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FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection” Robert Lefenfeld Managing Principal Real Property Research Group, Inc. Southeast.

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Presentation on theme: "FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection” Robert Lefenfeld Managing Principal Real Property Research Group, Inc. Southeast."— Presentation transcript:

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 29 th 2013

2 Market Study Criteria National Council of Housing Market Analysts (NCHMA) MAP Guidelines Market Study Objectives

3 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” Market Study Objectives

4 Elements of Market Analysis Market Study Objectives 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 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. Site and Market Area

6 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? Site and Market Area

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

8 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. Site and Market Area

9  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 Market Area Site and Market Area

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

11 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 Site and Market Area

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

13 How about this market area? Site and Market Area

14 Does this seem reasonable? Site and Market Area

15 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 Site and Market Area

16  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 Economic Context Environment in which project will be operating

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

18 Unemployment Rates Economic Context

19 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. Economic Context

20 Change In At Place Employment Economic Context

21 At-Place Employment by Sector Economic Context

22 Long Term Change in Employment by Sector Economic Context

23 Short Term Change in Employment by Sector Economic Context

24 Economic Forecast Major Employers Location; Size of Workforce; Prospects for future growth or reduction Economic Expansions Any planned expansions in the Market; i.e., BRAC, New Plants. Is household growth increasing demand for services Economic Disruptions Major Layoffs or Closing; Vulnerable Sectors of Economy Wage Trends Are wages increasing or decreasing? Location of Major Employers Economic Context

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

26 Baby Boom Generation Demographic Context

27 Trends in U.S. Rentership Rate Demographic Context

28 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. Demographic Context


30 Influences and Assumptions that Guide Projection Process Births and Deaths – Natural IncreaseMigration – Internal and ExternalNational Shift to Service Economy – Pre Great RecessionNatural Shift to ?? Economy – Post Recession – Only Meds, Eds and Feds??Older Labor Force – Semi RetirementEffect of Baby Boom, Semi-Retirement; Growing Number of Senior CitizansBaby Bust, Echo Boom - Decline in Household SizeBusiness Relocations and DeathsLocal Govt. Development Policy - Federal and State Economic PolicyLocal Govt. Development Patterns Demographic Context

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

32 Population and Household Trends Demographic Context

33 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) Demographic Context

34 Housing Stock Analysis of Rental Supply  Inventory Characteristics  Rent and Vacancy Trends  Construction and Absorption Levels Pipeline Competitive Context  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 Rental Summary Competitive Context

37 Detailed Rental Information Competitive Context

38 Rental Price Position Competitive Context

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

40 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. Competitive Context

41 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 Findings and Conclusions

42 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… Findings and Conclusions

43 Net Demand Findings and Conclusions

44 Components of Inventory Change Findings and Conclusions

45 Varied Rentership Rates

46 Findings and Conclusions

47 Varied Rentership Rates

48 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… Findings and Conclusions

49 Interpreting Capture Rates Income-qualified households 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. Findings and Conclusions

50 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 Findings and Conclusions

51 Tax Credit Rents and Incomes Findings and Conclusions

52 Affordability @ 35% Rent Burden Findings and Conclusions

53 Affordability @ 30% Rent Burden Findings and Conclusions

54 Affordability @ 120% AMI Findings and Conclusions

55 Capture and Penetration Rate Findings and Conclusions

56 Calculating Capture Rates & Demand Analysis There are no right or wrong capture rates Capture/penetration rates must be considered within context of market In rural markets, be conservative; “don’t want to be wrong forever” Critical demand for several units does not mean sufficient demand Senior markets may consider support from homeowners Findings and Conclusions

57 Rural MarketsDanger Zone Best Opportunity Urban Markets Penetration Rate Capture Rate Interpreting Capture & Penetration Rates Findings and Conclusions

58 Other Factors Impacting Demand Location —Surrounding land uses may attract or prevent renters from moving to the site Proposed Rents —Capture rates estimate the number of households able to pay the proposed rents, not the willingness to do so Housing Markets —Rental markets with high vacancy rates may reflect an oversupply of available housing. The overall health of the rental market may impact the ability of a proposed development to reach stabilization despite low capture rates Findings and Conclusions

59 Final Conclusions  Findings  Evaluation of Site  Evaluation of Economic Trends  Evaluation of Demographic Trends  Evaluation of Competitive Environment  Net Demand  Product Evaluation  Unit Distribution  Unit Sizes  Features and Amenities  Price Position  (Appraiser does specific grids)  Affordability Findings and Conclusions

60 Projected Absorption Levels  Historic Pattern of New Units Absorbed Annually  Performance of Recently Completed Projects  Adjust Estimate to Reflect Market Conditions  Economic and Demographic Forecasts  Units in Pipeline  Occupancy Levels  7.5.H.4 Study should also include an estimate of absorption period needed for the project to reach sustaining occupancy… Findings and Conclusions

61 Impact on Existing Market Will the subject’s success have an adverse impact on the competitive market. Penetration Analysis Clustering of existing product at same price point. Introduction of new product at same price point.  7.5.H.5 the market study must include an assessment of the impact the proposed project would have on existing rental developments Findings and Conclusions

62 Questions? Robert Lefenfeld Managing Principal Real Property Research Group, Inc. 410.772.1004

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