Chapter 15

Mezzanine Financing; Preferred Equity and Structured Common Equity

Section 1501

Mezzanine Financing
1501.01

Description

Requirements

A Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. is permitted only if

  • the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. is originated by an approved DUS Lender DUS LenderLender approved to Deliver loans under the Delegated Underwriting and Servicing program. Affiliate AffiliateWhen referring to an affiliate of a Lender, any other Person or entity that Controls, is Controlled by, or is under common Control with, the Lender. When referring to an affiliate of a Borrower or Key Principal: any Person that owns any direct ownership interest in Borrower or Key… (DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. ), or
  • Fannie Mae Fannie MaeThis Glossary term Is Created Using Automation in Lower Environments and is used for testing purposes only!! approves the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. from another source (non-DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. ) on a case-by-case basis. 

Before underwriting non-DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. , you must contact the Deal Team Deal TeamTeam responsible for reviewing Pre-Review Mortgage Loans, waivers, etc. .

1501.01A

Eligible Mortgage Loans

Requirements

Mortgage Loans Mortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. must:

  • be newly originated;
  • have an original principal balance of at least
    • $10 million, for DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. , or
    • $50 million, for non-DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. ;
  • be fixed rate; and
  • be flagged for MBS MBSMortgage-Backed Security additional disclosure per  Form 4098 .
1501.01B

Eligible Terms

Requirements

Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. must:

  • have a fixed rate or fixed mezzanine rate of return without escalations;
  • not have a maturity date, redemption date, trigger date, or require repayment of the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. during the term of the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 ; and
  • have a minimum $1 million origination balance.
1501.01C

Loss Sharing

Requirements

Loss sharing is required on all Mortgage Loans Mortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .

1501.01D

Lender's Loan Application

Requirements

Your loan application form must:

  • require the Borrower BorrowerPerson who is the obligor per the Note. to indicate whether it has or intends to obtain Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. as part of its organizational or capital structure; and
  • inform the Borrower BorrowerPerson who is the obligor per the Note. that you may delay approval or revoke any prior approval if the Borrower BorrowerPerson who is the obligor per the Note. changes its intention to obtain Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .
1501.02

Underwriting

Requirements

You must comply with the following table.

Topic

Requirements

Income Projections
  • Provide support for the income projections used to determine the aggregate amount of the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 and Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .
  • Demonstrate that the local economics are sufficient and sustainable to support both loans.

Underwritten NCF

Use the same Underwritten NCF NCFAt underwriting or for any specified period, the amount calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. to determine the loan amount for

 

  • the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 , and
  • the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .

Refinance Analysis

Prepare a refinance analysis that:

 

  • incorporates the terms of both the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 and the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. ;
  • demonstrates that the Borrower BorrowerPerson who is the obligor per the Note. will
    • maintain a positive equity position in the Property PropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). throughout the term of the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 , or
    • have some other incentive (e.g., continuing cash flow) to remain committed to the Property PropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). and its successful operation; and
  • concludes that there will be sufficient cash flow, NCF NCFAt underwriting or for any specified period, the amount calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis and the applicable products and features in Part III. growth, and residual value to pay off the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 and the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. at maturity (as fully extended, if applicable).

Experience

Ensure that the Sponsor SponsorPrincipal equity owner and/or primary decision maker of the Borrower (often the Key Principal or the Person Controlling the Key Principal). and each Key Principal Key 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. have sufficient net worth, liquidity, and experience with the Property PropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). type and market to justify the origination of the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 and the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .

 

If upgrades or rehabilitation are being financed by the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. , then ensure that the Borrower BorrowerPerson who is the obligor per the Note. , each Key Principal Key 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. , and the mezzanine borrower also have

 

  • sufficient experience managing the scope of the proposed rehabilitation, and
  • strong property management experience in the local market.

Mezzanine Borrower Structure

Ensure the mezzanine borrower is

 

  • a newly-formed, special purpose, bankruptcy-remote limited liability company or limited partnership,
  • the sole owner of the Borrower BorrowerPerson who is the obligor per the Note. , and
  • wholly-owned by the Principals PrincipalsPerson 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 Borrower BorrowerPerson who is the obligor per the Note. .

Appraisal

If the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. is funding rehabilitation, ensure the Appraisal AppraisalWritten statement independently and impartially prepared by a qualified Appraiser stating an opinion of the Property's market value as of a specific date, and supported by the presentation and analysis of relevant market information. states the Property’s Property’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). “as is” and “as completed” values.

Third-Party Reports

For Mortgage Loans Mortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. , include in the underwriting submission, on behalf of your DL DLLender approved to Deliver loans under the Delegated Underwriting and Servicing program. Mezzanine Affiliate AffiliateWhen referring to an affiliate of a Lender, any other Person or entity that Controls, is Controlled by, or is under common Control with, the Lender. When referring to an affiliate of a Borrower or Key Principal: any Person that owns any direct ownership interest in Borrower or Key…  any:

 

  • internal or third-party inspection reports;
  • PCAs PCAsAssessment of the Property's physical condition and historical operation. ; and
  • architect’s or engineer’s reports (or other similar reports) related to the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .

Guidance

You may require a Completion Guaranty ( Form 6018 ). 

The DUS Lender Mezzanine Affiliate may also require a completion guaranty from the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. borrower.

1501.03

Submission
1501.03A

Materials

Operating Procedures

You must submit the following in DUS Gateway DUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records.  when you submit the Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 underwriting:

  • the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. sizing model;
  • a sources and uses of funds reflecting the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. proceeds;
  • any approvals associated with the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. ; and
  • for any Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. that finances rehabilitation:
    • a description of the proposed rehabilitation;
    • the approved rehabilitation budget;
    • the rehabilitation timeline; and
    • the construction or rehabilitation documents.
1501.03B

Data

Operating Procedures

To obtain a Commitment CommitmentContractual agreement between you and Fannie Mae where Fannie Mae agrees to buy a Mortgage Loan at a future date in exchange for an MBS, or at a specific price for a Cash Mortgage Loan, and you agree to Deliver that Mortgage Loan. , you must complete the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. fields in DUS Gateway DUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. .

