Evaluate the location of the property.

• Proximity to universities, quality schools, medical facilities, the central business district, recreational facilities, and employment centers are especially important.
• If a new project is specifically targeting student rentals, it is critical for the lender to research the enrollment trends of the colleges or universities and assess the supply of and demand for apartment units/bedrooms. 
  • If the market supply is saturated, then the proximity to the college is vital to ensuring timely lease up. 

A lender must evaluate the ease of getting to the site. 

This is critically important especially in areas experiencing major growth. 

Verify legal access to the property through the following:

• Visual inspection 
• Review of a survey
• Review of title work

Availability of public utilities to the site to include water, sewer, and electric. 

Evaluate the site for potential environmental constraints or contamination. 

• Lender’s on-site inspection should look for potential wetlands (for example: standing water, low areas, types of tree growth), dead vegetation, unidentifiable debris or abandoned equipment/autos/tractors/fuel tank (operable or inoperable)/homes or buildings, endangered species (for example: gopher turtles), indications of past use related to farming, dry-cleaning, manufacturing, railroads and processing facilities, waste dump sites, defense or military operations, and mines. 
• Read and review the Environmental Risk Management Policy for documentation requirements.

Drive around to identify any off-site properties within a 1-mile radius that could have the potential to contaminate or could have already contaminated the site you are considering financing. It is quite common for a property to become contaminated through the migration of contaminants from offsite properties. 

Obtaining a Phase I Site Assessment performed by a qualified engineer will identify any potential Recognizable Environmental Conditions (REC’s).

If the property is located within a designated special flood area, evaluate the impacts that a weather event could have on your property’s cash flow, borrower, and collateral. Identify ways the Bank can mitigate its credit risk and decision the loan accordingly.

Within the state of Florida, our business clients are challenged by the constant turnover in insurance providers and rising insurance costs. A lender needs to understand what impacts there maybe be to the property’s cash flow if CCB had to place forced placed insurance on the loan. 
 

Confirm that your site has the appropriate zoning and future land use designation for the intended use. In addition, review Costar or the local permitting reports to determine if any new multi-family construction has been permitted within your property’s defined market area which is typically a 3–5 mile radius. When financing student housing, your defined market area should be three miles or less from the educational facility(s). 

Review Costar or Wikipedia to determine if the population is growing in the subject’s market and where that growth is coming from (for example: retires, young professionals, or new business). Age distribution, income levels, and household sizes influence the developer’s design and utility when building a new project.

When visiting the site, evaluate the condition of the neighboring properties both commercial and residential, the availability of public transportation, and overall curb appeal of the area.

Evaluate market conditions relative to renting versus home affordability, local employment conditions, direction of home values, and trends relative to rents, new inventory, vacancy rates and amount of new construction.

Must be sufficient to support the room/unit count and comply with the approved plans and specs. Oftentimes with student, fraternity, and sorority housing, the on- site parking count doesn’t support the room count.  To mitigate the parking risks, a lender must determine: 

• The availability of street parking and 
• Access to public parking garages 

Each of these parking alternatives must be located within a reasonable walking distance to the property. Finally, confirm that the property is ADA compliant.

The floorplans and amenities need to cater to the tenant the borrower is targeting. 

For example: If the project is designed for student housing, a lender should expect to see a higher percentage of 3 and 4 bedroom apartments. The common amenities related to student housing include a swimming pool, fitness center, study and computer areas, smart technology, outdoor recreational area, and washer/dryer hook ups. 

Conversely, if the target market is retirees, a lender should expect a higher weighting to one- and two-bedroom units along with more emphasis placed on landscaping, meeting rooms for socializing, outside sitting areas, and bathrooms equipped with accessories to meet the needs of a senior. 

Confirm that the developer’s amenity package is consistent with the property’s direct competitors.

Assess the overall quality, age, and condition of the units and note any deferred maintenance items. Evaluate the painting, appliance package, countertops, flooring, plumbing, and HVAC systems. Undercapitalized properties may neglect maintenance needs when cash flows are inadequate which may impact occupancy levels negatively.

Note the type of construction and quality, age of roof system, condition of exterior painting and parking area, lighting sufficiency, and signage. Properties individually metered with the availability of public water and sewer are highly recommended. 

If professionally managed, review the terms and conditions of the Management Agreement and integrate the related expenses in your cash flow projections.  

Research the management company to gauge their reputation and read online reviews from tenants. 

The quality of your management company is paramount to the success of a multi-family property. The ability to effectively manage tenant turnover, collect rents, and employ sound property maintenance practices are critical to sustaining cash flow performance during the life of the loan.

