Recently, Multifamily Guide Update 13-09 was released announcing changes to the Fannie Mae multifamily Selling and Servicing Guide.  In particular, the physical needs assessment requirements for all multifamily loans were changed, which will significantly change the way in which Physical Needs Assessment (PNA) reports are written.  The changes to the guide, scheduled to go into effect on February 3rd, 2014, are extensive and have been vetted through a nine-project pilot program.  Fannie Mae will be holding Lender training at their headquarters Tuesday, November 12, 2013. Training for Vendors will be held two days later.

As an indication of the increased complexity of the requirements, the previous Section of the Fannie Mae Selling and Servicing Guide regulating PNA reports (Section 316) was four pages long.  The new guidelines released last Thursday is 16 pages long with a 44 page instruction document and 35 additional pages of supplemental instructions, forms, and tables.

What are the key changes to be aware of in the requirements for a Base PNA Report that can affect Vendor observations, report cost and schedule, and Lender underwriting?

Property Evaluator Qualifications

The changes to requirements for property evaluator qualifications are significant and will restrict the number of Vendors that are qualified to deliver PNA reports.  Previously, a qualified evaluator was considered to be any firm or individual qualified by training and experience to evaluate building systems and site conditions and to provide cost estimates. 

The minimum qualifications of the Property Evaluator (individually or collectively) are:

  • Minimum professional experience in one or more of the following disciplines: 3 years in architecture; 3 years in engineering; or 10 years in construction management and cost estimating.
  • A minimum of 1 year experience performing multifamily property physical needs assessments;
  • A professional engineer or a registered or licensed architect in good standing;
  • Experience completing a minimum of 5 PNAs for multifamily properties;
  • Knowledge and experience with ASTM E2018-08 “Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process” or most current version;
  • Experience evaluating multifamily properties with comparable building systems and components;
  • Knowledge of applicable federal, state and local building code and regulations of the Property jurisdiction; and
  • Completion of a course of similar scope such as that offered by HUD’s Real Estate Assessment Center (REAC) or the American Society of Home Inspectors (ASHI).

In addition, the representative of the Property Evaluator performing the site visit is required to:

  • have a minimum of 1 year of experience in multifamily real estate property inspections;
  • have experience evaluating multifamily properties with comparable building systems and components;
  • have completed a minimum of 5 PNA site visits for multifamily properties;
    be knowledgeable of the applicable federal, state and local codes and regulations in the jurisdiction where the Property is located; and
  • possess one of the following current professional certifications:  Real Estate Assessment Center (“REAC”) for the Department of Housing and Urban Development (“HUD”) as a Certified Home Inspector; American Society of Home Inspectors (“ASHI”); International Association of Certified Home Inspectors (“InterNACHI”), State certification as a home inspector; be a registered architect, civil engineer or have successfully completed acceptable training courses in lieu of the above (acceptable training courses include the “Property Inspection Risk Management” course provided by Fannie Mae.

The PNA Report delivered to Lender must be reviewed and certified by a professional engineer or by a licensed or registered architect, in good standing, and who is not a subcontractor to the Property Evaluator.

Finally, it is the responsibility of the Lender to maintain a statement of qualifications of the Property Evaluator and ensure that the Property Evaluator maintains copies of all the required certifications and experience documentation for each report.  An annual Lender-managed QA/QC program is also required to ensure that the PNA reports are in compliance with the new regulations.

Dwelling unit observation minimums

The new requirements mirror what the industry standards have been in the recent past.

  • For subject properties with 50 units or less, observation of a minimum of 5 occupied units, all vacant units up to a maximum of 15, and all down units is required.
  • For subject properties with between 51 and 300 units, observation of a minimum of 10% of the occupied units, all vacant units up to a maximum of 20, and all down units is required.
  • For subject properties with more than 300 units, observation of a minimum of 5%, of the occupied units, but not less than 30, all vacant units up to a maximum of 20, and all down units is required.

New Special Hazards requirements

  • Fannie Mae Peak Ground Acceleration (PGA).  The PNA needs to include the actual probability of the Peak Ground Acceleration.  An approximated PGA is not acceptable
  • Identify if the subject property region is prone to Earthquakes, Volcanic activity, Floods, Hurricanes, Tornados, Wind, or Wildfires.
  • A Structural Risk Evaluation (SRE) Questionnaire must be completed for the subject property.

New remediation requirements

Known Problematic materials are identified with required remediation recommendations.  While the identified materials are industry standards, the required remediation is new.  The list is as follows:

  • Fire Retardant Treated Plywood (FRTP)
  • Compressed Wood or Composite Board Siding
  • Exterior Insulation Finish Systems (EIFS)
  • Chinese Drywall
  • Unit Level Electrical Amperage
  • Aluminum Branch Wiring
  • Electrical Overload Protection – Fused Subpanels
  • ABS Sanitary Lines
  • Polybutylene Water Distribution Lines
  • Galvanized Steel Water Distribution Lines
  • Omega Brand Fire Sprinkler Heads
  • Central Brand Fire Sprinkler Heads
  • Cadet Brand Electric In-wall Heaters
  • CPSC identified appliances or equipment

Additional New Requirements

  • Report Format: Fannie Mae now mandates a specific format for the report text and cost tables in order to ensure uniformity across vendors and across subject properties.
  • Estimated Useful Life Tables: Fannie Mae now requires the use of specific useful life estimates for Multifamily/Coop, Senior, or Student Housing reserve tables.
  • ADA and FFHA compliance investigation is required.
  • Modules: in addition to the Base PNA, specific property type modules can be requested by the Lender and will add further scope of work to the PNA Report. Modules include Student housing, Senior housing, Manufactured homes, Coop properties, Commercial/Retail, Integrated Pest Management Plan, and High performance building evaluation. The Property Evaluator must also have experience in the observation of the specific Module Class. 

What will this mean?

These new regulations are extensive and will have a significant impact on PNA reports, Lender underwriting, and which vendors are qualified to complete the reports.  The new guidelines were released on Thursday, October 24th, and are therefore just beginning to propagate through the industry.   

Some larger companies with high levels of experience and an adequate number of trained personnel on staff will be able to continue in the Fannie Mae arena.  Other smaller companies may be eliminated from the Vendor pool due to their lack of qualifications.  As the Lender and Vendor training sessions are held and further details become available, Partner Engineering and Science will continue to update the industry on the new Fannie Mae PNA Guidelines.