Chapter 2

Valuation and Income

Section 201

Market Analysis

Requirements

When structuring 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. , you must:

  • evaluate 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).  market; and
  • using objective factors, consider its
    • strengths, and
    • weaknesses.
Section 202

Appraisal and Valuation
202.01

Appraisals
202.01A

Appraiser Selection

Requirements

You must:

  • document the selection and approval of an AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , who is:
    • a Certified General AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. (or licensed or certified per state law, if that state does not use the Certified General AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. designation);
    • listed in good standing on the state roster per Title XI of FIRREAFIRREAFinancial Institutions Reform, Recovery, and Enforcement Act of 1989. ; and
    • actively prepares multifamily appraisals 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). market;
  • require the 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. to:
    • be in a narrative format, using only objective factors;
    • be signed by the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. ;
    • be certified by the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. to conform with current USPAPUSPAPUniform Standards of Professional Appraisal Practice requirements; and
    • comply with:
      • Instructions for Appraisers (Form 4827); and
      • any governmental regulations in effect when 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. was originated, including
        • FIRREAFIRREAFinancial Institutions Reform, Recovery, and Enforcement Act of 1989. , 
        • all fair lending laws, and
        • all fair housing laws;
  • provide the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. all applicable documents needed to accurately assess 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, including:
    • the most recent PCA ReportPCA ReportProperty Condition Assessment Report documenting the findings of a PCA. , or any other inspection reports (e.g., a structural engineering report);
    • a rent roll dated within 60 days of the Appraiser’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. inspection date;
    • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). operating statements detailing
      • income and expenses for the previous year (if available, for the previous 2 years), and
      • year-to-date income and expenses;
    • your sample of residential leases reviewed;
    • copies of any:
      • executed commercial leases, including all amendments and attachments;
      • ground leases;
      • easements or regulatory agreements; and
      • any purchase/sales contracts executed within 3 years before the 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. date;
    • any Environmental Site AssessmentsEnvironmental Site AssessmentsInvestigation and resulting report (Phase I ESA or Phase II ESA) conducted per Environmental Due Diligence Requirements (Form 4251), identifying if a Property has Recognized Environmental Conditions or Business Environmental Risks. ;
    • architectural plans, 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). is not yet completed;
    • site plans/surveys, if available;
    • for a Moderate Rehabilitation PropertyModerate Rehabilitation PropertyProperty that will undergo at least $8,000 per unit of Rehabilitation Work. , details of the
      • capital expenditures incurred, and
      • total construction costs; and
    • any information that may affect the Appraiser’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. estimate 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). value; and
  • not accept any 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. completed by an AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. selected, retained, or compensated by:
    • the BorrowerBorrowerPerson who is the obligor per the Note. ;
    • the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). ;
    • any 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. ;
    • any GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. ;
    • for an acquisition, the seller or any related party; or
    • any third party, including 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.
      • BrokersBrokersThird-party Person who arranges Mortgage Loan financing on the Borrower’s behalf, or Transfers/Assumptions on behalf of the new Borrower for an assumption, or transferee for a transfer. , or
      • Correspondents.

Guidance

If final reports are unavailable, you may send draft versions of the

  • PCA ReportPCA ReportProperty Condition Assessment Report documenting the findings of a PCA. , and
  • Environmental Site AssessmentsEnvironmental Site AssessmentsInvestigation and resulting report (Phase I ESA or Phase II ESA) conducted per Environmental Due Diligence Requirements (Form 4251), identifying if a Property has Recognized Environmental Conditions or Business Environmental Risks. .

If the final reports differ materially from the drafts sent to the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , you must:

  • forward the final reports to the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. ; and
  • inquire whether the 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. should be updated based on the final reports.
202.01B

Permissible Appraiser Communications

Requirements

When communicating with an AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , you must comply with the Appraiser Communications table.

Appraiser Communications
You may... You must not... 
  • obtain supporting information for a specific market, including:
    • sales or rental comparable properties;
    • rent or expense data;
    • capitalization rate data;
    • recent sales; or
    • price per unit or square footage ranges;
  • provide all documents needed to accurately assess the Property's value per this Chapter;
  • share or request additional supporting comparable property information; and
  • request additional documents supporting the Appraiser’s conclusions.

provide any 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. data, such as

 

  • 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.  ,
  • 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. ,
  • amount, or
  • Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. .
202.01C

Valuation Date

Requirements

Valuation Date
If the Appraisal Date is more than... You must...
6 months before the Commitment Date Instruct the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. to update the 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. per Instructions for Appraisers (Form 4827).
12 months before the Commitment Date Order a new 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. .

