Section 303

Key Principals, Principals, and Guarantors

303.01

Generally

Requirements

For every Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. , you must:

  • Identify and underwrite the SponsorSponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). , any GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , and all Key PrincipalsKey PrincipalsPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. and PrincipalsPrincipalsPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… of the BorrowerBorrowerPerson who is the obligor per the Note. .
  • Require the BorrowerBorrowerPerson who is the obligor per the Note. to disclose any foreign PersonsPersonsLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). whose direct or indirect ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. , in the aggregate, is 10% or greater. 
  • Ensure the GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty.
    • is not a foreign person or a foreign entity, and
    • either has an ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. or ensure that the GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. has adequate legal consideration to enter into the GuarantyGuarantyPayment Guaranty, Non-Recourse Guaranty, or other guaranty by a Guarantor for the Mortgage Loan. .

You must:

  • not deliver a Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. with
    • undisclosed PrincipalsPrincipalsPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,…, or 
    • a Blocked PersonBlocked PersonAny Person who is: on the FHFA SCP List; sanctioned or blocked by OFAC; or identified on: HUD's “Limited Denial of Participation, HUD Funding Disqualifications and Voluntary Abstentions List”; or General Services Administration’s “System for Award Management (SAM) exclusion list”… as a 
      • BorrowerBorrowerPerson who is the obligor per the Note. ,
      • GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. ,
      • Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , or
      • PrincipalPrincipalPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,…;
  • review all original, unredacted organizational documents, and any amendments and restatements;
  • comply with Part III, Chapter 16: Mezzanine Financing and Preferred Equity, Section 1602: Preferred Equity if the organizational documents provide any investor having a direct or indirect ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. with:
    • unequal rights to receive dividends, distributions, payments, or returns relative to other equity owners; or
    • the right to, directly or indirectly, force a
      • sale of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ,
      • transfer of the direct or indirect ownership interests in the BorrowerBorrowerPerson who is the obligor per the Note. , or
      • transfer of the Controlling InterestControlling InterestFor any entity, ownership or control of 50% or more of the ownership interests in the entity or the power or right to control or modify, directly or indirectly, the management and operations of the entity. in the BorrowerBorrowerPerson who is the obligor per the Note. , Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , or GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. ; and
  • identify:
    • as a Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). with control takeover rights per the Preferred EquityPreferred EquityA direct or indirect equity investment in an entity providing that investor with unequal rights to receive dividends, distributions, payments, or returns relative to other equity owners. Checklist (Form 6441); and
    • PrincipalsPrincipalsPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… based on the aggregate of all direct and indirect ownership interests in the BorrowerBorrowerPerson who is the obligor per the Note. held per the following table.

If the Borrower (or the Person owning an interest in the Borrower) is a...

Then a Principal is...

General Partnership or Joint Venture

any general partner or joint venturer.

Limited Partnership
  • all general partners;
  • any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns, directly or indirectly, an aggregate 25% or more limited partnership interest in the BorrowerBorrowerPerson who is the obligor per the Note. through any single limited partner; and
  • any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns, directly or indirectly, an aggregate 25% or more limited partnership interest in the BorrowerBorrowerPerson who is the obligor per the Note. through multiple limited partners.

Privately-Held Corporation

any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns 25% or more of the voting stock in the BorrowerBorrowerPerson who is the obligor per the Note. .

Limited Liability Company
  • all non-member managers or member-managers;
  • any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns, directly or indirectly, an aggregate 25% or more membership interest in the BorrowerBorrowerPerson who is the obligor per the Note. through any single member; and
  • any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns, directly or indirectly, an aggregate 25% or more membership interest in the BorrowerBorrowerPerson who is the obligor per the Note. through multiple members.
Co-Tenant Borrower any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who owns, directly or indirectly, a 25% or more ownership interest in each co-tenant.

Trust (other than a Land Trust)
  • the grantor (if the trust is a revocable trust or if the grantor or settlor has retained powers); 
  • any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who has a 25% or more beneficial interest in the trust; and
  • any trustee.