1501.04

Intercreditor Agreement

Requirements

For each Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. , you and the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. lender must execute an intercreditor agreement approved by Fannie Mae Fannie MaeThis Glossary term Is Created Using Automation in Lower Environments and is used for testing purposes only!! .

Operating Procedures

The Borrower BorrowerPerson who is the obligor per the Note. must pay the legal fees if Fannie Mae Fannie MaeThis Glossary term Is Created Using Automation in Lower Environments and is used for testing purposes only!! engages outside counsel to review any intercreditor agreements.  These fees are non-refundable, and you must pay the counsel retainer when you submit the underwriting. 

Guidance

You may charge the Borrower BorrowerPerson who is the obligor per the Note. your own legal and due diligence fees.

1501.05

Servicing

Operating Procedures

You must service, report, and remit on the DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. per Part V.

In all cases, you, as servicer of the DLA Mezzanine Financing DLA Mezzanine FinancingMezzanine Financing provided by an approved mezzanine lending affiliate of a DUS Lender. , must promptly notify Fannie Mae Fannie MaeThis Glossary term Is Created Using Automation in Lower Environments and is used for testing purposes only!! of any default on the Mezzanine Financing Mezzanine FinancingSubordinate debt financing provided to a direct or indirect owner of a Borrower that is secured by a pledge of the direct or indirect equity interest in the Borrower held by the owner, and not by a Lien on the Property. .

Section 1502

Preferred Equity and Structured Common Equity

Requirements

For any Mortgage Loan Mortgage 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. Test Notes-SV Test Again Sub-bullet test1 Sub-bullet test2 with Preferred Equity Preferred EquityA direct or indirect investment in the Borrower, for which the organizational documents provide that equity investor with: an asset management fee or other fee before dividends, distributions, payments, or returns are paid to the investors; or preferred or unequal rights to receive… or Structured Common Equity Structured Common EquityEquity interests in the Borrower's organizational structure (not including Preferred Equity) where the investor has: Forced Sale rights; or Control Takeover rights. in the Borrower’s Borrower’sPerson who is the obligor per the Note. ownership structure, you must comply with the

Guidance

This Section does not apply to any Borrower BorrowerPerson who is the obligor per the Note. organizational or capital structures relating solely to the allocation of LIHTCs LIHTCsFederal program offering tax credits to owners of eligible properties that contain low-income occupants and rent restrictions. .

Operating Procedures

You must submit:

  • a completed Equity Checklist ( Form 6441 ) using:
    • DUS Gateway DUS GatewayMultifamily pre-acquisition system, or any successor systems, recording deal registration, Pre-Review and/or waiver tracking, Mortgage Loan Commitments, and decision records. if the Borrower’s Borrower’sPerson who is the obligor per the Note. ownership structure includes any Preferred Equity Preferred EquityA direct or indirect investment in the Borrower, for which the organizational documents provide that equity investor with: an asset management fee or other fee before dividends, distributions, payments, or returns are paid to the investors; or preferred or unequal rights to receive… or Structured Common Equity Structured Common EquityEquity interests in the Borrower's organizational structure (not including Preferred Equity) where the investor has: Forced Sale rights; or Control Takeover rights. requiring Pre-Review Pre-ReviewRequirement that you obtain Fannie Mae’s approval before you Rate Lock a Mortgage Loan. per  Form 6441 ; or
    • DUS DUSDelegated Underwriting and Servicing DocWay DocWayBusiness-to-business electronic documentation delivery application, or any successor system. with the Mortgage Loan Delivery Package Mortgage Loan Delivery PackageLoan Documents and underwriting material required in connection with the Delivery of a Mortgage Loan. in Folder II if the Borrower’s Borrower’sPerson who is the obligor per the Note. ownership structure does not include Preferred Equity Preferred EquityA direct or indirect investment in the Borrower, for which the organizational documents provide that equity investor with: an asset management fee or other fee before dividends, distributions, payments, or returns are paid to the investors; or preferred or unequal rights to receive… or Structured Common Equity Structured Common EquityEquity interests in the Borrower's organizational structure (not including Preferred Equity) where the investor has: Forced Sale rights; or Control Takeover rights. requiring Pre-Review Pre-ReviewRequirement that you obtain Fannie Mae’s approval before you Rate Lock a Mortgage Loan. per  Form 6441 ; and
  • Multifamily Underwriting Certificate Multifamily Underwriting CertificateMultifamily Underwriting Certificate (Form 6460 series) , and/or other agreement approved by Fannie Mae that provides underwriting information for a Mortgage Loan. (Key Principal Key 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. /Principal PrincipalPerson 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,… ) ( Form 6460.Key Principal ) for all Preferred Equity Preferred EquityA direct or indirect investment in the Borrower, for which the organizational documents provide that equity investor with: an asset management fee or other fee before dividends, distributions, payments, or returns are paid to the investors; or preferred or unequal rights to receive… investors identified as Principals PrincipalsPerson 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,… with "Additional Principal Due Diligence Requirements" per  Form 6441 , with the Mortgage Loan Delivery Package Mortgage Loan Delivery PackageLoan Documents and underwriting material required in connection with the Delivery of a Mortgage Loan. in Folder II in DUS DUSDelegated Underwriting and Servicing DocWay DocWayBusiness-to-business electronic documentation delivery application, or any successor system. .