Guidance

You may be required to obtain a new or updated 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. if Fannie Mae determines the market deteriorated between the

  • Appraisal DateAppraisal DateEffective date of value in the Appraisal. , and
  • Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .
202.01D

Appraisals Ordered by Another Lender

Requirements

If you DeliverDeliverSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. 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 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. prepared by an AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. selected by another lender, you must:

  • make all representations and warranties to Fannie Mae regarding the 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. ; and
  • confirm it complies with this GuideGuideMultifamily Selling and Servicing Guide controlling all Lender and Servicer requirements unless a Lender Contract specifies otherwise. .
202.01E

Lender Appraisal Review

Requirements

Your employees must:

  • review and approve each 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. for adequacy and compliance; and
  • ensure the 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. includes:
    • an accurate description of 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 the market, including:
      • 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). complete legal description;
      • any information you provided the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. ;
      • color photographs 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).
        • exterior,
        • interior common areas,
        • typical unit interiors,
        • surrounding area,
        • rental comparables,
        • sales comparables, and
        • commercial rental comparables;
      • maps showing 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). location relative to the location of the
        • land comparables,
        • current rental comparables,
        • future rental comparables, and
        • sales comparables;
      • qualifications of the
        • AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , and
        • any supervising AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. ; and
      • a copy of your
        • complete signed engagement letter with the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , and
        • communications with the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. regarding the 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. scope;
    • an opinion 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). value per Part II, Chapter 2: Valuation and Income, Section 202.02A: Appraised Value, and supported by
      • market data,
      • logical analysis, and
      • sound professional judgment;
    • an opinion 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). insurable value; and
    • an industry standard form of 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. appropriate for the Mortgage Loan’sMortgage Loan’sMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement.
      • size, and
      • structure.

You must:

  • return any report to the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. that:
    • is incomplete; or
    • lacks credibility; and
  • ensure your 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. review:
    • is documented in the Transaction Approval Memo;
    • is accompanied by all other AppraisalsAppraisalsWritten 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. you ordered 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). during the past 3 years; and
    • includes all information per the following Appraisal Analysis table.
Appraisal Analysis
For... You must...
Market Conditions

Confirm the 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. accounts for current market conditions, including

 

  • supply and demand dynamics,
  • interest rates, and
  • economic factors.
Data Accuracy

Verify the Appraisal’sAppraisal’sWritten 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. data accuracy, 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). details,
  • recent sales prices, and
  • relevant market data.
Property Inspections Determine if the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. conducted a thorough inspection of 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). , including random sampling of occupied and vacant units per Instructions for Appraisers (Form 4827).
Sales/Rental Comparable Analysis
  • Determine if the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. used appropriate comparable properties similar in:
    • size and/or unit count (on both a per-unit and a per-square foot basis);
    • type (e.g., high-rise, mid-rise, garden, etc.);
    • age;
    • condition;
    • in-unit finishes;
    • amenities;
    • location, including
      • market,
      • submarket, and
      • distance to subject; and
    • sales of comparable properties, with at least 1
      • being a listing/pending sale, or
      • sold within 24 months of the Appraisal DateAppraisal DateEffective date of value in the Appraisal. .
  • If appropriate comparable properties were not used, either:
    • coordinate with the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. to obtain additional comparable properties; or
    • provide the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. additional comparable properties from AppraisalsAppraisalsWritten 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.
      • for any prior transactions you originated within the last 12 months before the Appraisal DateAppraisal DateEffective date of value in the Appraisal. , or
      • from any external data sources verifiable by the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. .
Market Rents and Expense Analysis If the Appraiser’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. proforma income or expenses substantially differ from 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). income and expenses used to calculate the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. , provide additional supporting comparable property data or rationale supporting your conclusions.
Capitalization Rate Analysis

Provide your assessment that the capitalization rate:

 

  • supports your final Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 202: Appraisal and Valuation. ; and
  • is within comparable capitalization rates compared to
    • your portfolio data, or
    • any other external data sources you use to review appraisals.
Value Reconciliation
  • Review how the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. reconciled the values obtained from different approaches to determine the final opinion of value.
  • Document your assessment.

For each 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. , you must ensure all:

202.01F

Subsequent Appraisals

Requirements

For any 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. , you must not order, obtain, use, or pay for a subsequent 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. unless:

  • you document in your Transaction Approval Memo that the initial 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. :
    • was not credible; or
    • violated legal and/or professional standards related to
      • USPAPUSPAPUniform Standards of Professional Appraisal Practice , or
      • nondiscrimination; and
  • the subsequent 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. :
    • is required per your pre-established written pre- or post-funding 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. review policy;
    • adheres to a policy of selecting the most reliable 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. rather than the 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. with the highest value; or
    • is required by law.
202.01G

Appraiser Discontinuance or Misconduct

Requirements

You must promptly notify:

