Underwriting Reserves MF
What goes into calculating how many reserves/unit for multi family deals? I've seen past underwriting at 275 to 350 a unit so what makes it fluctuate?
Thanks!
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Generally new construction starts at $200/unit and gets trended from there. For older existing properties it comes down to what you see when you tour the property, what's your take on current property management and the current owner and feedback from AM.
Other things like appliance packages and fixtures go into the equation. Common area features like elevators, pool, gym, parking garage weigh in to it also. You also have to consider how the property competes with comps in its trade area. Its more of an art than a science.
Either the lender requires a certain amount per unit or it's typically based on property conditions/risk. Keep in mind if you cure deferred maintenance and put in heavy capex in your rehab, you can get away with a smaller reserve.
For decades appraisers, UW's and lenders have used roughly 2% of rents for reserves. I've seen it as less, but it is usually 2% here in SoCal. On my models and pro-formas I'm running 1.5%.
For cmbs, we underwrite $250/unit for MF and rating agencies underwrite $300/unit. But a point was raised at this years CREFC how from a lending perspective, we have underwritten reserves literally the same way for decades when there have obviously been an inflationary trend.
Why would you underwrite differently than how the rating agencies will look at the same loan?
Rating agencies take our UW and stress it. For example, when I underwrite a hotel, I will underwrite based on T-12 Occupancy, ADR, Revpar. Rating agencies will use 2014 or 2015's Occ, ADR, Revpar or if there is no 2014/2015 cash flows available, they will often stress T-12's Revpar's by 10%. Some other examples- I will underwrite 3% management fees for limited service hotels, Fitch will underwrite 4.5%. I will uw 4% FF&E, Fitch will underwrite 5% FF&E. I will uw $.20/SF replacement reserves for office, Fitch will underwrite $.25/SF.
I will underwrite a property the same way any other balance sheet lender would and our stips in the loan app are based on our UW. With CMBS, the only difference is that I go a step further and also do "a rating agency UW" and predict what their NCF will be before even issuing an app. This is not very hard as they have a pretty standard methodology, though sometimes they do surprise us and their reasoning will make no sense. Our deltas are often less than 5% and our last pool, we killed it as our delta was less than 2%. A part of my job is being as accurate as possible on what their NCF will be. The less delta there is with the the actual rating agency NCF and my prediction, the more money we make and also we can be as accurate as possible with our loan proceeds and we dont have to retrade. Let me know if you have any other questions particularly with cmbs.
second this. the Fannie and Freddie agencies benchmark is also $250/unit.
Take a look at pgs 20-24 and 42-49 of this:
https://mitcre.mit.edu/wp-content/uploads/2018/05/MITCREforRER_CREcapCo…</a">https://mitcre.mit.edu/wp-content/uploads/2018/05/MITCREforRER_CREcapCo…
Are 'reserves' just contingency money set aside to fix things? Sorry I'm a foreigner and probably use a different term (sinking fund?).
Pretty much. Money set aside monthly/annually that builds up over time to pay for unexpected expenses. Most likely repairs but it could be a high legal fee for the year, maybe vacancy projections were underestimated on a renovation...it's used for whatever needs it. It's the savings account for your building.
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