7.14.1 — HUD Multifamily Accelerated Processing (MAP)

A. When it is anticipated that the project’s net income will be inadequate to support the insured loan during the initial rent-up period, the appraiser must estimate the anticipated project operating deficit utilizing the following steps:

Estimate the total project operating expenses, add the debt service requirement (including principal, interest, and mortgage insurance premium (MIP)) and divide the total by the potential gross income for the project. The resultant ratio is the break-even occupancy level. Multiply that percentage times the total project units to obtain the number of units required for break-even occupancy (rounding up any fraction of a unit).
Estimate the total number of units expected to be occupied at the time of Final Endorsement. The difference between the total units required for break-even occupancy and those occupied units at the

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time of Final Endorsement represent the total number of units that must be rented in order to reach a break-even occupancy level.

Estimate the likely rate of absorption of the available units, taking into account the current and proposed supply of housing units in the subject’s market balanced against demographic and demand considerations. The absorption or lease-up rate must be supported by comparison to similar projects’ historic rates of absorption during their lease-up period, whenever such a comparison can be made. The number of units to be absorbed, divided by the monthly absorption rate, will yield the total number of months of the entire operating deficit period.
- Absorption Period. The Absorption Period is the period of time necessary for a newly constructed or renovated project to achieve stabilized occupancy. The absorption period begins when the first certificate of occupancy is issued and ends when the last unit to reach stabilized occupancy has a signed lease and is actually occupied by a resident. A typical pre-marketing period begins about three to six months prior to the issuance of the certificate of occupancy, therefore the month that leasing is assumed to begin should accompany all absorption estimates. It is important to consider that the absorption of restricted/low-income units may be different, depending on the differential in rent between low-income rents and market rents, and the number of income-qualified potential residents in the Housing Market Area (HMA.)

Maximum Allowable Absorption Period. As a result of risk mitigation guidance, the absorption period used in estimating market demand for the proposed number of units has been reduced from 24 to 18 months. Larger projects may phase additional units under a separate application for mortgage insurance (e.g., under Section 241(a)). An exception to the 18-month absorption period limitation may be waived by the Regional Center Director for large high-rise buildings. Such projects will be evaluated based on their own merit and will require a larger initial operating reserve to insure against the risk inherent in a longer absorption period.
Absorption Rate. The Absorption Rate is the average number of units rented each month during the absorption period.

Because the deficit period can begin at certificate of occupancy and continue through the cost certification phase and the amortization phase, there are three distinct expense intervals to consider when calculating the total deficit period, although not every project will require using all three intervals.
- Interval 1 covers the time between certificate of occupancy and the end of the construction period and cost certification. (Note that the construction period is defined as construction time plus two months for cost certification purposes). This is an optional interval, because some projects may have the same certificate of occupancy and construction completion dates and thus would not need an Interval 1. When calculating expenses for this Interval, no debt service is to be included as an expense since the mortgage interest for this interval is included in the mortgage in Section G Line 53 "Construction Interest". Replacement Reserves and ground rent are not to be included in Interval 1. This interval must only include the appraiser's estimate of all of the applicable operating and leasing expenses for each month (period).

Interval 2 begins at the end of the construction period/cost certification process (construction time plus two months) and ends at the beginning of loan principal amortization. This period can be no greater than 2 months and is also an optional interval. (Chapter 8, Section 8.9.1.B.1 requires

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amortization to begin "no later than 4 months after construction completion for insurance of advances and first day of second month after final endorsement for insurance of completion cases"). If amortization begins at the end of the construction period, this interval will not be necessary. Debt service must include payment of interest and MIP, but not amortization, as the beginning of amortization signals the beginning of Interval 3. (Section G Line 53 of form HUD92264 includes mortgage interest for the construction period plus two months. If amortization is deferred until 4 months after construction completion, there will be two months of unaccountedfor interest and MIP that must be included in the Initial Operating Deficit (IOD)). Ground rent must be included if the project is a leasehold since only ground rent during construction can be included in the mortgage, and this interval begins after construction completion. Replacement reserves are not included in interval 2. This interval must include the appraiser's estimate of applicable operating expenses for each month (period).

Interval 3 begins at the beginning of amortization. Amortized debt service is mandatory in this interval, and must include payment of principal, interest, and MIP. Ground rent, if applicable, and replacement reserves are also mandatory in interval 3. This interval must include the appraiser's estimate of applicable operating expenses for each month (period). Interval 3 ends when NOI becomes positive and is sufficient for breakeven coverage of the mortgage debt.

B. Operating deficits can occur before and after the start of amortization. The operating deficit calculation for the first interval must begin when the Certificate of Occupancy is secured.

C. If the dollar amount of debt service for a period is greater than the net income for that period, the difference represents the estimate of the operating deficit. One period of positive income does not cancel a prior period of income deficiency.

D. The operating deficit represents the total of all cumulative losses projected to occur before the project reaches breaks even and produces a positive cash flow. These losses may not be offset by intermittent periods of positive cash flow.

E. Where commercial facilities are included in the project, a separate operating deficit estimate of income loss for commercial rent-up must be prepared. The appraiser must ensure that expenses included in the residential deficit estimate are not duplicated in the commercial space deficit estimate so as to unfairly penalize the project. The commercial space deficit is added to the residential operating income deficit to determine the total project operating deficit escrow funding that will be necessary. Any positive income attributable to the commercial space during the deficit period will not offset the residential operating deficit requirements.