  • Fannie Mae if you discontinue using any AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. who completed AppraisalsAppraisalsWritten 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. within the past 12 months for 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. you DeliveredDeliveredSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. ; and
  • Fannie Mae and the applicable state AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. certifying and licensing agency, or other regulatory body, if you believe an AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. is:
    • violating USPAPUSPAPUniform Standards of Professional Appraisal Practice , fair lending, fair housing, or other applicable laws;
    • not complying with Instructions for Appraisers (Form 4827) in violation of its engagement with you; or
    • engaging in unethical conduct.
202.02

Valuation
202.02A

Appraised Value

Requirements

You must ensure:

  • the Appraiser'sAppraiser'sPerson engaged to estimate a Property’s market value per USPAP. engagement letter requires compliance with Instructions for Appraisers (Form 4827);
  • the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. provides an opinion of the market value on an "as is" basis;
  • the Appraiser'sAppraiser'sPerson engaged to estimate a Property’s market value per USPAP. opinion of the market value covers:
    • each separate ProjectProjectMultifamily buildings on multiple Properties, owned by the same Borrower, and that comply with Part II, Chapter 1: Attributes and Characteristics, Section 102.01: Single Borrower Ownership.  per Part II, Chapter 1: Attributes and Characteristics, Section 102.01: Single Borrower Ownership; and
    • the aggregate market value of all ProjectsProjectsMultifamily buildings on multiple Properties, owned by the same Borrower, and that comply with Part II, Chapter 1: Attributes and Characteristics, Section 102.01: Single Borrower Ownership.  ; and
  • regardless of any allocation in the purchase/sales agreement, the Appraiser’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. opinion of the market value excludes any value from
    • goodwill,
    • business value (permitted for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. ),
    • intangibles,
    • furniture,
    • fixtures (unless customary in the market), or
    • equipment.

You may also request the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. provide an opinion 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). market value on an "as completed" basis, but you must only use an "as completed" value if all of the following apply:

  • less than 12 months have passed between the
    • Borrower'sBorrower'sPerson who is the obligor per the Note. acquisition of 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
    • Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. ;
  • for any capital improvements completed after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. to be considered in an "as completed" value, they must be:
    • Immediate Repairs listed in the PCAPCAAssessment of the Property's physical condition and historical operation. ; or
    • improvements identified by the BorrowerBorrowerPerson who is the obligor per the Note. , if you agree the improvements will add PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). value;
  • all capital improvements are included in either the
    • Completion/Repair ScheduleCompletion/Repair ScheduleThe Required Repair Schedule to the Multifamily Loan Agreement (Form 6001 series) and the applicable parts of the Multifamily Loan Agreement, or other Fannie Mae-approved agreement, evidencing: the Borrower’s agreement to fund the Completion/Repair Escrow, and perform Completion…, or
    • Rehabilitation Reserve AgreementRehabilitation Reserve AgreementBorrower’s agreement to undertake identified Rehabilitation Work, the terms for funding the Rehabilitation Work, and the disbursement of funds from the Rehabilitation Reserve Account (e.g., Form 6222 or Form 4523). ;
  • sufficient funds to complete all capital improvements are deposited into either the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. or the Rehabilitation Reserve AccountRehabilitation Reserve AccountCustodial Account established by the Lender and funded by deposits from the Borrower per the Rehabilitation Reserve Agreement to fund the Rehabilitation Work. :
    • for capital improvements identified as Immediate Repairs, the funds must cover any higher funding percentage you require; and
    • for capital improvements identified by the BorrowerBorrowerPerson who is the obligor per the Note. , the funds must cover the estimated cost (including a cost overrun allowance); and
  • all capital improvements must be completed within:
202.02B

Property's Sale History

Requirements

You must:

  • analyze 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). sale history for the last 3 years, including any transfer of a Controlling InterestControlling InterestFor any entity, ownership or control of 50% or more of the ownership interests in the entity or the power or right to control or modify, directly or indirectly, the management and operations of the entity. in the owner;
  • address the following in your Transaction Approval Memo:
    • if a sale occurred within the last 24 months, document the
      • circumstances of the sale, and
      • support for any increased Appraised ValueAppraised ValueAppraiser’s opinion of the Property's market value documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted per the Guide. by analyzing any
        • Net Cash FlowNet Cash FlowOn 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… increases,
        • capitalization rate compression, and
        • value-add market drivers; and
    • if any stated sales price per the purchase/sales agreement differs from the transfer price per the public records or third-party reports, investigate and document the discrepancy;
  • for any acquisition, confirm the seller was 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). owner in the real estate records when the purchase/sales agreement was signed;
  • evaluate the purchase/sale contracts to
    • clearly identify the
      • seller, and
      • purchaser, and
    • confirm the sale was an arm's length transaction;
  • review the final settlement statement before the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. to confirm accuracy of the
    • purchase price,
    • closing costs, and
    • any cash in/out to the seller and purchaser; and
  • submit a copy of:
    • the final settlement statement at DeliveryDeliverySubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. ; and
    • all purchase/sales contracts and amendments to
      • the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. , and
      • Fannie Mae.
202.02C

Underwriting Value

Requirements

Your Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 202: Appraisal and Valuation. must not exceed the Appraised ValueAppraised ValueAppraiser’s opinion of the Property's market value documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted per the Guide. , as reduced by any adjustments you deem necessary, accounting for:

  • your analysis 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). sales history; and/or
  • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). deficiencies that cannot be cured within 6 months after the Appraisal DateAppraisal DateEffective date of value in the Appraisal. .

