Course 10 Multifamily Lending Risks and Risk Mitigants Flashcards
What are the common risks associated with lending on multifamily?
- Mortgage credit – borrower and sponsor
- Property – location, physical condition, environmental condition and requirements, legal, and other
- Financial and economic – property performance
- HUD process risk
- Risk mitigants
- Character of Borrower
- Experience – HUD and multifamily
- Ownership and management capacity
- Financial strength – net worth and liquidity
What is a Location risk?
The underwriter determines how the location increases or decreases the risks of the property not generating sufficient income. Evaluation of the location as desirable or less desirable includes proximity to parks, schools, shopping, and employment centers. Proximity to transportation is also considered.
What is a Physical condition risk?
The physical condition/design of the loan collateral is thoroughly analyzed to ensure that the asset remains functional throughout the term of the loan. In the case of an FHA-insured multifamily loan, the term of the loan may not exceed 75% of the remaining economic life of the improvements.
What are some Enviromental issues?
Noise, towers and power lines, past uses, contamination, underground storage tanks, floodplain, wetlands, SHPO, USF&W (endangered species), radon lead-based paint and asbestos.
What is a Legal risk?
The FHA loan must be in the first position. Any liens that may be filed against the property must be settled before the loan is closed. Any encroachments or easements that impact the site must be evaluated. The title must also be consistent with the financial statements in terms of any outstanding debt. Other legal risks include the Regulatory Agreements that may include rent and or income and Cross Use agreements for amenities, liens, easements, and encroachments.
What is a Process risk?
For the borrower, using FHA-insured financing comes with a unique set of risks not present with other financing sources. These include:
* Choice Limiting actions
* Accessibility/UFAS repairs
* SHPO/THPO
* Higher initial deposit to reserves for replacement
* NSPIRE Inspection
* Annual audits
What is the Mortgage constant calculation?
Mortgage Constant annualized is calculated by adding the interest rate, principal amortization rate and mortgage insurance premium (MIP), if applicable.
What is the annual debt service calculation?
The annual debt service is calculated by multiplying the mortgage constant by the loan amount: $14,900,000 x 0.06442 (6.442%) = $959,837.
What is the loan to value calculation?
The loan to value is used to measure what percentage of the value serves as collateral to the loan. The difference between the value and the loan amount is the amount of equity the borrower has remaining in the property. The higher the LTV the less equity the borrower has in the property which increases the risk to the lender.
Loan amount / Value = LTV
What is the Debt Service Coverage Ratio calculation?
Debt Service Coverage Ratio (DSC) is calculated by dividing NOI by the annual debt service: $1,199,796/$959,837 = 1.25
