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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2014

Keeping Multifamily in Check

New physical-needs assessment guidelines from Fannie Mae measure the health of older properties

Keeping Multifamily in Check

The two giants of government-sponsored-enterprise multifamily lending, Freddie Mac and Fannie Mae, along with the U.S. Department of Housing and Urban Development (HUD), are in the process of updating the guidelines used by their network of lenders to assess the physical condition of multifamily properties.

This is not surprising when you consider a certain statistic from the Harvard Joint Center for Housing Studies: The average age of the U.S. multifamily housing stock as of 2012 is 38 years and counting. Thus, property-condition assessment needs are very different now than they were when Fannie Mae, Freddie Mac and HUD last defined them back in the 1990s. Add in the fact that the commercial real estate market is still recovering from the financial crisis, and the resulting pressure to get a full and accurate read on the risk of multifamily assets has intensified.

The latest of these three lending sources to update their requirements is Fannie Mae, with new instructions for performing multifamily physical-needs assessments (PNAs) that took effect this past February. Multifamily continues to be a favored asset class, so thorough study by qualified property-condition assessment firms is important to avoid lending on a risky asset.

For commercial mortgage originators, these new requirements signal an important move toward better quality and more consistency in reports designed to flag any physical problems that exist in multifamily  properties. To ensure a seamless loan-origination process, it is critical to be aware of Fannie Mae’s assessment requirements and to work with property evaluators who meet the new professional qualifications. More specifically, it’s important to understand who must follow the guidelines, what’s changed in them and why Fannie Mae implemented these tighter standards.


Since the new guidelines went into effect this past February, Fannie Mae’s Delegated Underwriting and Servicing (DUS) lenders and their vendors have been required to follow the Multifamily Selling and Servicing Guide when conducting PNAs on multifamily loans.

The PNA is an underwriting tool that provides information necessary for the lender and Fannie Mae to assess the overall physical condition and risk of a multifamily property when a mortgage loan is to be financed by the lender and purchased by Fannie Mae. The PNA provides:

  • An assessment of the property’s current physical condition.
  • For each of the property’s systems and components, an estimate of the effective age and the remaining useful life.
  • An evaluation of past and current operating and maintenance practices at the property, as well as suggestions for future operating and maintenance practices.
  • An identification of current and future physical needs, including all significant capital replacement costs and maintenance costs required at the property during the mortgage loan term.

The new instructions from Fannie Mae provide directions for the property evaluator conducting the PNA and are considered minimum requirements. Lenders approved to deliver loans under Fannie’s DUS guidelines may also be subject to additional requirements. Since the PNA update was first published in October 2013, more than 500 lenders and property evaluators have already been trained on the new requirements.


A principal element of the updated PNA is the requirement that the property evaluator visit the property. The site visit is a visual inspection needed to make a reasonable determination of the property’s overall functionality and sustainability.

During this walkthrough, the evaluator observes the property’s systems and components to identify deferred-maintenance items, physical needs, and any unusual or unique features. The resulting PNA report includes a description and condition of the property systems and components, including recommendations for repairs, replacement, maintenance, estimated remaining useful life, and the scope of work for repair or replacement, if recommended.

The PNA update includes several new forms that reflect an effort by Fannie Mae to establish minimum evaluator qualifications, standardize report formats and improve assessment quality and consistency. The bar has been raised for property evaluators and report reviewers because Fannie Mae seeks to reduce past problems that resulted from too many poor-quality assessment reports. PNA reports must now be reviewed and certified by a professional engineer, a licensed or registered architect in good standing, or an individual with appropriate experience and certifications in the construction field.

It is worth noting that the educational requirements in Fannie Mae’s new guidelines are now in line with those of Freddie Mac. Companies that provide PNAs — also known by a more generic term, “property-condition  assessments” — for Fannie Mae projects now have a higher bar to reach, and DUS lenders are more proactively informing their borrowers of what to expect from their PNA professionals.

Another change is that PNA reports now have a six-month shelf life versus the previous 12 months. Fannie Mae is now aligned with HUD, ASTM International and the general industry in terms of PNA-report life spans. Because of this change, six months after a PNA report is prepared, a new site visit by the property evaluator is required. At the lender’s discretion, however, the life of the PNA report may be extended to 12 months, provided that the lender visits the property to confirm that there have been no adverse changes.

An interesting and timely element of the new guidelines relates to the energy efficiency of multifamily properties. PNA reports must provide an energy benchmark for any multifamily properties in a state or municipality where legislation requires that a property be benchmarked. As of this past December, this list included New York, Seattle, Boston, Washington, D.C., and Chicago.

The energy benchmark is a numeric metric measuring the combined energy consumption by the property’s systems and equipment for the same 12-month period as used for the reporting of the property’s annual financial information. The metric is calculated using Energy Star’s Portfolio Manager. This benchmark score is the property’s Energy Star rating on a 1 to 100 scale. If the energy benchmark score is below 50, the evaluator’s PNA Report should attempt to identify causes for the property’s low performance and suggest remediation opportunities for improvement.

Fannie Mae also tightened its underwriting standards and is paying more attention to life-cycle costs. Sustainability for multifamily properties older than 15 years is expected to carry reserves required for component replacement throughout industry-recognized life cycles. This is another area of revision that aligns Fannie Mae with the rest of the industry, including HUD and the U.S. Department of Agriculture’s underwriting standards. This change is likely to result in higher annual deposits to reserve accounts for older properties. The biggest impact thus far has been an increase in reserves for loans longer than 10 years.


The broad range of Fannie Mae’s investment in the U.S. multifamily sector was a major reason for the changes to and scope of the organization’s PNA guidelines. Fannie Mae provided $28.8 billion in multifamily financing in 2013 to more than half a million multifamily units. Some of the biggest names in multifamily lending participate in Fannie Mae’s DUS program, including Wells Fargo & Co., CBRE Group, Beech Street Network and Berkadia Commercial Mortgage LLC, just to name a few.

The new PNA guidelines are the result of the ongoing review of loan-delivery requirements and guidance by Fannie Mae to ensure that it is maintaining high loan standards. Improved guidance on property conditions and more stringent minimum requirements provide a more thorough understanding of the physical condition of the properties financed by multifamily mortgage loans purchased by the enterprise.

Given the aging U.S. multifamily housing stock, this move toward an improved understanding of property conditions is intended to help maintain safe and affordable housing in the multifamily sector. The PNA guidelines are likely to remain fluid and are subject to additional changes. Fannie Mae has solicited feedback from its network of lenders, property evaluators and owners, and it expects to make appropriate updates to the guidelines as necessary. Mortgage originators would be wise to familiarize themselves with the new guidelines and to stay abreast of them as they evolve in the coming years. 

Tammy Romero, a credit risk analyst III at Fannie Mae, and Greg Bailey, director, architectural and engineering technical operations at EMG Corp., contributed to this article.


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