4566.1 REV-1

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CHAPTER 8. THE VALUATION PROCESS

8-1. INTRODUCTION. Valuation Analysis is made for the purpose of

evaluating the property as security for a long term coinsured

mortgage. Included in the evaluation is the analysis of

market need, location, earning capacity, expenses and taxes

and warranted costs of property. Valuation Analysis develops

conclusions with respect to feasibility, suitability of

improvements, quality and duration of earning capacity and other

factors that have a bearing on the economic soundness of the

property.

8-2. PURPOSE. The principal purpose of the appraisal is to estimate

the market value of the project. Market value is defined as

the most probable price for which a property could be sold, if

offered for sale for a reasonable time on the open market,

assuming that both the buyer and the seller were well informed,

acted intelligently and without compulsion. To estimate the

market value, it is necessary to use value limits indicated by

the project replacement cost, by capitalization and by direct

sales comparison.

8-3. INSPECTION. The appraiser may participate in the inspection of

the property with the architect and possibly a representative

of the local building inspector\'s office to identify any code

violations or may arrange a separate inspection, if desired.

If it would be more expeditious for the architect to make the

physical inspection separately it may be so scheduled. Upon

completion of the work write-up the results are transmitted to

the appraiser who may visit the site and begin processing. It

is not necessary for the appraiser to inspect all the units.

The appraiser observes and may discuss with the architect and/or

inspector the eligibility of the property and need for required

repairs while at the same time supporting or disproving occupancy

and rental data information shown in the owner\'s rent roll by

observations on the spot. When it is established to the

satisfaction of the appraiser that the rent roll appears to be

correct, an entry will be made in Remarks on Form HUD-92264 to

that effect, for example, \"Actual occupancy, based on owners

rent roll and a physical inspection of a representative number

of units as of 4/2/83, is 87%.\" The appraiser must also determine

whether apartments are rented furnished or unfurnished. The

appraiser may assist in selecting equipment and short-lived

building components to be considered in developing the initial

deposit to the reserve fund for replacements.

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8-1 1/84

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4566.1 REV-1

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8-4. APPLICATION STAGES. At the option of the lender, the processing

may be divided into two stages, the conditional commitment stage,

and the firm commitment stage. When two stages are used, the

appraiser\'s work is completed in the conditional commitment stage,

unless a change in the local requirements or in the list of

proposed repairs and replacements would require confirmation or

reconsideration of conclusions previously reached. These stages

are explained in more detail in Chapter 4 of this Handbook.

a\. Conditional Commitment Stage. The primary purpose of this

processing stage is to determine the appraised value and

maximum mortgage amount available to an acceptable purchaser.

The actual purchaser may not have been identified at this

point in time.

b\. Firm Commitment Stage. At firm commitment stage, mortgage

credit processing determines the amount of mortgage available

to the specific purchaser or refinancing mortgagor in the

proposed transaction. Usually, no valuation processing is

needed at firm commitment stage.

c\. Combined Stages. When a purchasing or a refinancing

mortgagor wishes to combine the processing stages, he must

supply all the exhibits needed for both processing stages,

with the application for Firm Commitment, and the appropriate

combined fee. All processing required for both the Conditional

and Firm Commitment Stages will be performed for the purpose

of issuing a Firm Commitment.

8-5. PROCESSING FOR CONDITIONAL COMMITMENT. In order that a conditional

commitment application be processed, the following exhibits

shall be reviewed by the appraiser:

a\. A copy of the completed application form.

b\. Balance Sheets and Operating Statements. The most recent

year\'s statement certified by an Independent Public Accountant

or Certified Public Accountant.

c\. Rent Roll of Subject Property, in columnar form, as described

in Chapter 4 of this Handbook. (See Appendix 4.)

d\. Legal Description of the project property.

e\. Repair List. A list of repairs (if any) (see paragraph 4-3e)

which are proposed to be completed and which are to be

included in the value.

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1/84 8-2

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4566.1 REV-1

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(8-5) f. Plans and Specifications. Applications involving projects

less than 10 years old shall be accompanied by project

plans and specifications (complete to the extent possible).

For projects 10 years old or more, plans are not required

but should be submitted, if available.

