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Apartment Lender requires that the property be
in overall satisfactory condition with deferred maintenance; that
being curable, physical deterioration needing immediate correction
kept to a minimum to be eligible for apartment loans under the small
balance program. Apartment Lender also requires that a property have
compliance in systems that affect life-safety or code issues at a
level of equivalency in the market. This is not meant to require
modernization above the standards for a property in its market
class.
An example of where a functional
modernization requirement may be applied is where rental occupancy
and corresponding rent level, demands that certain functional
capacity is adequate for safe use of the space and where most
comparable alternatives satisfy that need.
Repairs generally need not include
minor, inexpensive repairs, maintenance items that are covered by
borrower’s current property maintenance program and budget or
routine replacements that may be necessary during the first two
years. Underwriting will not include these types of repairs in the
calculations referred to under
Section U140.10.
U140.10 Repair/Modernization
Holdback Agreements
Apartment loans provided when the Property Condition Assessment
indicates a total of all high urgency items equal to or greater than
1% of the appraised value (as determined by Apartment Lender) or purchase
price (if applicable; and as determined by
Section U320.00
or Section U320.21),
whichever is less, or all low urgency items equal to or greater than
2% of the appraised value (as determined by Apartment Lender) or purchase
price (if applicable; and as determined by
Section U320.00
or Section U320.21),
whichever is less. Apartment Lender will require a holdback equal to 125% of
the sum of all high and low urgency items. Apartment Lender will require that
all high urgency items be repaired within 90 days and that all low
urgency items be repaired within 180 days after closing, weather
permitting.
Apartment Lender will prepare a
Repair/Modernization Holdback Agreement that will disclose the
amount of the holdback as well as the procedures that must be
followed in order to facilitate the release of said holdback and
close the apartment loan request. The
funds will be held by the title company. When a request for the
release of funds comes to Apartment Lender from the borrower,
Apartment Lender requires
a re-assessment of the property, by an approved Apartment Lender consultant.
The consultant will provide updated comments regarding those items
which were listed on the Repair/Modernization Holdback Agreement as
needing repair/modernization. The borrower shall be responsible for
the cost of any re-assessment.
Apartment Lender will also charge a service fee
for each payout request. The Repair/Modernization Holdback Agreement
will disclose the service fee(s) for these requests. Apartment
Lender will
allow only one payout for all holdbacks totaling up to and including
$20,000. Additional payouts will be allowed for holdbacks greater
than $20,000. When a partial payout is requested by the borrower,
Apartment Lender will only payout 100% of those items being requested
(provided they have been completed satisfactorily); thereby holding
the 25% cushion until the last and final payout request. For
example, if a roof needs replacement (@$10,000) and asphalt parking
lot needs replacement (@$5,000), Apartment Lender will hold back $18,750
($15,000 X 125%). If Apartment Lender receives a request for a payout because
the roof is complete, Apartment Lender (following a satisfactory
re-assessment) will release $10,000. The remaining holdback will be
$8,750. Once the asphalt parking lot is satisfactorily completed,
Apartment Lender will release the remaining $8,750.
Apartment Lender, generally, will not consider
making an apartment loan on property which has repairs totaling more than 5% of the
appraised value (as determined by Apartment Lender) or purchase price (if
applicable; and as determined by
Section U320.00
or Section U320.21),
whichever is less.
All holdbacks will be funded from the
borrower’s apartment loan proceeds, escrowed with the title company, and
disbursed to the borrower(s), at Apartment Lender’s discretion, following
acceptable re-assessment and documentation.
U140.20
Apartment Loan Repair/Modernization
Letter Agreements
When the cumulative total of all high
urgency items is less than 1% of the appraised value or the
apartment loan request (as determined
by Apartment Lender), or purchase price (if applicable: and as determined by
Section U320.00
or Section U320.21),
whichever is less, or the cumulative total of all low urgency items
is less than 2% of the appraised value (as determined by Apartment
Lender), or
purchase price (if applicable: and as determined by
Section U320.00
or Section U320.21),
whichever is less, Apartment Lender will require that all high urgency items
be repaired within 90 days and that all low urgency items be
repaired within 180 days after closing, weather permitting. The
Repair/Modernization letter for apartment financing will list the items of
repair/modernization needed, as well as the time frame in which they
shall be made, with adjustments made due to seasonal considerations.
