7.8.9 Underwritten NOI and Program Guidance

A. Underwriters should use the following general guidance. Underwriters should stress-test assumptions that raise risks and evaluate worst case scenarios.

1. Projects must have an average physical occupancy rate of at least 85%. For market rate properties, the maximum underwritten economic occupancy rate is 93%. For affordable properties, refer to the Section 7.6.6.

2. Projects must demonstrate a pattern of stable physical occupancy (i.e., the average occupancy standards noted above), for a period of six months prior to submission of the Firm Commitment application, and maintain that average occupancy through to the date of Initial/Final Endorsement. Continued occupancy consistent with the underwriting conclusions must be documented with an updated rent roll no more than 30 days prior to closing. (For newly built projects, i.e., certificates of occupancy issued less than three years prior to application, see Chapter 3, Section 3.7.2.B.)

3. The Borrower must submit an updated, certified rent roll detailing the occupancy level at the project. The rent roll must be dated no more than 30 days prior to endorsement. If HUD determines that the updated rent roll shows a significant change in occupancy from that submitted at the time of

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application and that was assumed in the loan approval, then any Commitment issued shall be of no force or effect and may be cancelled by HUD or amended.

4. Operating Expenses will be stabilized based on the previous three-year operating history where available. Operating expenses, as evidenced by the three-year operating history may require adjustment if capital expenditures (normally considered a reserve for replacement item) have been paid out of the operating budget. Additionally, adjustments to management fee may be made provided a new management contract is executed that reflects a different percentage of gross collection. Adjustments to real estate taxes may be permissible if there is an anticipated tax reduction based on reassessment or reclassification. Annual deposit for the reserve for replacement will be based on the estimate made by the Needs Assessor in the capital needs assessment. (For newly built projects, i.e., certificates of occupancy issued less than three years prior to application, see Chapter 3, Section 3.7.2.B.)

5. Exceptions: Set forth below are exceptions to developing NOI for underwriting Criterion 5 (debt service):

   • For projects with units assisted under a Section 8 HAP contract subject to mark-down to market or having short terms, the Underwriter should size the debt service mortgage at the lower of either:

• 1. Market rents as estimated by the third-party appraiser, or
• 2. Section 8 HAP rents.

• For projects with Section 8 HAP contracts at above-market rents for a long term, the Underwriter may amortize the additional debt supportable with the above-market portion of rent (per the Criterion 5, debt service approach) based on two tranches, an A and B piece.

  • 1. The A piece will be determined by underwriting to the market rent levels over the entire term of the mortgage.
  • 2. The B piece will be underwritten as the difference between the market rents and the higher Section 8 rents over the remaining term of the HAP Contract.

• For Criterion 5 in the first refinance of a 202 direct loan, the Underwriter may use the Section 8 HAP rents (even if they exceed the market) as well as actual project expenses, as evidenced by the three-year operating history as stabilized. This assumes that these projects are not subject to restructuring under Mark-to-Market and that no equity will be extracted in the transaction based on above market rents.

• For a second refinance of projects which previously had Section 202 direct loans, the Underwriter will use the two-tranche method described above. These projects are no longer exempt from mark-to-market under MAHRA at the next HAP contract renewal.

• Tax Increment Financing (TIF) income may be underwritten as a second tranche for the term of the TIF, only to the extent the offset request NOI is guaranteed or refinanced to obtain anticipated benefits and the TIF would unquestionably not result in a default. The underwritten narrative must provide a complete explanation of the TIF and stress test analysis.

• For (LIHTC) Projects, debt service rents will be the lower of market or tax credit restricted/achievable rents unless there is a Section 8 HAP contract that covers the LIHTC rental

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units. In the case where there is a long-term Section 8 contract in place with rents comparable to market the Section 8 rents will be used. If the HAP has less than 15 years remaining, no renewals are necessary, but the Lender must underwrite to the lesser of Section 8, market, or LIHTC achievable rents or see Section 7.8.9.A.5.b (above) for Section 8 rents that exceed market.

• When an application for a stabilized, operating property proposes green building certification, then 100% of projected energy/utility savings may offset historic expense, but if energy saving repairs and alterations are proposed without a green building certification, then only 75% of projected savings may be underwritten. Refer to Chapter 6 of the MAP guide or underwriting guidance for projects with energy savings.