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FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection”

FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection”. Robert Lefenfeld Managing Principal Real Property Research Group, Inc. Southeast Mortgage Advisory Council Hilton Head, South Carolina May 29 th 2013. Market Study Objectives. Market Study Criteria.

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FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection”

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  1. FHA Multifamily Underwriting Training“How to Avoid a HUD Market Rejection” Robert Lefenfeld Managing Principal Real Property Research Group, Inc. Southeast Mortgage Advisory Council Hilton Head, South Carolina May 29th 2013

  2. Market Study Objectives • Market Study Criteria National Council of Housing Market Analysts (NCHMA) WWW.Housingonline.org MAP Guidelines

  3. Market Study Objectives Role of Market Analyst and Appraiser in the MAP Process Market Analyst evaluates balance of supply and demand for rental housing Appraiser is responsible for income (rent) and (operating) expenses. Based on Supply/Demand and income/expenses, Market Analyst is responsible for Absorption. 7.5.A “The purpose of the market study is to assure that there is enough sustainable demand for additional units without adversely impacting the existing supply, so as to maintain a balanced overall market”

  4. Market Study Objectives Elements of Market Analysis Components of Market Study: • Site Analysis and Market Area • Economic Context • Demographic Context • Supply Context • Findings and Conclusions: • Balance of Supply and Demand • Affordability • Product Positioning in terms of offering and pricing

  5. Site and Market Area Site Analysis Questions? • What is setting of site? • What is characteristics of general area? • What are transportation linkages? • What improvements are anticipated in area? • How is the area served by amenities? • Schools? • Perceptions of Crime • Considerations for non-residential land uses? • 7.5.C.4 Project location in terms of neighborhood and any other locational considerations.

  6. Site and Market Area Conducting a Site Analysis • Is the site suitable for development as rental housing? • Surrounding land uses compatible with housing? • Neighborhood adequately served by facilities and services? • Is it accessible by car and public transportation? • Planned changes in the area that may compromise its suitability in the future?

  7. Site and Market Area Amenity Analysis should cover: • Convenience Shopping • Comparison Shopping • Recreation • Entertainment • Medical • Mass Transit • Schools • Library • Public Transportation (Bus, subway)

  8. Site and Market Area Future Improvements • Transportation - State Consolidated Transportation Programs • Other Improvements – County/City Capital Improvement Budget • Proposed public transportation service Important to understand how community is developing; Impact on Household Growth.

  9. Site and Market Area Market Area • A housing market area is the contiguous area within which households compete for available housing, and • within which your project will compete for qualified renters. • 7.5.D Housing Market Area is the geographic area in which units with similar characteristics are in equal competition

  10. Site and Market Area Impact of Market Area Definition • Population and Household Counts • General Demographics • Demand Analysis • Supply Analysis • Competitive Stock • Attainable Rents

  11. Site and Market Area Factors used to define a market area: • Location of Competitive Properties • Accessibility • Natural Boundaries • Housing Product Characteristics • Market Perceptions • Commuting Patterns • Target Market • Jurisdictional Boundaries • Local Agency Service Boundaries • Non-geographic Factors • Data availability

  12. Site and Market Area Is this a good market area?

  13. Site and Market Area How about this market area?

  14. Site and Market Area Does this seem reasonable?

  15. Site and Market Area Secondary Market Areas • Less relevant to rental than retail • Secondary source of buyers/renters • Typically assumed as bonus demand over and above demand derived by Primary Market Area • Often a comparison geography to the Primary Market Area

  16. Economic Context Environment in which project will be operating • At Place Employment Trends • Labor Force and Unemployment Rates • Major Employers – Contractions or Expansions • Commuting Patterns • 7.5.E.1 A discussion of current economic conditions and employment characteristics

  17. Economic Context Define the Local Economy • Larger than the market area • Jurisdictions with functional integration • Metropolitan Areas • Counties • Cities

  18. Economic Context UnemploymentRates

  19. Economic Context At Place Employment Quarterly Census of Employment and Wages (QCEW) • Data is from the employer reporting of employees covered under the unemployment insurance program. • It counts only filled jobs, whether full or part-time, temporary or permanent, by place of work.  • Individuals holding more than one job are counted for each job. • Major exclusions from UI coverage include self-employed workers, most agricultural workers on small farms, all members of the Armed Forces, elected officials in most states, most employees of railroads, some domestic workers, most student workers at schools, and employees of certain small nonprofit organizations.