To insure that the repair/modernizations are completed in a timely
manner, Apartment Lender will use Repair/Modernization Letter Agreements,
prepared by Apartment Lender’s Closing Department, to obtain the borrower(s)
commitment. The repair/modernizations listed on the letter are
determined by the Property Condition Assessment Report, the
Appraisal Report, and/or Apartment Lender’s Underwriting Department.
Apartment Lender’s Post-Closing department will
follow-up on all Repair/Modernization Agreements. Failure to
complete the repair/modernization(s) may result in an event of
default of the apartment loan.
U140.25
Apartment Loan Advisory
Repair/Modernization Letters
Definition:
Reserves/(Repair/Modernization) Multiplier (Multiplier) is the
mathematical relationship between the Borrower(s) verified cash
deposits and listed securities, excluding any retirement assets
(i.e. IRAs, 401Ks, Keoghs, etc.) (“reserves”), and the total amount
of the Repair/Modernization holdback (based on U/W’s analysis).
Example: If the Repair/Modernization
holdback is determined to be $20,000 and reserves of the Borrower(s)
is $100,000, the multiplier is 5 ($100,000/$20,000).
APARTMENT LOAN PURCHASES ONLY
Apartment Lender will allow all items which
would generally require a “time monitored” Repair/Modernization
Letter Agreement (See
Section U140.20)
or a Repair/Modernization Holdback Agreement for apartment loan
purchases
(See
Section U140.10),
to be placed on a “non-time monitored” Advisory Repair/Modernization
Letter when the multiplier is equal to or greater than 5.
Exception Items
Environmental/Life-safety issues are
still required to be repaired, regardless of the multiplier. A
Repair/Modernization Holdback Agreement would be required if the
dollar amount of said repair/modernization(s) is equal to or greater
than 1% of the appraised value (as determined by Apartment Lender’s
Underwriting Department). Otherwise, a “time monitored”
Repair/Modernization Letter Agreement will be sufficient.
U140.30 Seller Contributions For
Repair/Modernization(s)
Seller contributions credited to the
buyer at closing for bona fide repairs (as determined by
Underwriting) will not be a reduction of the purchase price, if the
funds are escrowed as a Repair/Modernization Holdback Agreement.
Funds not controlled by a Repair/Modernization Holdback Agreement
will be a direct reduction from the purchase price (See
Section U220.20).
Non bona fide repairs (as determined by Underwriting) will not
result in a reduction of the purchase price if they do not exceed 3%
of the appraised value or purchase price, whichever is lower.
U140.40 Repair/Modernization
Holdback Agreements/Letter Agreements For Low LTVs
When the LTV (see
Section U320.00)
is 50% or less, Repair/Modernization Holdback Agreements and
Repair/Modernization Letter Agreements will not be required,
provided: the amount of the repairs does not exceed 5% of the
appraised value and the existing repairs will not migrate into
larger repairs.
U150.00
APARTMENT LOAN ENVIRONMENTAL HAZARD
GUIDELINES
Apartment Lender is concerned
that environmental hazards often cause varying degrees of undue risk
to both the property owner and Apartment Lender which could effect the
integrity of collateral for Banc-Series Apartment Loan Program.
During the apartment loan underwriting process of an
application, the
Apartment Lender underwriter will review information
provided by the appraiser and/or property consultant in order to
determine the need for remediation or further
assessment/investigation by a professional environmentalist.
Depending on the type of hazard and
degree of risk, an environmental site; assessment (“ESA”)
may be required.
U150.10 Common Environmental
Hazards
The following is a
non-comprehensive description of some of the more common
environmental hazards that may effect apartment financing and are provided to
identify the hazards of which to be aware of during the loan
origination process:
A.
Friable Asbestos
A stage where
asbestos or asbestos containing material (ACM) has or will (in the
near future) become airborne and thus can easily be absorbed into
the environment. Borrowers will be required to sign an Asbestos
Disclosure on all buildings suspected of having materials containing
asbestos.
B.
Lead-Based Paint
Exposure to lead-based paint is known to contribute to health problems. Federal Law requires Lead-based Paint
Disclosures on all buildings constructed prior to 1978;
C.
Surface Contamination
Surface contamination can be generated
from prior site use or off-site source. The most common examples of
such a hazard include an electrical substation or an above ground
storage tank(s);
D.
Subsurface Contamination
Subsurface contamination can be
generated from prior site use or off-site source. The most common
example of such a hazard is an underground storage tank(s) which can
cause soil and ground-water contamination;
E.
Soil Subsidence
Caused by erosion or settlement;
F.