If less than 12 months have passed between the Borrower'sBorrower'sPerson who is the obligor per the Note. acquisition of 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 the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , your Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 202: Appraisal and Valuation. must not exceed the lower of the

  • Appraised ValueAppraised ValueAppraiser’s opinion of the Property's market value documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted per the Guide. , or
  • sum 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). acquisition price per the title company settlement statement, with no allocations to:
      • goodwill,
      • business value (permitted for Seniors Housing PropertiesSeniors Housing PropertiesMultifamily residential rental property with any combination of Independent Living, Assisted Living, Alzheimer’s/Dementia Care, or Skilled Nursing units. ),
      • intangibles,
      • furniture,
      • fixtures (unless customary in the market), or
      • equipment;
    • cost of capital improvements or repairs that increase 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, if
      • completed and fully paid, or
      • sufficient funds for completion are deposited in the Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. or reserve account; and
    • actual acquisition costs, not exceeding 3% of the acquisition price, including:
      • Origination FeeOrigination FeeFee you charge the Borrower for underwriting and originating the Mortgage Loan. ;
      • arm's length acquisition fee (generally 1% - 2%) paid to an unrelated 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). if documented in the Settlement Statement;
      • third-party report fees;
      • BorrowerBorrowerPerson who is the obligor per the Note. -paid legal fees incurred on your behalf;
      • title search and title insurance fees;
      • survey fees;
      • real estate and stamp taxes;
      • deed-recording fees; and
      • credit report charges.

Guidance

Actual acquisition costs should exclude any prepaid operating expenses or deposits applied toward future operating expenses or PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). improvements, including:

  • prepaid or escrowed
    • real estate taxes, or
    • insurance premiums;
  • prepaid
    • utilities,
    • 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. interest, including any interest rate buydown expense,
    • rents, or
    • security deposits;
  • funded
    • Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. (including any initial deposit),
    • Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate.  The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. cost,
    • operating or Restabilization Reserve, or
    • BorrowerBorrowerPerson who is the obligor per the Note. -controlled PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). operating or capital accounts;
  • fees included in the Gross Note RateGross Note RateInterest rate stated in the Loan Documents. , including any
    • Origination FeeOrigination FeeFee you charge the Borrower for underwriting and originating the Mortgage Loan. , or
    • broker fee;
  • acquisition fees paid to a BorrowerBorrowerPerson who is the obligor per the Note. -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…; and
  • for an 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. , pre-paid BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. -related and compliance monitoring fees.
Section 203

Income Analysis
203.01

Underwritten Net Cash Flow (Underwritten NCF)

Guidance

When calculating 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). Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. , you should:

  • use objective measures to determine the revenue generated and the expenses incurred;
  • use the best information available, including
    • historical performance, and
    • anticipated operations;
  • use best efforts to obtain operating statements for the prior 3 years;
  • obtain the prior full-year operating statement or, at a minimum, one covering the trailing 6 months (annualized);
  • request trailing 3-month physical and economic vacancy history if not included on the operating statement provided;
  • use best efforts to obtain a current aged receivables report, listing rent delinquencies at day
    • 30,
    • 60, and
    • 90;
  • review operating statement and rent roll updates, ensuring no inexplicable variances compared to previously provided statements;
  • if variances are identified compared to previously provided statements, they should be
    • investigated,
    • reconciled, and
    • documented in the Transaction Approval Memo; and
  • consider 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). can achieve the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. within 12 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , absent
    • unexpected market conditions, or
    • other unforeseen events.

You may, for:

  • acquisitions only, rely on the Borrower'sBorrower'sPerson who is the obligor per the Note.  budgeted operating statements; and
  • 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. , calculate the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. more conservatively, if warranted by specific PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). circumstances.

Requirements

You must:

  • determine the reasonableness 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). current income and expenses based on historical data from external real estate data aggregator services; and
  • use the following table to calculate Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. for 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. unless another table is provided in the applicable Part III chapter based on the specific product.