  20. Economic Context Change In At Place Employment

  21. Economic Context At-Place Employment by Sector

  22. Economic Context Long Term Change in Employment by Sector

  23. Economic Context Short Term Change in Employment by Sector

  24. Economic Context Economic Forecast Location of Major Employers

  25. Demographic Context Demographic Context • Overall Trends • Projection Process • Demographic Analysis • 7.5.E.2 A thorough discussion of past and anticipated future trends in the demographic character of the housing market.

  26. Demographic Context Baby Boom Generation

  27. Demographic Context Trends in U.S. Rentership Rate

  28. Demographic Context Predictions, Forecasts, Prophecy • A PREDICTION is a foretelling of what one believes will happen. • A PROPHECY is a PREDICTION under the influence of divine guidance. • A FORECAST is an analytical relationship based on assumptions and political decisions that will influence the future growth of an area or region.

  29. Demographic Context

  30. Demographic Context Influences and Assumptions that Guide Projection Process

  31. Demographic Context Projection Sources • Projections   • Metropolitan Planning Organizations www.narc.org • National vendors (Nielsen, ESRI) • Local Governments • State Data Centers • U.S. Census Bureau • C-40 report • 2010 Census • American Community Survey

  32. Demographic Context Population and Household Trends

  33. Demographic Context Demographic Characteristics • Family type and proportion of one-person households • Owner / Renter Distribution • Age Distribution of Population • Permanent Renters • Income Distribution by Tenure (Owners vs. Renters)

  34. Competitive Context • Housing Stock • Analysis of Rental Supply • Inventory Characteristics • Rent and Vacancy Trends • Construction and Absorption Levels • Pipeline • 7.5.F Market study must include a comprehensive description of the current conditions of the rent market

  35. Competitive Context Is rental market tight or soft? • Evaluate stabilized vacancy rate and total vacancy rate • Are concessions being offered? Why? • Is the market overbuilt at one price position? • Are some projects poorly positioned in the market (i.e. overreaching in rents)? • Has there been a downturn in employment?

  36. Competitive Context Rental Summary

  37. Competitive Context Detailed Rental Information

  38. Competitive Context Rental Price Position

  39. Competitive Context Net Rent and Size Market Analysis should comment on reasonableness of rent. Not necessary to do rent grid.

  40. Competitive Context Pipeline • Other rental projects planned or under construction. • Local building/planning department(s) • Tax Credit Allocations • Regional Surveys • 7.5.G The market study must include separate estimates of the number of rental units currently under construction and number in planning during specified forecast period.

  41. Findings and Conclusions Supply and Demand Key Questions • Oversupply of Pipeline Units? • Will the market area need any additional units by the time the proposed project would be ready for occupancy? • Enough income-qualified consumers (Capture Rate)? • Potential oversupply of LIHTC units (Penetration Rate)? • Need for more affordable units to accommodate growth and alleviate substandard housing conditions? • 7.5.H Demand Estimate and Study

  42. Findings and Conclusions Net Demand • Demand • Household Growth • Demolitions • % of Renter Households • Supply • Pipeline • Subject • Balance of Demand and Supply • 7.5.H.1 Estimate of demand must be based on a calculation of incremental demand…

  43. Findings and Conclusions NetDemand

  44. Findings and Conclusions Components of Inventory Change

  45. Findings and Conclusions Varied Rentership Rates

  46. Findings and Conclusions Varied Rentership Rates

  47. Findings and Conclusions Varied Rentership Rates

  48. Findings and Conclusions Affordability Capture Rates - Definitions • Capture Rate “The percentage of age, size, and income qualified renter Households in the Primary Market Area that the property must capture to achieve the Stabilized Level of Occupancy. Funding agencies may require the use of other factors in the calculation of the capture rate.” • Penetration Rate “The percentage of age and income qualified renter Households in the Primary Market Area that live in all existing and proposed properties (which are competitively priced to the subject) that must be captured to achieve the Stabilized Level of Occupancy.” • 7.5.H.3 demand estimate should identify the “effective demand pool with sufficient incomes…

  49. Findings and Conclusions Interpreting Capture Rates 5% Capture Rate (need to get 1 in every 20 eligible households) 33% Capture Rate (need to get 1 in every 3 eligible households) An acceptable capture rate only indicates sufficient demand to support the proposed number of units at the proposed income levels. It does not include an evaluation of the subject development versus the existing rental stock. Income-qualified households

  50. Findings and Conclusions Key Assumptions and Threshold Measurements • The appropriate income range for residents to qualify for the project must be established • Maximum allowable income for the subject project is based on the household income necessary to qualify for the largest unit offered at the site. Real (Tax Credit) or Artificial. • Minimum income required to live at the property is based on the lowest gross rent (including all utilities) offered at the subject site. • Accepted ratio of rent to income is 35% for families and 40% for seniors. Sometimes 30% is minimum. • May vary by state or situation

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