7.10.1 Lender’s Responsibilities

A. Based upon the market study prepared by the market analyst and the rental income and expense estimates prepared by the appraiser, the Lender is responsible for making the following determinations before submitting the application:

1. Determine the current occupancy levels, market absorption rates, and market demand for the number and type of units proposed.

2. Analyze site for acceptability.

3. Determine market rents reflecting amenities, services, and equipment offered, and estimate project income.

4. Estimate total operating expenses. HUD’s Environmental Review Online System (HEROS) reports, including the Phase I ESA, should be consulted to determine if additional carrying costs are to be included in the operating expense summary.

5. Estimate mortgage amount based on form HUD-92264-A, Criteria 5, and Debt Service Ratio.

6. Make a determination of feasibility or non-feasibility of the Sponsor’s proposal.

7. Evaluate the market study and appraisal report. The Lender will either accept their conclusions for use in underwriting or may revise them for underwriting purposes. Any such revisions must be explained and justified. The Lender may adjust the appraised value downwards but may not adjust it upwards. Once accepted by the Lender and submitted to HUD as part of the Lender’s application, the Lender assumes the validity of the findings and conclusions of the appraisal.

B. The HEROS report, including a Phase I ESA, must be prepared in accordance with Chapter 9 and the Lender should advise the market analyst and the appraiser of any conditions which might affect the marketability or value of the project.

C. The appraiser or market analyst must prepare the market study in accordance with the requirements of this Chapter.

D. The appraiser must determine project rents, estimated rental income, operating expenses, and the warranted price of land or “as is” value (of land and buildings for substantial rehabilitation cases). The Lender must ensure that forms HUD-92273 (Estimate of Market Rent by Comparison) and HUD-92274 (Operating Expense Analysis Worksheet) are prepared. For substantial rehabilitation projects, the appraiser must estimate the rents and expenses based on the assumption that all proposed substantial rehabilitation to the project has been completed and is used as the basis for NOI in the debt service criterion. However, pre-rehabilitation rents and operating expenses must be used for purposes of developing the cost build up and determining as-is value.

E. The Lender must consider cost information from various sources, including the Sponsor, appraiser, and cost consultant (including soft-cost and land cost information) to calculate the total replacement cost, and will compare its estimate of total replacement cost with the costs estimated by the Borrower.

F. The Lender must ensure that forms HUD-92264, HUD92264-A, and supporting forms are completed.

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Chapter 7 Valuation & Market Analysis 7.11 Firm Commitment for 220, 221(d), and 231 (New Construction)

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G. The Lender must compare the calculations on form HUD-92013 with those proposed by the Borrower and either accept the Borrower’s proposal, recommend its modification, or reject it and advise the Borrower that the project is infeasible.