How should you choose the right scope of work for your due diligence assessment if you haven’t yet decided on a lender?
I often field calls from clients who have recently gone under contract on a multi-family housing asset asking me to prepare a Phase I Environmental Site Assessment (ESA) and
Property Condition Report
(PCR) as part of their due diligence. My first question is always:
“Have you selected a lender?”
A typical response is:
“It’ll likely be a Fannie Mae or a Freddie Mac loan, but I’m not sure yet which way it’ll end up.”
It seems that most in the industry lump Fannie and Freddie together, and not surprisingly so: they are both government sponsored enterprises, you hear about them on the nightly news, and the names even sound similar. However, for all of their similarities, there are enough differences that if you select the wrong lender’s scope of work for your due diligence assessments, you could find yourself in trouble.
Same Same but Different
Here are some of the major differences between Fannie Mae and Freddie Mac scopes of work. On the
Phase I ESA
, beyond the typical
requirements, Freddie Mac requires
containing material (ACM) testing at almost all properties, whereas Fannie Mae’s requirements for these items are much more asset specific.
On the PCR (or
when using Fannie terminology), Freddie Mac has much more stringent unit inspection requirements than Fannie Mae and requires the preparation of the 1105 Form, which is a “Multifamily Property Condition Form” specific only to Freddie Mac.
For both the Phase I ESA and PCR Freddie Mac also has a more specific qualification requirement for the field observers, including specific educational, experience and third party training requirements. Beyond these major differences there is a litany of more nuanced items for which you’ll need to rely on your consultant to know and interpret.
(To learn more about the differences between Freddie Mac and Fannie Mae’s requirements, read my colleague
‘s excellent article titled
“Going Through a Phase: Knowledge of Fannie Mae’s and Freddie Mac’s environmental guidelines is key to multi-family deal completion”
So Which Report Should You Pick?
If you’re not sure who your lending agency will be, choosing an assessment conducted to the more stringent requirements of Freddie Mac is likely to be your best bet.
Starting out with Fannie Mae compliant reports and making last minute changes to make it compliant with Freddie Mac guidelines may require an assessor to go back in to the field to take additional samples and re-inspect the asset. However, starting out with a Freddie Mac compliant report and making a switch to Fannie Mae will allow required changes to the report to be addressed from someone’s desk, which will save time and money.
In general, preparing reports to Freddie Mac standards will also meet Fannie Mae’s requirements. So what is the drawback of preparing Freddie Mac compliant reports initially? Cost and potentially timing. Because of the more stringent requirements, the price of Freddie Mac compliant reports will likely be slightly higher than that of Fannie Mae compliant reports, but you’ll likely save time, money (in the long run) and heartburn by starting out with the more conservative Freddie Mac approach.