Chapter 2

Valuation and Income

Section 201

Market and Valuation
201.01

Market Analysis

Requirements

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 area, identifying its strengths and weaknesses.
  • Take these characteristics into account 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. .
201.02

Appraisal

Requirements

You must:

  • obtain an AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. that:
    • is prepared by a qualified, state-licensed or -certified appraiser;
    • conforms to the requirements in the USPAPUSPAPUniform Standards of Professional Appraisal Practice ; and
    • meets 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 the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; and
  • ensure all:
201.02A

Appraiser Role and Qualifications

Requirements

You must:

  • Provide the appraiser all 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.
  • Ensure the appraiser:
    • completely and accurately describes 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;
    • provides 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, supported by
      • market data,
      • logical analysis, and
      • sound professional judgment; and
    • uses an industry standard form of AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. that is appropriate for the size and structure 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. .

When selecting an appraiser, you must document that the appraiser is licensed or certified, as appropriate, per applicable state law.

When using an appraiser, you must ensure the appraiser (whether third-party or in-house):

  • acts independently;
  • does not participate in 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. approval; and
  • is not a member of the loan origination or underwriting staff.
201.02B

Valuation Date

Requirements

You must:

  • update any AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. if the Appraisal DateAppraisal DateEffective date of value in the Appraisal. is more than 6 months before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. ; and
  • require a new AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. if the Appraisal DateAppraisal DateEffective date of value in the Appraisal. is more than 12 months before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .

Guidance

For an AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. dated less than 12 months before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , you may obtain an updated AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. that complies with USPAPUSPAPUniform Standards of Professional Appraisal Practice guidelines, dated within 6 months of the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .

201.02C

Appraised Value

Requirements

You must ensure the appraiser provides an opinion of the market value, on an “as is” basis, of:

  • 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.  .

You may also request the appraiser 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” AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. for the opinion of Appraised ValueAppraised ValueAppraiser’s opinion of the market value of the Property documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted by the Guide. if all of the following conditions 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 the 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 made after the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. to be considered in an “as completed” AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, supported by the presentation and analysis of relevant market information. , they must be:
    • Immediate Repairs listed in the PCAPCAAssessment of the current physical condition and historical operation of the Property. ; 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 agreement approved by Fannie Mae) that evidence the: Borrower’s agreement to perform Completion/Repairs and other identified capital…, 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.Mod, 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 an allowance for cost overruns); and
  • all capital improvements are required to be completed in a timely manner:
201.03

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 201: Market and Valuation. must not exceed the Appraised ValueAppraised ValueAppraiser’s opinion of the market value of the Property documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted by the Guide. , as reduced by any adjustments you deem necessary accounting for 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 201: Market and Valuation. must not exceed the lower of the

  • Appraised ValueAppraised ValueAppraiser’s opinion of the market value of the Property documented in the Appraisal, on an “as is” basis, unless use of an “as completed” basis is specifically permitted by 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;
    • 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
    • Completion/Repair EscrowCompletion/Repair EscrowCustodial Account funded on the Mortgage Loan Origination Date for Completion/Repairs or capital improvements per the Loan Documents. ,
    • Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. ,
    • 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 202

Income Analysis
202.01

Underwritten Net Cash Flow (Underwritten NCF)

Guidance

Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. may

  • differ significantly across assets, and
  • will be driven by particular 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.  

Therefore, 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 202: 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).
  • 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 202: 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:

  • Rely, for acquisitions only, on the Borrower'sBorrower'sPerson who is the obligor per the Note.  budgeted operating statements.
  • Calculate the Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. more conservatively, if warranted by particular 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 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 202: 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 there are fluctuations, 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’s 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 202: Income Analysis and the applicable products and features in Part III. 4;
  • actual property management fee (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. ); or
  • 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 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% (the 3% trending is not required for trailing 12-month or year-to-date annualized expenses); 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:

 

  • consider any automatic tax reassessment upon acquisition in the next 12-month period; and
  • 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. , underwrite fully assessed real estate taxes.

