only period.
- When you expect to incur costs for tenant improvement allowances and leasing commissions, or to realize rent increases from the rollover of tenants, commercial income should be adjusted appropriately.
Economic Vacancy: 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 submarkets with depressed economic conditions due to temporary demand or supply issues may be modeled to reflect the economic vacancy projected by a reliable source. If you expect a decrease in vacancy to achieve stabilized levels, you should consider
- the anticipated timing, and
- effect of decreased economic vacancy on projected income growth over the same time period.
Section 204 | |
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Requirements
You must:
- examine the risk of allowing cash out to the BorrowerBorrowerPerson who is the obligor per the Note. (see Form 4660 for a description of cash out transactions); and
- for New ConstructionNew ConstructionProperty recently developed/constructed with any certificates of occupancy received within 12 months before the Commitment Date. , consider 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 relative to 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). total development cost basis.
Guidance
When underwriting a cash out transaction you should consider:
- the amount of hard equity remaining 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). , excluding prior permanent financing costs, such as interest or prepayment premium;
- the length of time the BorrowerBorrowerPerson who is the obligor per the Note. has owned 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). ;
- 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). effective age and current physical condition;
- any improvement in asset quality over the ownership period;
- any improvement in 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). operations (i.e., its 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 202: Income Analysis and the applicable products and…) or value over the ownership period;
- 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). value increased due to an increase in 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 202: Income Analysis and the applicable products and…, rather than a decrease in the capitalization rate; and
- for New ConstructionNew ConstructionProperty recently developed/constructed with any certificates of occupancy received within 12 months before the Commitment Date. , 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). total development costs basis:
New Construction | |
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For... | The Property's total development cost basis includes... |
Land |
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Hard Costs |
Expenses for:
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Soft Costs |
Fees for:
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Construction Financing Costs |
Expenses for:
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HUD or LIHTC New Construction | Amount supported by the Cost CertificationCost CertificationIndependent third-party audit report itemizing the Property's construction and development costs, including a statement of eligible and qualified basis, submitted to the state housing finance agency to obtain IRS Form 8609(s). . |
Cash Out Transaction Support | |
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Factor... | Should... |
Cash Out Proceeds | Be commensurate with the length of the ownership period. |
Property Condition | Have improved or been good over the ownership period. |
Property NCF | Have improved over the ownership period. |
Property Value | Have increased due to higher 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 202: Income Analysis and the applicable products and… over the ownership period. |
Section 205 | |
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Guidance
For Rent-Stabilized PropertiesRent-Stabilized PropertiesProperty where rent increases on more than 50% of the residential units are limited by state or local statutory controls, not by an Affordable Regulatory Agreement. (e.g., located in New York State), you should:
- underwrite PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). income based on current rents;
- exclude any potential rent increase for units converting to market rate from the projected 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 202: Income Analysis and the applicable products and… in the refinance risk analysis;
- assess and stress the cap rate used to determine the Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation. , and consider obtaining an AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the Property's market value as of a specific date, and supported by the presentation and analysis of relevant market information. before Rate LockRate LockAgreement between you and the Investor containing the terms of the Lender-Arranged Sale or Multifamily Trading Desk trade of the Mortgage Loan and the MBS terms and conditions relating to the underlying MBS, if applicable, which may be documented via a recorded telephone conversation. ;
- for fund SponsorsSponsorsPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). or other SponsorsSponsorsPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). requiring minimum investment returns, consider whether the Sponsor'sSponsor'sPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). interests are aligned with the limited rent increases allowed under the law; and
- fund the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. to maintain 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). physical condition.