Fannie Mae Student Housing Financing:
Often student housing complexes are not easily converted to conventional multifamily properties.
Fannie Mae has specific underwriting requirements for properties that fall under the definition of “Student Housing.”
The property specifically caters to students, or 40% or more of the occupants are students. This requires most of the leases be 12-month leases and most often require parental guarantees. If the occupant can demonstrate they have sufficient income and credit strength to support the rental obligation, then a parental guaranty would not be required. We see this most often in properties that have a concentration of graduate students (MBAs/Doctorate). If the property offers meal service as part of the overall rent, this would make the property ineligible (no food services allowed) for this loan program. Overall, minimum occupancy must be 90%. The size of the overall student population for the local college/university must be at least 10,000 in active enrollment.
Sponsor/Owners: Fannie Mae would like to see the owners have prior experience in ownership and/or management of multifamily properties. Generally, this means four or more similar type and size properties (or larger) than the property up financing consideration. What happens if you do not have this history or experience? You may consider bringing in a minority owner that would fulfill this requirement. We could also request Fannie Mae to consider an exception to this underwriting requirement or simply move to another lender that does not have this requirement. Fannie Mae also requires the Sponsors/Owners to be US Citizens to have liquid assets of not less than 6-months principal and interest payments post closing. In determining the liquidity requirement Fannie Mae will not consider unused lines of credit, or certain qualified retirement accounts such as IRAs and 401K. There are some possible exceptions to the retirement accounts. If the sponsor is required to take minimum distributions, a portion of these accounts can be used to meet the liquidity test. Typically, liquid assets are unencumbered; checking account balances, savings accounts, publically traded stocks, bonds, and cash value in life insurance policies.
You will receive a detailed Application from the lender. This document will outline the insurance requirements, the escrow requirements, and provide additional information on closing requirements.
How long will it take to close a Fannie Mae loan? Normally, 50 to 60-days after the lender receives the completed Application, Application Fee and requested documents. For example the lender will ask for copies of the historic operating statements, a current rent roll, resume’s on the principals, and personal financial statements on the principals. These documents will need to be certified as being true and correct by one of the principals.
Minimum Occupancy Requirements: 85% Physical Occupancy for 90 days. 70% economic occupancy required.
Third party reports and other loan provisions:
- Appraisal – ordered by the lender – this can take between three and five weeks to complete.
- Title Commitment with exception documents – this can take from one to three weeks to prepare.
- Survey: From time to time the lender may waive the requirement for survey if the title company will provide acceptable survey coverage protection without a new survey. We can often assist with this issue if a new survey is not available. If a survey is required this can be the longest lead item, especially during winter months where the ground is covered in snow.
- Phase One Environmental Report: The lender will engage a company to conduct an environmental inspection of the property. On older properties that have or are likely to have asbestos materials and/or lead base paint the Environmental Report will often recommend the property owner put in place an Operating and Maintenance (“O&M”) Plan. These plans are prepared by a third party and typically cost between $400 and $500 each.
- Property Inspection Report, also known as the physical needs assessment. The lender will hire a company to walk at least 10 percent of the units, walk the entire exterior and common areas. They will prepare a report outlining those areas that need repair and replacement now (“Immediate Repairs”) and prepare a schedule showing the items that will need replacement over time on an annual basis. The most common loan term is 10-years (with a 30-year amortization). The report will cover a period of time two years beyond the loan term (12-years in this example). The report will adjust for inflation and arrive at an annual estimated replacement reserve amount (normally between $250 and $300 per unit per year collected monthly along with your principal, Interest, insurance and real estate tax escrow accounts). This will be known as the Replacement Reserve. These funds can be used to make future repairs to the property, e.g. property water heater, replace roof, repaint exterior, carpet hallways, replace heating and cooling units, etc. Should the report find items that need Immediate Repairs the lender will most often holdback from Closing 125% of the estimated amount of the item that needs repair. Once the work is completed the lender will release these funds to the borrower or pay direct to the contractor as instructed by the borrower.
- The lender will order a flood certificate.
- Lender will conduct a site inspection.
- The lender will hire an attorney to prepare the loan documents.
- Closing costs: $12,500 will address the appraisal, property condition report, a phase one environmental report, property condition report, lender site inspection, lender processing fee.
In addition to the costs above you should consider the following;
- Lender will require a Legal Opinion from your attorney. $TBD
- Lender will engage outside legal counsel to prepare the loan documents and provide additional assistance to the Closing. Most often the costs for lender’s outside counsel ranges between $7,500 and $12,500.
- Survey, lender will most likely require a survey. From time to time an old survey can be used. $TBD.
- Title Insurance, in acquisitions the Seller most often pays for the title policy, in refinances you will have to pay for this policy. The costs vary from State to State. In Kansas this runs about $1,050 per $1 million in loan dollars.
- You should factor in another $500 – $600 for the title company to handle the closing and disbursements.
- Recording costs should also be factored in. In some states this is a few dollars while in other states this can add up to well over $1,000. $TBD
- The Loan Placement Fee (Mortgage Broker). $TBD
Under this loan program Fannie Mae will increase the loan amount to allow for reimbursement of many of the above closing costs.
- Prepayment Penalty: Yield Maintenance.
- As mentioned earlier, this is considered a non-recourse loan. Having stated this, Fannie Mae will ask the principals to execute a guaranty that is limited to certain provisions. For example, if the lender suffers a loss due to fraud, wasting of the subject property, environmental, misappropriation of funds and if the borrowing entity goes into bankruptcy, then the loan can become full recourse to the principal who executed this limited guaranty. Within the industry, this type of recourse is commonly referred to as “Bad Boy” provisions or “Carveouts.”
- The lender will require the entity that owns the property to be a Single Purpose Entity (SPE).
We welcome the opportunity to assist with the loan placement with Fannie Mae. Contact: Mike Caffrey (913) 402-7077.