 

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 amounts due and owing per the Mortgage Loan 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 obligations under the Loan Documents. );
  • 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
  • 110% of the current expense, for insurance policies with a remaining term less than 6 months.

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;
  • on-going 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 202: Income Analysis and the applicable products and features in Part III. and analyzing refinance risk.

 

EQUALS

UNDERWRITTEN NOI

20

MINUS

Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. expense, including a

 

Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents.  expense must be included whether the escrow is funded or not.

 

EQUALS

UNDERWRITTEN NCF
202.02

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 202: 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 202: Income Analysis and the applicable products and features in Part III. per Part II, Chapter 2: Valuation and Income, Section 202.01: 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 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .

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 202: 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 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. , 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 202: Income Analysis and the applicable products and features in Part III. .

Section 203

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 amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. (e.g., use the projected NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… in year 11 for a Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. with a 10-year term), by calculating a:

  • “reversion” cap rate, which is the expected capitalization rate able to be supported per the projected NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and…; and
  • Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. .
203.01

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 202: Income Analysis and the applicable products and features in Part III. .  For all subsequent Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. , you must derive proforma NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… as follows:

Factor For... Use...
Income Growth Rate
  • Student HousingStudent HousingA multifamily residential rental property in which 40% or more, but less than 80%, of the units are leased to either undergraduate or graduate students. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ,
  • Dedicated Student HousingDedicated Student HousingMultifamily rental Property in which 80% or more of the units are leased to undergraduate or graduate students. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ,
  • 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%.
Multifamily Affordable HousingMultifamily Affordable HousingProperty 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. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).

an overall growth rate based on the proportion of restricted units (i.e., affordable at 80% AMI or less) and the proportion of unrestricted units, and using:

 

  • 2% for restricted units; and
  • the rent growth published in DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. for the 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). submarket for unrestricted units.
For example, for a 100 unit 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 20 restricted units, and a 4% DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. submarket rent growth, the overall growth rate would be 3.6% or (20/100 x 2%) + (80/100 x 4%).
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 rent growth published in DUS GatewayDUS GatewayMultifamily pre-acquisition system including deal registration, Pre-Review and/or waiver tracking, decision records, or any successor systems. for the 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). submarket.
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 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.
  • for California:
    • acquisitions, use 2%; or
    • refinances, no trending is required until the year when the actual tax bill would surpass the underwritten taxes, then trend by 2%; 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 3%; or
    • 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%; or
    • 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 amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. , use fully assessed real estate taxes.
All Other Expense Growth Rate 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. 3%.

 

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 amounts due and owing per the Mortgage Loan 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 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .
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 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .

Guidance

Since these base assumptions are indicative only, you may use more conservative estimates if warranted by circumstances particular to the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .

In most cases, the combined effect of principal amortization and NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… growth should result in a refinancing at the minimum DSCRDSCROn an annual basis or any specified period, the ratio of Net Cash Flow to the total of:  principal, interest, and required Mezzanine Financing or Hard Preferred Equity payments. and maximum LTVLTVRatio of the actual aggregate UPB of the Mortgage Loan, plus any Pre-Existing Mortgage Loans, plus any Hard Preferred Equity, plus any Mezzanine Financing, to the value of the Property, expressed as a percentage.  for TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2, using a reasonable interest rate.

You should consider the following refinance parameters:

  • A target reversion capitalization rate at least 2.0% greater than the initial capitalization rate used for determining Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation. .
  • A Refinance Interest RateRefinance Interest RateMaximum interest rate that could be supported based on the UPB, required DSCR, and projected Net Cash Flow for the first year following the Maturity Date. at least 2.25% greater than the current 10-year Amortizing Nationwide Underwriting Floor rate, per Form 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .
203.02

Alternative Assumptions

Guidance

If you determine the base assumptions do not appropriately estimate the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… over the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. term, you may present an alternative risk analysis using assumptions that deviate from the base assumptions.