REQUIRED UNDERWRITTEN NCF

(CONVENTIONAL LOANS)

Item

Function

Description

CALCULATION OF NET RENTAL INCOME

1

 

GROSS RENTAL INCOME – actual rents in place for occupied units, plus market rents for vacant units based on a current rent roll (multiplied by 12).  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 have Stabilized Residential OccupancyStabilized Residential OccupancyPercentage of Property units physically occupied by Qualified Occupants, per Part II, Chapter 1: Attributes and Characteristics, Section 105.02: Qualified Occupants as adjusted for the applicable Part III products and features. by Qualified TenantsQualified TenantsParty occupying a dwelling unit in a Property in full compliance with a lease. .

 

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). is located in New York City and subject to the J-51 Tax Incentive Program where the BorrowerBorrowerPerson who is the obligor per the Note. has decontrolled rent-stabilized units (a Decontrol EventDecontrol EventFor Properties located in New York City, an event that causes a property or unit to be removed from rent control but subject to rent-stabilization pursuant to New York City rent stabilization laws. ), you must adjust the current rents to reflect no rent decontrol benefits:

 

  • Calculate the base rent as the rent amount per unit prior to the Decontrol EventDecontrol EventFor Properties located in New York City, an event that causes a property or unit to be removed from rent control but subject to rent-stabilization pursuant to New York City rent stabilization laws. date.
  • Use the base rent for each applicable unit to determine the Gross Rental Income.
  • Increase the base rent by the appropriate percentage allowed per New York City Rent Stabilization laws per annum through the present rent roll date.

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)

3

MINUS

Premiums (e.g., identifiable additional income from furnished units or short term leases) and/or corporate premiums (e.g., identifiable additional income from corporate units, housekeeping services, etc.).

4

MINUS

Physical vacancy – market rents for vacant units based on a current rent roll (multiplied by 12).1

5

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.1

6

MINUS

Bad debt - the aggregate amount of unpaid rental income determined to be uncollectable, including any adjustments to other income for bad debt.1

 

EQUALS

NET RENTAL INCOME (NRI)2

1 The total of Items 4, 5, and 6 must equal the greater of

 

  • the difference between the trailing 3-month net rental collections (annualized) and GPR, or
  • 5% of GPR.

2 NRI must reflect projected operations for the underwriting period.

 

a.  You must assess the NRI using these parameters and fully support any changes:

 

  • Assess the individual month NRI within the prior full-year operating statement or, at a minimum, an operating statement covering at least the trailing 6 months (annualized).
  • If rents and collections are stable or increasing, and any negative fluctuation can be reconciled and adequately explained, you may use an NRI that exceeds the trailing 3-month NRI, provided the NRI does not exceed the highest 1-month NRI used in the trailing 3-month NRI calculation.

b.  You must assess declines in NRI using these parameters:

 

  • Assess if any decline occurred in NRI for the trailing 3-month period compared to the trailing 6-month period and the trailing 12-month period.
  • If the decline in NRI for the trailing 3-month period is greater than 2% compared to either the trailing 6-month period or the trailing 12-month period, you must adjust the NRI downward to an amount that is 2% less than the lowest NRI for the trailing 1-month, 3-month, 6-month, or 12-month period.
  • You must make a minimum 2% adjustment to NRI; however, you are expected to make additional downward adjustments as appropriate to reflect current market conditions not reflected in historical operations.

CALCULATION OF OTHER INCOME

7

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.

 

When determining the other income, you must

 

  • adjust Items 8 through 12, and
  • include specific income for Items 13 through 15 when applicable.

CALCULATION OF COMMERCIAL INCOME

8

PLUS

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

9

PLUS

Actual income from 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… units.

10

MINUS

10% of the actual commercial space income (total of Items 8 plus 9).3

11

PLUS

Commercial parking income (e.g., public parking) that does not exceed actual trailing 12-month collections.3

3 If net commercial income is greater than 20% of EGI, then reduce to 20% of EGI.

12

PLUS

Premiums, provided that the income must:

 

  • be stable or increasing;
  • be typical (in type and amount) in the market;
  • be supported by prior years; and
  • not exceed the income generated over the most recent year or trailing 12-month period.

13

PLUS

Corporate premiums, provided that this income must:

 

  • not be included for more than 10% 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). units; 
  • be stable or increasing;
  • be typical (in type and amount) in the market;
  • be supported by prior years; and
  • not exceed the income generated over the most recent year or trailing 12-month period.

14

PLUS

Laundry and vending.

15

PLUS

Parking - income from residential parking/garage spaces.

16

PLUS

All other income, including the following:

 

  • application fees;
  • cable;
  • club house rental;
  • fees charged tenants for returned checks due to insufficient funds (NSF);
  • forfeited security deposits;
  • late fees;
  • miscellaneous;
  • non-refundable fees;
  • pet fees;
  • reimbursements;
  • storage;
  • temporary tenants;
  • utility; and
  • other.

