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; and
  • 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 the complete, unredacted organizational documents, and any amendments and restatements;
  • comply with Part III, Chapter 15: Mezzanine Financing; Preferred Equity and Structured Common Equity, Section 1502: Preferred Equity and Structured Common Equity, if the Borrower'sBorrower'sPerson who is the obligor per the Note. organizational structure includes any:
    • Structured Common EquityStructured Common EquityEquity interests in the Borrower's organizational structure (not including Preferred Equity) where the investor has: Forced Sale rights; or Control Takeover rights. ; 
    • Hard Pay Preferred EquityHard Pay Preferred EquityPreferred Equity structure in the Borrower including the Preferred Equity investor's right to a Control Takeover while the Mortgage Loan is outstanding if the Preferred Equity investor fails to receive returns required to be paid regardless of: available Excess Net Cash Flow; or whether the…;
    • Mandatory Pay Preferred EquityMandatory Pay Preferred EquityPreferred Equity structure in the Borrower including the Preferred Equity investor's right to a Forced Sale while the Mortgage Loan is outstanding if the Preferred Equity investor fails to receive returns that are required to be paid, regardless of: available Excess Net Cash Flow; or  …; or
    • Soft Pay Preferred EquitySoft Pay Preferred EquityPreferred Equity structure specifying: any returns due to the Preferred Equity investor are only required to the extent of available Excess Net Cash Flow for so long as the Mortgage Loan is outstanding; and if Excess Net Cash Flow is not available, any returns owed to the Preferred Equity….

Guidance

You should refer to the Equity Checklist (Form 6441) for additional information on BorrowerBorrowerPerson who is the obligor per the Note. ownership structures with:

  • Structured Common EquityStructured Common EquityEquity interests in the Borrower's organizational structure (not including Preferred Equity) where the investor has: Forced Sale rights; or Control Takeover rights. ;
  • Hard Pay Preferred EquityHard Pay Preferred EquityPreferred Equity structure in the Borrower including the Preferred Equity investor's right to a Control Takeover while the Mortgage Loan is outstanding if the Preferred Equity investor fails to receive returns required to be paid regardless of: available Excess Net Cash Flow; or whether the…;
  • Mandatory Pay Preferred EquityMandatory Pay Preferred EquityPreferred Equity structure in the Borrower including the Preferred Equity investor's right to a Forced Sale while the Mortgage Loan is outstanding if the Preferred Equity investor fails to receive returns that are required to be paid, regardless of: available Excess Net Cash Flow; or  …; and
  • Soft Pay Preferred EquitySoft Pay Preferred EquityPreferred Equity structure specifying: any returns due to the Preferred Equity investor are only required to the extent of available Excess Net Cash Flow for so long as the Mortgage Loan is outstanding; and if Excess Net Cash Flow is not available, any returns owed to the Preferred Equity….

Requirements

You must identify:

  • 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,… 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). required per the Equity 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 Borrower (other than a Land Trust)
  • the grantor (if the trust is a revocable trust or if the grantor or settlor has retained powers); 
  • any trustee; 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 has a 25% or more beneficial interest in the trust.
Trust owning, directly or indirectly, an aggregate 25% or more interest in the Borrower
  • the grantor (if the trust is a revocable trust or if the grantor or settlor has retained powers); 
  • any trustee; 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 an aggregate 25% or more direct or indirect interest in the BorrowerBorrowerPerson who is the obligor per the Note. , including their beneficial ownership in the trust.

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:

  • 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.