8-6. BASIC FORM. The basic form to be used in the coinsurance

appraisal process is Form HUD-92264. These forms may be

requisitioned from the local HUD office. This form provides

for the development and recording of Capitalized Value, Total

Estimated Replacement Cost, Comparison Approach to Value and

final opinion of Fair Market Value of a multifamily housing

project. These estimates, and others, are necessary in making

a determination as to the economic soundness of a project. It

is important that all information required on the form be

completed. This form will eventually be utilized by HUD for

program data purposes.

a\. General information. Form HUD-92264 is designed to permit

processing in an orderly sequence. Completion of the form

requires a study and analysis of information obtained from

many sources including the following:

\(1\) Form HUD-92013, Application for Mortgage Insurance.

\(2\) Owners and operators of rental income properties,

management companies, mortgage lending institutions

and real estate appraisers specializing in this field.

\(3\) Housing Market Analysis Reports/Publications.

b\. Required exhibits. Exhibits to be attached to Form HUD-92264

include expense comparable analysis, rent comparable analysis,

replacement cost formula, comparable project sales data,

rent formula for existing housing (see Appendix 9), market

absorption data and land sales data.

8-7. INSTRUCTIONS FOR COMPLETING FORM HUD-92264.

a\. Section A. Location and Description of Property.

\(1\) Project name is as shown on the mortgagor\'s application.

\(2\) Items 1-15. The information required for completion

of these items will be available from the application

and exhibits, confirmed by inspection and modified as

needed. Items 4a, Census Tract Number, and 4b, Placement

Code, are to be left blank.

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8-3 1/84

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4566.1 REV-1

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(8-7) (3) Item 16. Enter year built.

\(4\) Item 16a. Indicate type of construction by checking

appropriate box.

\(5\) Item 17. Structural System is described as follows:

Steel frame, wood frame, solid masonry,

reinforced concrete, etc.

\(6\) Item 17a. Floor System (structural) steel frame,

reinforced concrete, etc. (This does not refer to

finished floors.)

\(7\) Item 17b. Exterior Finish is described as follows:

Brick, masonry, stucco and siding, prefab

panels, etc.

\(8\) Item 18. Heating/Air Conditioning System will be

described by use of appropriate symbols. Those symbols

preceding the diagonal mark will describe the type of

project heating system, if any, while those after will

indicate the type of project air conditioning system,

if any. The symbols, to be used as appropriate, apply

to both the heating and air conditioning systems and

are as follows:

I for Individual; C for Central; N for None;

E for Electric; G for Gas; and O for Oil.

For example, a project with individual gas furnaces

and individual electric air conditioners would be

entered as follows: IG/IE.

b\. Section

\(1\) Items 19-25. The information required for completion

of Section B will be taken from the sponsor\'s

application, Form HUD-92013, verified as necessary.

\(2\) Item 26 is not applicable since under Section 223(f)

coinsurance the site is already fully improved.

c\. Section C. Estimate of Income.

\(1\) Items 27-28. The estimated unit rental rates per

month will be based upon and supported by current

market rents for similar units in comparable projects

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1/84 8-4

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4566.1 REV-1

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(8-7) furnishing comparable services in competing areas.

both trended to the projected endorsement date for the

subject. In estimating the rates for a specific

property, rental data on subsidized projects must not

be used as comparables. Appropriate adjustments will

be made on a rent comparable analysis sheet (Form HUD

92273 or equivalent format), to reflect measurable

differences between the subject units and the comparable

units and any variations in the general level of rents

expected to occur by the time the project reaches

endorsement. For projects subject to local rent control,

the rental estimates cannot exceed that permitted

by local rent control.

NOTE: OPERATING ANALYSIS. In making estimates of rental rates,

occupancy rates, operating expense, and net income,

based on data from comparable projects, the appraiser

also analyzes the operating history of the subject

project. This very pertinent source of information

must not be overlooked in cases of existing construction.

Estimates of future performances need not be identical

to the history of past performance, but the differences

should be reasonable and probable and explained by

brief logical comment in remarks. For example, analysis

of trend might indicate that rents and/or expenses

could be expected to be higher (or lower) in the next

year, than was the case in the last operating history

year. For another example, the market value sought

is the estimated market value of the property after

completion of required repairs. If the effect of the

repairs would be to increase rents, or to increase

occupancy rates, or to decrease (or increase) total

operating expense, the estimate of net income and of

value by capitalization would reflect conditions after

completion of repairs required by the commitment.