Radon
An invisible, odorless, radioactive
gas produced by the decay of uranium in rock and soil;
G.
Exposure to Flooding
Especially to properties which are in
or encroach on flood plains (flood hazards are covered under
National Flood programs). If the property is located in a Zone A or
Zone V Flood Hazard Area, as defined by a Apartment Lender approved third
party, flood insurance
is required to close the apartment loan;
H.
Insect Infestation
A Wood Destroying Infestation Report
(“WDIR”), copy acceptable, is required on all purchase apartment loan
transactions. A WDIR is only required on apartment loan refinance transactions
when the appraiser and/or inspector has identified possible
infestation, except for collateral in the following states: Idaho,
Maine, Michigan, Minnesota, Montana, New Hampshire, North Dakota,
Oregon, South Dakota, Vermont, Washington, Wisconsin, and Wyoming.
(Apartment Lender reserves the right to require a WDIR, based on the findings
of the appraiser, property consultant, and/or Apartment Lender Underwriter.)
The WDIR must not be more than 120 days old from the date of the
closing. If the WDIR indicates that there is evidence of "active
infestation", Apartment Lender will require satisfactory evidence, prior to
closing that reflects the active infestation has been completely
remediated. Limited reports will be accepted as long as termite
company can confirm that the subject is free and clear of active
infestation. If the WDIR indicates that damage exists, then either
evidence of satisfactory repair or a monetary holdback (125%) for
the same will be required, provided Apartment Lender’s repair/modernization
holdback criterion are met. Depending on the extent of damage, a
structural report (from a firm found satisfactory by Apartment
Lender) may be
required at the borrower’s expense; and/or
I.
Earthquake
The following Earthquake Guidelines
shall apply to all properties located in the following states:
Alaska (part of State), Arizona (part of State), Arkansas (part of
State), California (entire State), Hawaii (part of State), Idaho
(part of State), Illinois (part of State), Kentucky (part of
State), Missouri (part of State), Montana (part of State), Nevada
(part of State), Oregon (part of State), Tennessee (part of State),
Utah (part of State), Washington (part of State) and Wyoming (part
of State).
All properties in the United States
fall into 1 of 4 zones, defined by the FEMA Seismic Zone Map.
Apartment Lender
will determine the zone by ordering a report from an approved
vendor.
When the outcome of the determination
results in a Zone 3 or Zone 4, the determination of the property’s
structural construction type is necessary.
Apartment Lender will rely on the Appraiser’s
and/or Property Condition Consultant’s professional opinion as to
the structural construction type.
For zones 3 and 4, Apartment Lender will
make an apartment loan,
without earthquake insurance, on buildings whose structural
construction type is that of wood frame, unless the property is
considered “soft story”
1or
“tuck-under” parking2,
in which case earthquake insurance will be required. The wood frame
may be “faced” with stucco, aluminum, vinyl, face brick, etc..
For zones 3 and 4,
Apartment Lender will also
provide apartment financing, without earthquake insurance, on buildings whose structural
construction type is classified as subterranean3,
provided the building(s) was constructed during or after 1980. This
type of construction is not to be confused with the aforementioned
“soft story” or “tuck-under” parking.
For zones 3 and 4, Apartment Lender will
make an apartment loan,
with earthquake insurance, on buildings that have exterior
structural walls built with masonry brick/ block, reinforced masonry
brick/ block, poured concrete, pre-cast concrete and buildings which
have a “soft story”, “ tuck-under” parking, or other open
construction where the upper level is supported by independent
columns, to the extent that more than 30.00% of the ground level is
open.
If it is determined that earthquake
insurance is a requirement of the loan, the borrower will have the
option of paying for a PML (Probable Maximum Loss) Assessment. The
PML Assessment Consultant will be an approved vendor of Apartment
Lender and
will only be engaged by Apartment Lender following receipt of the appropriate
fee from the borrower.
Following receipt and review of the
report by Apartment Lender, if it is determined that the probable maximum loss
(based on a 475 year event) is greater than 20.00%, earthquake
insurance will be required.
Regardless of the seismic zone
determination, if the property exhibits structural damage, Apartment
Lender
reserves the right to require an engineering assessment (which may
or may not include a PML) from an approved structural
engineer, at the borrower’s expense.
Environmental hazards take many forms
and are not limited only to the hazards summarized here. In
general, existing elements that usually bring on the need for a
professional environmental consultant, include but are not limited
to, items A-I of the aforementioned list.
