Underwritten Net Cash Flow (Underwritten NCF)

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)

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).

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;

• 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.

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.

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

• minimum annual amount of $200 per unit, or
• greater amount if required in Part II, Chapter 4: Inspections and Reserves, Section 404: Replacement Reserve.

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