Fannie Mae has released Multifamily Mortgage Business Guide Update 14-02 announcing changes to the Multifamily Selling and Servicing Guide. The Guide changes affect primarily mortgage loans with either mezzanine financing or preferred equity, and properties with prior bond financing. The preferred equity provisions in the Guide Update come in response to the increasing use of preferred equity in borrower organizational structures. The Guide Update is effective for loans that are committed on and after March 31, 2014. The Update includes a number of new Fannie Mae form documents relating to preferred equity and a revised Multifamily Underwriting Certificate, Form 6460.Borrower. The new Underwriting Certificate must be used for all loans with a signed application dated on and after March 31, 2014.
Fannie Mae also issued new Multifamily Underwriting Standards to lenders, which are effective March 31, 2014. The Multifamily Underwriting Standards are proprietary and will not be publicly disseminated. The Underwriting Standards are provided by Fannie Mae only to Lender CEOs, Heads of Production and Chief Underwriters. Some of the more notable changes in the Guide Update include the following:
• The Multifamily Underwriting Certificate (Borrower), Form 6460.Borrower, has been revised for use in connection with the underwriting of all multifamily loan originations. The changes to the Form are designed primarily to solicit disclosure by the borrower of any preferred equity within the borrower’s organizational structure.
• Chapter 10 of the Multifamily Selling and Servicing Guide has been substantially revised to separately address preferred equity and mezzanine financing options that are available to borrowers. Fannie Mae will permit mezzanine financing only under certain circumstances and, for all practical purposes, lenders will need to coordinate with their Fannie Mae Deal Team when mezzanine financing is contemplated.
• Soft preferred equity that provides solely for the distribution of promote interests and priority waterfall distributions in the borrower’s organizational structure, and which do not benefit from any remedial or change of control rights for failure to receive a specified return, are not subject to the additional underwriting and loan documentation requirements of Chapter 10. A provision in a borrower’s organizational documents that triggers a requirement to sell a property because of the failure to pay a preferred return is not considered a remedial right for purposes of determining if the Chapter 10 standards will apply.
• Fannie Mae has published new form documents, which standardize the documentation of loans containing preferred equity that fall within the scope of Chapter 10 coverage. The most notable of the new documents is Fannie Mae Form 6015.PEG, Guaranty of Non-Recourse Obligations (Preferred Equity Guarantor), which will commonly be referred to as a “Springing Guaranty” of Non-Recourse Obligations.
• With respect to bond financing, a formal waiver request must be submitted to Fannie Mae through Fannie Mae’s Deal Management System for any loan where the proceeds are being used to retire a tax-exempt bond issuance.
The developments around preferred equity are particularly significant to Fannie Mae lenders and their borrowers.
Please contact us if you would like to discuss further. Our Multifamily Housing Finance contact list is attached. Troutman Sanders LLP has more than 600 lawyers, with a robust practice representing lenders financing multifamily housing projects nationwide.
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