Posted by Josh Geyser on March 30, 2006 at 16:46:26:
I hope this post is not too long, but here is a little glimpse into an underwriters mind for a Multi-family loan. Hopefully it will help.
Operating expenses shall be based on a blend of the appraiser?s forecasted expenses, expense data from comparable properties and historical expenses (except for non-recurring or extraordinary expenses as well as depreciation, interest or amortization expenses).
Generally, the expenses for apartments and mixed-use buildings will include real estate taxes, insurance, utility, repair, decorating, off-site management, janitorial, resident manager?s salary, replacement reserves plus any other expenses unique to the property (including but limited to trash removal, pest control, interior & exterior decorating, cleaning expenses & supplies, general & administrative, association fees, and professional fees, i.e. legal & audit).
Generally, the expenses for mobile home parks will include real estate taxes, insurance, repairs and maintenance, general & administrative, management, utilities, payroll and replacement reserves, plus any other expenses that may be unique to the property.
Lender has the right to adjust expenses accordingly, if appraiser?s estimates appear unrealistic for the subject property.
Real Estate Taxes: In a period of upward trending values, the estimate of real estate taxes needs to be given careful consideration. Underwriting should be provided with the most recent copy of the real estate tax bill or other satisfactory proof of current real estate taxes to aid in this analysis. The underwriter?s real estate tax expenses will reflect future increases and any special levies or assessments, with reliance on the appraiser?s forecast. The expense will reflect any tax abatements that lower taxes in the short term but allow substantial increases in taxes over time.
Insurance: Insurance expense should be based on the actual insurance bill based on Lender?s coverage levels. Insurance expense must also include flood & earthquake coverage, if applicable. Underwriting must be provided with the current insurance policy, or other proofs of cost coverage.
Utilities: All utilities paid by the landlord shall be included and an allowance for increases should be considered. Reliance will be placed on the appraiser?s forecast.
Repairs: Repairs should not include one time capital expenditures. For apartments/mixed-use properties, the repair expense amount will be based on the higher of the appraiser?s forecast or $100 per unit per year. For mobile home parks, based on the higher of the appraiser?s forecast or historical.
Decorating: Decorating should not include one time capital expenditures. The decorating expense amount will be based on the higher of the appraiser?s forecast or $100 per unit per year. Does not apply to mobile home parks.
Off-Site Management: For apartment/mixed-use loans that are $1,500,000 or less, the expense will be based on the highest of 5% of the underwriter?s EGI or the actual percentage quoted in the management agreement of the underwriter?s EGI. For apartment/mixed-use loans that are greater than $1,500,000, the expense will be based on the highest of 3% of the underwriter?s EGI or the actual percentage quoted in the management agreement of the underwriter?s EGI. For mobile home parks, based on the higher of the appraiser?s forecast or historical, but no lower than 4% of the effective gross income.
Janitorial: At least $100 per unit per year is required for buildings with 12 or more units. If MFG Underwriter utilizes a janitorial expense, then no Resident Manager?s Salary expense will be utilized, unless both apply to the property. Does not apply to mobile home parks.
Resident Manager?s Salary: This expense shall be based on the concessions for ?staff units". If the Underwriter utilizes a Resident Manager expense, then no Janitorial expense will be utilized, unless both apply to the property. Does not apply to mobile home parks, see Payroll expense below.
Replacement Reserves: For apartment/mixed-use properties, this expense shall be based on a minimum of appraiser?s estimate or the underwriter?s estimate based on the following:
Condition of Improvements (based on Appraisal) and the Amount of Reserve required (per unit per year)
If there are more than two buildings for the subject, an additional $25 will be added to the appropriate figure in the above chart. For example, a property has four buildings and is in average condition, the reserve amount per unit will be $200.
For mobile home parks, the replacement reserve will be based on $50 per pad.
General & Administrative: Mobile home parks only, based on the higher of the appraiser?s forecast or historical.
Payroll: Mobile home parks only, based on the higher of the appraiser?s forecast or historical.
Miscellaneous: Any other expenses unique to the property must be included which the underwriter will base on the higher of the appraiser?s forecasted figures or historical data.