The following must not be included:

 

  • corporate tax and refunds;
  • delinquency;
  • Financial Accounting Standards Board 13 straight-line lease income;
  • gain on sale;
  • insurance proceeds;
  • interest income;
  • interest on security deposits;
  • mobile home sales;
  • partnership funds received;
  • sales tax collected;
  • security deposits collected;
  • security deposits returned;
  • straight-line lease income; and
  • tax reimbursement from real estate taxes.

 

EQUALS

EFFECTIVE GROSS INCOME (EGI)
CALCULATION OF OPERATING EXPENSES

17

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 expenses must not be included.

 

You must access:

 

  • 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 (in the case of an acquisition).

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). ; and
  • 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.

17(a)

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:

 

  • 3% 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. 4;
  • 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.

4 Minimum property management fee may be 2.5% of EGI (rather than 3% of EGI) provided that the:

 

  • underwritten management fee is at least $300 per unit;
  • actual third-party management fee is equal to or less than the underwritten management fee;
  • Mortgage Loan has an original principal amount greater than $3 million; and
  • market management fees support the underwritten management fee for similarly sized properties.

17(b)

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, 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. , include fully assessed real estate taxes;
  • any PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). whose sale would trigger an automatic reassessment, include any expected increase;
  • any 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 an annual or scheduled reassessment within 12 months after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , include any expected increase;
  • all PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). :
    • use the most recently available assessed value (even if preliminary); and
    • do not use expected results from a protest, unless the protest is legally binding on the BorrowerBorrowerPerson who is the obligor per the Note. and taxing authority.

 

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, per written documentation from the state or local tax assessor; and
  • 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. (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).
17 (b) continued MINUS

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.

 

    17(c)

    MINUS

    Insurance equal to:

     

    • the quoted expense, for insurance policies with a bona fide written quote from a reputable broker for a new 12-month policy; or
    • for insurance policies with a remaining term of:
      • less than 6 months, 110% of the current expense; or
      • 6 to 12 months, 105% of the current expense.

     

    For an acquisition:

     

    • only underwrite premiums from the purchaser's carrier; and
    • disregard the seller's current insurance
      • premiums, or
      • estimates.

    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). area is prone to Catastrophic EventsCatastrophic EventsNatural or man-made hazard resulting in an event of substantial extent causing significant physical damage or destruction, loss of life, or drastic change to the natural environment, such as earthquake, flood, terrorist attack, or windstorm. , ensure the expense aligns with the market.

    17(d)

    MINUS

    Utilities, including the following:

     

    • building lights;
    • dumpster rental;
    • electricity;
    • fuel oil;
    • heat;
    • natural gas;
    • non-common area electric;
    • parking lot electric;
    • parking lot lights;
    • septic;
    • trash removal (including contract);
    • utilities;
    • vacant unit utilities; and
    • other.

    17(e)

    MINUS

    Water and sewer.

    17(f)

    MINUS

    Repairs and maintenance, including the following:

     

    • appliances;
    • building;
    • carpet;
    • cleaning;
    • common area maintenance;
    • decorating;
    • electrical;
    • elevator;
    • equipment repairs;
    • exterminating services;
    • floor covering replacement;
    • HVAC;
    • janitorial;
    • landscaping (exterior);
    • landscaping (interior/plants);
    • lawn and grounds;
    • lock/keys;
    • maid service;
    • make ready;
    • mechanical;
    • painting;
    • parking lot;
    • parking lot lighting repair;
    • pest control;
    • plumbing;
    • pool;
    • rubbish removal;
    • scavenger;
    • snow removal;
    • supplies;
    • supplies (cleaning);
    • turnover;
    • vacancy preparation;
    • water irrigation;
    • water treatment;
    • window covering repair/replacement (minor); and
    • other.

    17(g)

    MINUS

    Payroll and benefits, including the following:

     

    • 401k;
    • bonuses;
    • contract labor (carpet cleaning);
    • contract labor (make ready);
    • contract work;
    • custodian salary;
    • employee benefits;
    • employee expense;
    • employee insurance;
    • FICA;
    • health benefits;
    • labor plumbing;
    • manager salaries;
    • payroll and benefits;
    • payroll and processing;
    • payroll taxes;
    • salaries;
    • salaries maintenance;
    • security personnel's salary;
    • subcontracted labor;
    • temporary help;
    • unemployment insurance;
    • worker's compensation; and
    • other.

    17(h)

    MINUS

    Advertising and marketing, including the following:

     

    • apartment finder/guide;
    • banners;
    • brochures;
    • building signage;
    • finder's fee;
    • media commissions;
    • newspaper ads;
    • promotions;
    • resident relations;
    • signage;
    • supplies (marketing);
    • tenant relations;
    • Yellow Pages; and
    • other.

