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Buyers and Sellers Meeting Albany, New York. Underwriting Guidance For Multifamily Housing. Purpose of Underwriting Guidance. Present and explain the underwriting principles as adopted by the Agency for underwriting MFH Revitalization.
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Purpose of Underwriting Guidance • Present and explain the underwriting principles as adopted by the Agency for underwriting MFH Revitalization. • Transactions include transfer of ownership transactions and Multifamily Portfolio Revitalization (MPR) Demonstration transactions.
“Underwriting” Defined.The agency uses the term “underwriting” to refer to financial feasibility. • Will the property be able to meet its projected up-front and long term capital needs? • Are the proposed rents adequate without being excessive? • Is the O & M Expenses level adequate to operate the property? • Will the borrower’s loan accounts be current after the transaction is closed?
Underwriting Principles for Transfer/MPR Transactions CRCU Limitation: Any equity loan debt service, and any increase in Return to Owner (RTO), must fit within Conventional Rents for Comparable Units (“CRCU”), after providing sustainable levels of rent loss, O&M expenses, and Reserves. CRCU must be determined using an Agency-approved method.
Underwriting Principles for Transfer/MPR Transactions(continued) Generally No Agency Funds: • If equity pay-out or increased RTO are proposed, no Agency funds(e.g., debt deferral, supplemental loans, or grants) may be proposed as part of the transfer. • Agency funds may, however, be proposed as part of an MPR transaction, after completion of transfer underwriting
Underwriting Principles for Transfer/MPR Transactions(continued) Adequate O&M Expenses: • O&M expenses underwritten for the transfer must be adequate to operate the project in a normal year. • Projects requiring major rehabilitation may reflect changes in maintenance cost whenever cost have been elevated due to poor property condition. The proposed cost will be adequate to maintain the property and is in line with similar properties in the USDA portfolio.
Underwriting Principles for Transfer/MPR Transactions(continued) Needs of the Seller, Buyer and Agency: • The seller wants to sell the property for a profit and receive some equity. • The purchaser typically wants to receive a viable property plus a (developer fee). This fee can only be paid from tax credit equity, RTO that is earned and distributed , or Section 538 funds but not from other Agency funds such as MPR tools or 515 funds. • The Agency wants a sustainable property for the term of the RUP or RUC.
Underwriting Principles for MFH Transactions(continued) • Working with Third Party Lenders:In most instances there are outside funds provided through tax credits, TCEP (1602) Exchange Credits, TCAP Funds, tax exempt bonds or third party funding. It is imperative that the Agency’s representative get involved during the negotiations stage between the purchaser and the seller to make sure the interest of the agency. Policy and requirements for all interested parties must be worked out and made acceptable to all.
Underwriting Principles for MFH Transactions(continued) When an appraisal is required: • An appraisal “current value of property” is required whenever an equity pay-out is proposed. An appraisal for security value may also be required for security value. See revised HB-3, Chapter 7, Paragraph 7-8D and 7-26, Attachment 7-B-1, items 11 and 12. • For MPR, whenever new debt exceeds the amount of the deferral.
Key Underwriting Determinations for Transactions • Re-amortization: A re-amortization of the existing should always be done if it is in the best interest of the government. For example, reducing the debt service allows dollars for additional deposit to reserves, new debt service, etc. • Maximum equity loan debt: What is the largest equity loan monthly payment that will fit within CRCU and the appraised value, when the underwriting otherwise complies with Agency revitalization principles. Caution,never allow more equity to be paid for a property than the appraisal allows. It is beneficial to no one except the seller of the property and adds additional financial burden to our debt service
Key Underwriting Determinations for Transactions(continued) • Sales Price: Agency personnel should be involved in the determination of the sales price to make sure it is within the appraised value and there is enough funds in the deal to handle the needs of the property. • New Rents: What should the post transaction rents be? In MPR it is a guideline that rents go up no more than 10% in a year. In transfer transactions rents can go up to CRCU but the underwriter must be realistic that the rent can be realized in the market place. • New RTO: The new RTO is determined based on the amount of equity put towards hard cost of construction. The amount allowed is granted in §3560.406 (D) 14 ii. The increase must be within the appraised value and does not cause the rents to exceed CRCU.
Key Underwriting Determinations for Transactions(continued) Increase in Return To Owner (cont.): In the event the owner receives and increased RTO, the owner is responsible for subsidizing any tenant that may become rent over burden . Below is the actual language put in the official concurrence letter: As of [date], [number] income producing units were unsubsidized units, of which [number] were occupied by the following affected tenants: [unit number, unit type, tenant name, pre-transfer Basic Rent, post-transfer Basic Rent]. Notwithstanding the authorized Return to owner level discussed in paragraph [x], the owner is to subsidize the rents of all affected tenants. The subsidy for each unit is the difference between the pre-transfer Basic Rent and the post-transfer Basic Rent; that is, the rent to be paid by each Affected Tenant will be the then current Basic Rent minus the subsidy. The subsidy shall not increase or decreased based on subsequent adjustments in Basic Rents.
Key Underwriting Determinations for Transactions(RTO language continued) The owner is to fund the subsidy for foregoing otherwise allowable Return to Owner. Annual operating budgets are to reflect the amount of foregone Return to owner to fund the temporary rent incentives. This obligation will end when the last of the affected tenants is either assigned rental assistance, receives a housing voucher, voluntarily leaves the property, has his or her tenancy properly terminated for cause, or achieves increased income sufficient to afford the current Basic Rent without exceeding 30% of income for rent and utilities. Furthermore, the borrower at all times remains obligated to observe all applicable occupancy and tenancy requirements of USDA regulations, including 7 CFR 3560. When proposing and approving rent changes during the transition, the borrower and USDA agree that the Basic Rent rates and utility charges for a unit will not be affected by whether the tenant is an affected tenant.”
Key Underwriting Determinations for Transactions • Rent Loss Factor: An appropriate allowance for vacancy loss, bad debt loss, and concessions. It is absolutely necessary to account for the operating history of the property and take this into account. If there is a proposed change that could change this historical date an explanation should be given but a cushion provided. • Reserves must be sized Properly: The reserve account must be sized adequately to meet the needs of the CNA over a 20 Year period of time.
Transfers in the MPR Program Transfers need to meet transfer principles Equity sized using market appraisal Equity funded from 3rd party funds or tax credit equity (NOT MPR tools or 515 dollars) Reserve sized to 20 year CNA Needs Post transaction rents don’t exceed CRCU New/Revised ROI based on “equity” brought into transaction for “hard costs” of construction
General MPR Underwriting Guidelines • LIHTC properties receive debt deferral only • Rent increases 10% or less in any one year • Full RTO budgeted • Annual increase to reserve limited to no more than 3% (OMB inflation) • 10% Operating Cushion – built into the underwriting • Identified work completed within 18 months • Full Debt Deferral for loans obligated before 10-01-91
General MPR Underwriting Guidelines cont’d. • Cash generated from Debt Deferral directed to Reserve and/or reduce rents • No appraisal required when1) Debt Deferral only, or 2) Debt Deferral with MPR tools only (soft, bullet, grant), or 3) Debt Deferral with new loan funds less than amount of deferral • Appraisals may be required based on servicing actions i.e. transfers, subordinations, etc.
Underwriting Summary The purpose of underwriting is to ensure that the transaction addresses both the physical needs of the property as well as the financial needs so the properties are sustainable. ** Remember this presentation is not inclusive of every single aspect of underwriting but does cover major points.