Land Trust

any PersonPersonLegal person, including an individual, estate, trust, corporation, partnership, limited liability company, financial institution, joint venture, association, or other organization or entity (whether governmental or private). who has

 

  • the power of direction, and
  • a 25% or more beneficial ownership interest in the land trust.

Guidance

For example:  BorrowerBorrowerPerson who is the obligor per the Note. ABC Apartments, LLC has the following ownership structure:

Equity Owner Role Direct Ownership % in Borrower Member Equity Owner and % Interest Aggregate Indirect Ownership % in Borrower
ABC Reality, LLC Managing Member 1% John Doe - 100% 1%
Member A, LLC Non-managing Member 19.80% Bob Smith - 50% 9.9%
Others - 50% 9.9%
Member B, LLC Non-managing Member 19.80% Bob Smith - 50% 9.9%
Others - 50% 9.9%
Member C, LLC Non-managing Member 19.80% Bob Smith - 20% 3.96%
XYZ Owner, LP - 80% 15.84%
Member D, LLC Non-managing Member 19.80% Bob Smith - 50% 9.9%
Sally White - 50% 9.9%
Member E, LLC Non-managing Member 19.80% Bob Smith - 50% 9.9%
Others - 50% 9.9%

In addition, the ownership interest of XYZ Owner, LP is:

Equity Owner Role Direct Ownership % in XYZ Owner, LP Aggregate Indirect Ownership % in Borrower
987 Investor, LLC General Partner 1% 0.16%
Sally White Limited Partner 99% 15.68%

You must identify and underwrite:

  • Bob Smith as a PrincipalPrincipalPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… of ABC Realty based on his aggregate 43.56% indirect ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. ; and
  • Sally White as a PrincipalPrincipalPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… of ABC Realty based on her aggregate 25.58% indirect ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. .

It is immaterial that:

  • neither Bob Smith nor Sally White has any direct ownership interest in the BorrowerBorrowerPerson who is the obligor per the Note. or the managing member of the BorrowerBorrowerPerson who is the obligor per the Note. ; and
  • none of the non-managing members of the BorrowerBorrowerPerson who is the obligor per the Note. owns greater than the 25% direct interest in the BorrowerBorrowerPerson who is the obligor per the Note. that would qualify for being identified as a PrincipalPrincipalPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,….
303.02

Entity Review

Guidance

When you review an entity, consider the following questions:

  • If it is an existing entity (e.g., a corporation, limited liability company, limited liability partnership, or other acceptable structure) that is not newly formed, does it comply with the requirements for a BorrowerBorrowerPerson who is the obligor per the Note. owning more than a single asset per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 302.01: Single-Asset Entity?
  • Is it a well-capitalized, stable, ongoing business that would be expected to:
    • Remain financially healthy?
    • Support the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ?
    • Meet all GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. requirements and obligations under the GuarantyGuarantyPayment Guaranty, Non-Recourse Guaranty, or other guaranty by a Guarantor for the Mortgage Loan. ?
    • Have assets and net worth that are significantly greater than what would be minimally acceptable for an individual Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. ?
303.03

Fund Review

Guidance

When you review a fund, consider the following questions:

  • What is the experience and performance history of the fund manager with similar funds?
  • Can the fund raise equity from financially substantial investors?
  • What is the performance of the fund?
  • What is the leverage level of the fund?
  • What is the net worth and liquidity of the fund?
  • What is the type and quality of
    • the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). and market,
    • other existing properties and markets, and
    • any potential additional properties and markets targeted by the fund pursuant to its agreements?

Additionally, you should review the organizational documents and private placement memorandum (if applicable) for the following information:

  • the fund’s expiration date;
  • any extension to the fund’s existence and conditions to approve that extension; and
  • the process for winding up the business affairs of the fund, including whether the fund is organized in a state that requires the orderly dissolution of investment funds, such as Delaware or Illinois.