If new construction, obtain a feasibility study to:

• Assess the competition 
• Validate your borrower’s forecast for rents, occupancy, operating expenses, and net operating income, and 
• Determine the lease up period

Review CoStar to obtain a multi-family market report that provides you with economic conditions and trends related to the multi-family sector for the market area.

The CoStar report drills down further to a property’s submarket which is especially useful. 

When financing new construction for student housing it is critically important that the lender evaluate the following:

• The relationship between the date of projected completion and the date when there is peak demand (peak time period) for students seeking rentals. 
  • For reference, the peak time-period is most often just prior to the end of the Spring Semester as student’s are trying to lock down their fall leasing arrangements prior to returning home for the summer.
• If preleasing, ensure that the construction contract provides for a sufficient amount of time for the construction of the planned improvements. 
  • Landlord’s that prelease and don’t deliver the units timely are at risk of financial penalties, lease cancellations, bad publicity, and loan defaults.
• In reviewing the rent roll, the lender wants to confirm that the lease terms are a minimum of 12 months, otherwise, month to month leases are considered a vacancy when underwriting the credit.
  •  An acceptable rent roll should include:
    • Tenant name
    • Unit number
    • Date of tenancy
    • Maturity date
    • Rental rate 
  • Confirm that the rental rate by unit type (# bedrooms, # of baths) is comparable throughout the rent roll. Outliers most oftentimes indicate 1) deficiencies in the unit or 2) management discounting a unit for services provided by the tenant. 
  • A lender will want to especially pay attention to the maturity date of the leases. Ideally, the Bank will want to minimize our credit risk by ensuring most of the leases have a period of 6 months or greater remaining until maturity. 

A lender is required to review a typical lease and make sure that there are no conditions included that could negatively impact the rentability/marketability of the property. Also, confirm that other income per the operating statement or proforma is consistent with the fees allowable per the terms in the lease. As a lender or underwriter, pay particular attention to the lease rate on the newer leases to confirm lease rates are stable or trending upward. Declining lease rates could indicate poor management, deferred maintenance, or an oversupply of comparable inventory. 

If financing a property older than 15 years, require a property inspection report especially if deferred maintenance items are noted by the lender on  site visit.

If a lender is financing 5 or more units within a larger condominium where the borrower will not own all of the units, the lender should  assess the financial capacity of the Condominium Association (COA). Deferred maintenance in the common areas (paving, pool area, landscaping, recreational areas, meeting rooms) are telling signs that an association has limited reserves. It is highly recommended that the lender request a copy of the associations most recent financial information to confirm financial capacity. In addition, it is advisable to ask your borrower if there have been any special assessments during his/her ownership and the overall impression he or she may have of the COA management.

For evaluating the loan to value ratio when financing residential condos (5 or more), the loan amount will be established based on the lessor of the net present value of the units or the value based on the income approach.

On an existing property, the borrower’s financial statements and tax returns for the last two years will give a lender the most insight into the operating expenses associated with a stabilized multi-family property. For new construction, the bank will utilize industry standards in estimating operating expenses.

The OER is the total operating expense divided by EGI. In your, Quick Reference Guide for Non-Owner-Occupied Properties, note that the typical operating expense ratio for a multifamily property falls within a range from 38% to 48% of effective gross income. A newer property is likely scale toward the lower end of the range and an older property, the higher end. The more amenities, the higher the range. As a reminder, do not forget to include COA dues when calculating OER when financing condominiums.

The lender is required to perform a cash flow analysis prior to presenting a multi-family financing request to Preflight or Credit Administration for confirmation that the requested loan amount is supportable based on the Bank’s underwriting criteria. Templates for cash flow analysis are available in the Quick Reference Guide. Below is a detailed example of a cash flow analysis on a multi-family property.

• Assess the contractor’s experience in building similar property types of the same scale
• Obtain active contractor’s license
• Determine if the contractor is bondable
• Obtain financial information if required as a condition of the loan approval
• Review contractor’s website and request a resume of projects
• Collect and review GC’s liability insurance policy

From time to time the lender or Credit Administration will require the borrower to fund an interest reserve at closing. An interest reserve account is a credit enhancement considering the construction project is not income producing while under construction or in lease up.

Interest costs during construction are funded from the Bank controlled interest reserve account as the interest comes due. Interest Reserves are non-interest-bearing accounts. Underwriting conditions that typically trigger an interest reserve requirement are: 

• Low liquidity levels of the borrower, 
• An extended timeline for project completion, 
• Project size or type, or 
• Volatile conditions within the economy.