1 Soft Story – refers to a building in
which one story, usually the ground floor, is particularly tall, or
more than 30.00% of the structure is built above a parking garage or
more than 50.00% of the structure is built above a retail store with
a large display window.
2 Tuck Under Parking – refers to a
building with more than 30.00% of the structure built above a
street-level parking garage. If tuck under parking is present, it is
classified as a soft-story condition.
3 Subterranean – refers to a structure
below the first floor with solid/shear wall construction, equating
to at least 30.00% of the perimeter. The solid/shear wall
construction must be composed of concrete.
U150.20 Definition Of Environmental Site Assessments
Banc-Series apartment loan program; ESAs
are performed to identify “recognized environmental conditions” at
a property. Recognized environmental conditions are defined as “the
presence or likely presence of any hazardous substances or petroleum
products on a property in conditions that indicate a historic,
current, or potential release into the structures, ground, or water
at the property.” This definition has been established by the
American Society of Testing and Materials (ASTM), an organization
that also has established the industry standard for performance of
ESAs. Standard recognized ESAs include Transaction Screen
Questionnaires, Phase I ESAs, and Phase II ESAs.
U150.21 Transaction Screen
Questionnaires
A Transaction Screen Questionnaire (“TSQ”)
is based on a 23-question questionnaire developed by ASTM. The
questionnaire follows the general outline of a Phase I ESA, but
requires less investigation; the questions are posed in a “yes/no”
format. As its name implies, the TSQ is most appropriate as an
initial “screening” of a property. Based on the results of the TSQ,
a decision can be made of whether to pursue additional investigation
(e.g., a Phase I ESA or Phase II ESA).
U150.22 Phase I ESAs/Phase II ESAs
A Phase I ESA includes historical
research to establish the site’s land use/ownership; a site walkover
to evaluate current environmental features and conditions of the
site; and a government records review to identify environmental
issues presented by the site or adjacent properties. A Phase II ESA
is performed to further investigate any recognized environmental
conditions identified in the Phase I. Phase II ESAs typically
include collection and analysis of soil and water samples for
environmental contaminants.
U150.23 Limited Phase I ESAs
If determined by
Apartment
Lender’s
Underwriting Department (“U/W”) that an ESA is required, Apartment
Lender may
require an ESA which combines some portions of the TSQ and the
Phase I ESA. This ESA will be known as a “Limited Phase I ESA”. More
specifically, this limited assessment will be encompass the TSQ,
with additional questions requiring: a historical investigation of
the subject site encompassing a 50 year period; a visual assessment
of the overall condition of interior and exterior lead based painted
areas (if the probability of it exists); and the friability of ACMs
(if the probability of it exists).
U150.30 Use Of An Approved
Environmental Assessment Firm
Apartment Lender requires that any and all
environmental studies to be performed by an approved firm.
Apartment Lender will internally maintain a list of approved firms.
U150.40
Reviewing The Limited Phase I ESA By Apartment Lender
Upon receipt of a completed report and
the subsequent review by Apartment Lender, Underwriting may require one of the
following in order to determine apartment loan eligibility:
A) Remediation as
outlined in the report, prior to or after the closing (which may
require a Repair/Modernization Letter or Repair/Modernization
Holdback
[See
Section U140.00]);
B) Further assessment testing,
i.e., a Phase I ESA and/or Phase II ESA, with subsequent review(s);
or
C) No further action.
U150.50 Criteria For
Apartment Loan Denial
There are circumstances where the
discovery of an environmental hazard may result in declination of
the loan. Some reasons for declining loans based on environmental
factors are:
A. The structure is built over
a sanitary landfill or other solid, hazardous or municipal waste
disposal site;
B. There are ACMs which cannot
be readily encapsulated (enclosed and isolated) or removed;
C. There is evidence of spills
or soil or ground water contamination on or around the subject
property;
D. Contamination of nearby
property is not being neutralized or removed;
E. A documented hazard cannot
be remedied/abated ("cleaned up") or otherwise resolved; and/or
F. The property is the subject
of governmental administrative action or litigation.
U160.00
APARTMENT PROPERTY AND LIABILITY
INSURANCE REQUIREMENTS
Apartment Lender can make reasonable changes in
these insurance requirements, before and after closing, to reflect
changes in or new knowledge of risks of loss to the property or from
liabilities that may arise out of the operation and use of the
property.
These are minimum requirements. Each
Borrower is encouraged to carry all insurances necessary to protect
its business, including carrying higher limits and broader coverage
than the minimums set out here.
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