Underwriters in the Multifamily Commercial Real Estate sector, including U.S. Department of Housing and Urban Development (HUD), Fannie Mae, and Freddie Mac, are tasked with assessing a variety of components when evaluating risk in multifamily commercial real estate transactions. Among the most important factors that must be considered are physical risk and environmental impacts.
Environmental contamination at the site of a multifamily development (or at adjacent sites) can have serious impacts on the safety and soundness of the project and consequently the health of its residents and staff. A multitude of Federal, State, and Municipal regulations and standards regarding potential environmental hazards require multifamily underwriters to have a deep understanding of the many complex factors involved. As a result, training sessions on this subject have become increasingly critical for this group.
Mortgage Bankers Association (MBA) has implemented a Multifamily Underwriter training platform for up-and-coming analysts, underwriters, originators, and others interested in multifamily real estate. AEI Consultants’ Staige L. Miller, Vice President, HUD Environmental Services, and Randy Ward, Vice President, Agency Services, are spearheading a partnership between AEI and MBA to present a course on physical and environmental risk assessment. Ward teaches the physical risk assessment segment of the course, while Miller teaches the environmental segment.
Among the elements of assessing physical risk that Ward addresses are the property’s condition, including deferred maintenance and material physical deficiencies, capital replacement, renovation, and design flaws and inefficiencies. A typical physical risk report, a.k.a. Property Condition Assessment, (PCA) addresses all building and site physical systems from pavement and walks to structural and envelope, mechanical, life safety systems, and accessibility. A standard PCA also addresses capital replacement reserves over the term of the loan, and how renovation costs (past, present, and future) affect the reserves.
Also covered in the physical risk portion of the course are seismic risk factors, the Americans with Disabilities Act (ADA), the Fair Housing Act, and an overview of the underwriter’s and PCA consultants’ responsibility with regard to physical risk, ranging from scheduling a site inspection to concluding which risks and mitigants are associated with the transaction.
In the environmental risk segment of the course, Miller discusses several Phase I Environmental Site Assessment (ESA) definitions, including Recognized Environmental Condition (REC), Controlled REC (CREC), and Historical REC (HREC); the importance of having a qualified Environmental Professional on the team; and the basics of three types of environmental site assessments—Phase I, Phase II, and remediation projects—as well as what each type of assessment covers.
Site visits for environmental risk include interior and exterior observations, identification and preliminary evaluation of potential RECs, including underground storage tanks and adjacent property uses and non-scope considerations such as asbestos, lead-based paint, and radon. The course also covers best practices for addressing identified risks, vapor encroachment, and remediation strategies for identified contaminants.
The world of physical and environment risks is complex, but the MBA Multifamily Underwriter course breaks down these risks into digestible segments. Undergoing this training helps those interested in commercial real estate more accurately assess the risks associated with the development of multifamily projects and increase their knowledge in the process.