    17(i)

    MINUS

    Professional fees, including the following:

     

    • accounting or tax preparation fees;
    • architectural fees;
    • attorney fees;
    • bookkeeping fees;
    • engineering fees;
    • legal fees/expense;
    • professional fees; and
    • other.

    17(j)

    MINUS

    General and administrative, including the following:

     

    • ad valorem tax;
    • administrative fee;
    • alarm system;
    • answering service;
    • auto leasing;
    • auto repairs;
    • bank charges;
    • broker commission/fees;
    • business license;
    • cable;
    • cell phone/pager;
    • commissions;
    • computer repairs;
    • courtesy patrol;
    • credit check;
    • donations;
    • education;
    • entertainment;
    • equipment lease/rental;
    • eviction expense;
    • fire extinguisher;
    • freight and shipping;
    • leased equipment;
    • leasing commissions;
    • leasing office expense;
    • licenses;
    • life safety;
    17 (j) continued MINUS
    • mileage;
    • miscellaneous general and administrative expenses;
    • model apartment;
    • moving expense;
    • office supplies;
    • office unit (non-revenue unit);
    • permits;
    • personal property taxes;
    • postage;
    • printing;
    • public relations;
    • rental commissions;
    • rental expense;
    • security;
    • security vehicle and maintenance vehicle;
    • space designs and drawings;
    • subscription dues;
    • telephone;
    • travel;
    • truck repairs;
    • uniform service;
    • utility vehicle;
    • vehicle lease;
    • vehicle repair and expense; and
    • other.

    17(k)

    MINUS

    Other expenses, including the following:

     

    • ancillary expense;
    • franchise taxes and fees;
    • general building;
    • miscellaneous;
    • ongoing costs associated with any Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. ;
    • other expenses/costs; and
    • for 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…:
      • taxes, fees, etc. imposed by the governing jurisdiction; and
      • if applicable, the difference in actual lease 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… income and an equivalent market rate apartment rent (as if leased as an apartment unit).

    For example, if actual lease 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… income for a unit is $1,000 and market rate residential rent for that unit is $900, then deduct $1,200 ($1,000 - $900 = $100 x 12 months) as an "other" expense.

     

    Do not include the following:

     

    • amortization;
    • depreciation;
    • entity (i.e., filing, license, etc.);
    • financing fees;
    • initial or upfront costs associated with any Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. ;
    • interest;
    • legal fees associated with securing 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. ;
    • life insurance;
    • owner's draw;
    • partnership fees;
    • principal payments on any loan;
    • sales tax paid; and
    • trust account fees.
    18 MINUS

    For a CondominiumCondominiumStatutorily established Property ownership regime where Condominium Documents designate: individual units for separate ownership; and common areas for shared use and joint ownership by the unit owners. 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 a Shared Use PropertyShared Use PropertyProperty subject to Shared Use Documents: benefiting the Property by granting the right to use Essential Elements on common areas created by, or other properties subject to, the Shared Use Documents, and/or burdening the Property by: subjecting it to: property-use or other…:

     

    • annual assessment fees, including any expected assessment fee escalation; and
    • any known special assessments.
    19

    MINUS

    Ground rent for any Ground LeaseGround LeaseContract for the rental of land, usually on a long term basis. or any master lease.  Ground LeaseGround LeaseContract for the rental of land, usually on a long term basis. bonus rent and/or 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. must be considered when calculating Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. and analyzing refinance risk.

     

    EQUALS

    UNDERWRITTEN NOI

    20

    MINUS

    Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense, including a

     

    Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense must be included whether the escrow is funded or not.

     

    EQUALS

    UNDERWRITTEN NCF
    203.02

    Underwritten DSCR

    Requirements

    You must calculate Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis, as adjusted for the applicable products and… per the following table.

    Item

    Function

    Description

    1

     

    		 Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. per Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).

    2

    DIVIDED BY

    Annual debt service 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. amount.

     

    You must base debt service on a level debt service payment, including amortization, and the greater of the

     

    • actual note rate, or
    • required Underwriting Interest Rate Floor per Form 4660.

    When calculating Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis, as adjusted for the applicable products and… 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 an interest-only period, you must use the same level debt service payment, including amortization, regardless of the length of the interest-only period.

    The Underwriting Interest Rate Floor, if applicable, is the lowest interest rate you may use to determine 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. 

    If the Gross Note RateGross Note RateInterest rate stated in the Loan Documents. is below the required Underwriting Interest Rate Floor, per Form 4660, you must use the Underwriting Interest Rate Floor to establish the permitted 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. 

    All underwriting TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). requirements must be based on the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. .