You should:

  • specifically identify and support any deviations with reliable evidence and historical and projected market trends; and 
  • state your conclusions and discuss any mitigating factors, such as the
    • strength of the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). or the submarket,
    • Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  characteristics, or
    • Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  operating history and performance.

Income and Expense Growth Rates:  Income and expense trending should incorporate projected market rates based upon general economic, market, and submarket conditions from reliable sources.  For example:

  • Rents on recently signed leases should only be used for estimating income growth in Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 1 and 2.
  • Rent projections greater than the Base Assumption Income Growth Rate should not be used beyond Loan YearLoan YearPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. 4.
  • When improvements in market economic occupancy or sustained market rental rate increases are widely anticipated, growth trends above the Base Assumption Income Growth Rate may be supported.
  • Projections of income growth resulting from PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). renovations or improved operations should be limited to the first 3 Loan YearsLoan YearsPeriod beginning on the date of the Note and ending on the last day of the month that is 12 full months after the date of the Note, and each successive 12-month period thereafter. .
  • When a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). is subject to a scheduled reassessment or a tax abatement phase-in period, tax expense should be adjusted appropriately.
  • If a tax abatement, exemption, deferral, or PILOTPILOTPayment In Lieu Of Taxes. begins phase out or expires more than 5 years after the Maturity DateMaturity DateDate all amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. , consider if the increased expense within 10 years after the Maturity DateMaturity DateDate all amounts due and owing per the Mortgage Loan become fully due and payable per the Loan Documents. may affect the Borrower'sBorrower'sPerson who is the obligor per the Note.  ability to refinance, and warrants
    • a lower Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. amount,
    • faster amortization, or
    • a reduced interest only period.
  • When you expect to incur costs for tenant improvement allowances and leasing commissions, or to realize rent increases from the rollover of tenants, commercial income should be adjusted appropriately.

Economic Vacancy:  PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). in submarkets with depressed economic conditions due to temporary demand or supply issues may be modeled to reflect the economic vacancy projected by a reliable source.  If you expect a decrease in vacancy to achieve stabilized levels, you should consider

  • the anticipated timing, and
  • effect of decreased economic vacancy on projected income growth over the same time period.
Section 204

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.

 Guidance

When underwriting a cash out transaction you should consider:

  • the amount of hard equity remaining in the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). , excluding prior permanent financing costs, such as interest or prepayment premium;
  • the length of time the BorrowerBorrowerPerson who is the obligor per the Note. has owned the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ;
  • the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  effective age and current physical condition;
  • any improvement in asset quality over the ownership period;
  • any improvement in the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  operations (i.e., its NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and…) or value over the ownership period; 
  • if the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  value increased due to an increase in NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and…, rather than a decrease in the capitalization rate; and
  • for New ConstructionNew ConstructionProperty recently developed/constructed with any certificates of occupancy received within 12 months before the Commitment Date. , the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). total development costs basis:
New Construction
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:

 

  • appraisal, 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... Should...
Cash Out Proceeds Be commensurate with the length of the ownership period.
Property Condition Have improved or been good over the ownership period.
Property NCF Have improved over the ownership period.
Property Value Have increased due to higher NCFNCFOn an annual basis or any specified period, the total Net Operating Income, minus the full amount underwritten for Replacement Reserve expense, regardless of whether deposits will be made (per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and… over the ownership period.
Section 205

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 202: Income Analysis and the applicable products and… in the refinance risk analysis;
  • assess and stress the cap rate used to determine the Underwriting ValueUnderwriting ValueValue of the Property determined by the Lender to size the Mortgage Loan per Part II, Chapter 2: Valuation and Income, Section 201: Market and Valuation. , and consider obtaining an AppraisalAppraisalWritten statement independently and impartially prepared by a qualified appraiser stating an opinion of the market value of the Property as of a specific date, 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 funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. 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.