    Section 204

    Refinance Risk Analysis

    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 203: 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 203: 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. .
    204.01

    Base Assumptions

    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 203: 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 203: Income Analysis and the applicable products and… as follows:

    Factor For... Use...
    Income Growth Rate
    • Structured Transactions, and
    • 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. secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).
    		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, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. 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).
    • acquisitions, 2%; or
    • refinances, no trending is required until the year when the actual tax bill would surpass the underwritten taxes, then trend by 2%.
    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).
    • use 3% for
      • Structured Transactions, and
      • 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. secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; and
    • for 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. , use the growth rates published in DUS GatewayDUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. 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). .
    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.
    • if an abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. begins phase out or expires within 5 years after the Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. , use fully assessed real estate taxes; and
    • if an abatement expires or taxes are expected to rise during 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, increase taxes to the expected level, then trend by:
      • 3% for
        • Structured Transactions, and
        • 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. secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; or
      • the growth rate published in DUS GatewayDUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. in the year prior to the adjustment for 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. .
    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
    • Structured Transactions, and
    • 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. secured by multiple PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).
    		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, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. 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...
    Amortization
    • 30 years, or
    • the amortization for the applicable product or features.
    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

    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 203: 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 202: Appraisal 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.
    204.02

    Alternative Assumptions

    Requirements

    You must:

    • present an alternative risk analysis using assumptions that deviate from the base assumptions 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 203: 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; or
      • third-party data providers project rent growth materially below Fannie Mae growth rates published in DUS GatewayDUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. ;
    • identify and support any deviations with
      • reliable evidence, and
      • historical and projected market trends; and 
    • state your conclusions, discussing 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
        • submarket; and
      • 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,
        • operating history, and
        • performance.

    Guidance

    Income and Expense Growth Rates:  Income and expense trending should incorporate projected market rates based on general economic, market, and submarket conditions from reliable sources, as well as 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). characteristics.  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.
    • A substantially renovated 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 improved in-unit finishes and/or new/renovated amenities, may experience different income and expense growth rates than properties of the same age; therefore, growth trends differing from the Base Assumption Income Growth Rate may be supported.

    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 205

    Cash Out Analysis

    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.

    When underwriting a cash-out transaction, you must consider and document in the Transaction Approval Memo:

    • the amount of hard equity remaining 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). debt structure, 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;
    • over the ownership period, any improvement in
      • asset quality,
      • 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 203: Income Analysis and the applicable products and…), or
      • value; 
    • 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 203: 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 per the New Construction table:
    New Construction
    For... The Property's total development cost basis includes...
    Land
    • Purchase price; plus
    • Value created since acquisition from
      • zoning changes,
      • demolition,
      • infrastructure improvements,
      • parcel assembly over time, and
      • other subjective entitlements.
    Note:  Valuation should be supported by recent land sale activity on a market and cash basis.
    Hard Costs

    Expenses for:

     

    • items including
      • substructure,
      • shell,
      • interiors,
      • construction services,
      • equipment, and
      • furnishings;
    • developer fee (8% maximum); and
    • general contractor fee (10% maximum).
    Soft Costs

    Fees for:

     

    • 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. , market studies, etc.;
    • professional services, including
      • architecture,
      • engineering,
      • consulting,
      • legal, and
      • accounting;
    • review, impact, and testing (i.e., surveys, feasibility, environmental, geotechnical);
    • building permits and utility access; and
    • any HUDHUDU.S. Department of Housing and Urban Development and LIHTCLIHTCFederal program offering tax credits to owners of eligible properties that contain low-income occupants and rent restrictions. processing.
    Construction Financing Costs

    Expenses for:

     

    • construction loan financing, including
      • interest, and
      • origination fee;
    • construction period
      • real estate taxes,
      • insurance, and
      • utilities; and
    • BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. related fees. 
    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
    Factor... Must...
    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 203: Income Analysis and the applicable products and… over the ownership period.
    Section 206

    Borrower Business Plan

    Requirements

    For acquisitions or refinances where 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 being repositioned through a substantial capital improvement plan, you must analyze (and document in your Transaction Approval Memo) 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). :
      • business plan (either through a written plan or by a conversation with the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). ), including
        • market rent growth expectations,
        • any planned capital improvements,
        • any expected rent premiums after renovations,
        • operating expense management, and
        • value appreciation through capitalization rate compression;
      • expected ownership period 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). relative 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. term; and
      • expected investment returns from owning/operating 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). , assuming
        • acquisition at 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 202: Appraisal and Valuation. , and
        • a hypothetical disposition at the Mortgage Loan’sMortgage Loan’sMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. ;
    • Mortgage Loan’sMortgage Loan’sMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Underwritten Capitalization RateUnderwritten Capitalization RateRatio, expressed as a percentage, of the Underwritten Net Cash Flow, divided by Underwriting Value. ; and
    • motivation 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). investment compared to the Borrower’sBorrower’sPerson who is the obligor per the Note. other investment alternatives.
    Section 207

    Rent-Stabilized Properties

    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 203: 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 202: Appraisal 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.