\(2\) Section C27 \"Number of Each Family Type Unit,\"

\"Rentable Living Area (Sq. Ft.),\" \"Composition of

Units,\" \"Unit Rent Per Month,\" and \"Total Monthly Rent

For Unit Type\" must be completed as appropriate in

order to properly describe the subject project/unit

characteristics.

\(3\) \"Living Area\" is the area of a living unit measured

from the inside faces of corridor and exterior walls

and from the inside faces of partitions separating the

living unit from other living or commercial areas.

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8-5 1/84

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4566.1 REV-1

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(8-7) (4) \"Composition of Units\" can be filled in by using

abbreviations for the various rooms (e.g., \"L\" for

Living Room, \"D\" for Dining Room, \"K\" for Kitchen,

\"BR\" for Bedroom (Precede with 0, 1, 2, etc., as

appropriate) and \"B\" for Bath (Precede with 1, 1-1/2,

2, etc., as appropriate), \"BALC\" for Balcony.

\(5\) Elevator units will be compared with elevator unit

comparables and non-elevator units will be compared

with non-elevator comparables. When both elevator

and non-elevator units are included in a project, a

separate identification and listing of the elevator

and non-elevator units will be made.

\(6\) Item 29, Parking. Enter the number of parking spaces,

whether attended or self-park, and the number of open

and covered parking spaces. Enter the monthly charge

per space. Where the parking charge is included in

the basic rental charge, enter N/A in the space

provided. Supporting documentation for the monthly

charge for parking must be attached to the appraisal

report.

\(7\) Item 30, Commercial. The rental income from commercial

space will be estimated on the basis of existing leases

and supported by market data.

\(8\) Additional income anticipated from submetering utilities,

valet service, non-laundry coin-operated equipment,

cigar stands, vending machines, pay telephones, apartment

furniture, etc., must not be included in project income

estimates. Income anticipated from the rental of

space for concession facilities or the rental value

of such space may be included on the same basis as

income from commercial areas.

Documentation supporting commercial income estimates

must be attached to the Form HUD-92264.

\(9\) Items 33, 34 and 35. Enter gross floor and net rentable

areas of the sponsor\'s proposal. These figures will

be based upon the sponsor\'s plans or other appropriate

sources. The definitions for the various areas are:

\(a\) Net Rentable Residential Area is the sum of all

rentable Living Areas within the exterior walls.

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1/84 8-6

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4566.1 REV-1

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(8-7) (b) Net Rentable Commercial Area is the sum of all

commercial areas within the exterior walls,

measured from the interior faces of exterior walls,

corridor walls and partitions separating the area

from other commercial and/or living areas.

\(c\) Net Rentable Area is the sum of the Net Rentable

Residential Area and the Net Rentable Commercial

Area.

\(d\) Gross Floor Area is the sum of all floor areas of

headroom height within the exterior walls, measured

to the exterior faces of the walls or to the center

line of walls separating attached buildings.

Note: Built-in garages, commercial area, basement

and all other areas within the exterior walls are

to be included. Items excluded from the gross

floor area are recessed, extended or continuous

balconies, attached or detached carports, accessory

buildings, patios, porches or terraces and all other

areas outside the exterior walls.

\(10\) Item 36. If non-revenue producing apartment units are

provided to project employees, indicate the

classification of employees who will occupy the unit and

other information in the space provided. In such instance

no income will be attributed to non-revenue producing

units in Item 27; however, the unit will be listed

separately in the column \"No. of each family type

unit.\" The loss of this income will not be considered

as an item of expense in Section E. The appraiser

will, however, review the entry in Section A, Item

11, for accuracy.

d\. Section D. Equipment and Services Included in Rent and

Special Assessments.

\(1\) Items 37-38. Check the appropriate items to indicate

the equipment and services included in the rent. The

sponsor\'s application will be compared with data to

determine competitive effect on rents and marketability.

Any deletion of equipment and services typically

expected in the market place may affect the rental

rate. Any variations will be reflected in the

appraiser\'s estimate, if appropriate, and brought to

the attention of the lender.

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8-7 1/84

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4566.1 REV-1

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(8-7) (2) The services to be reported in Item 38 are checked by

type of fuel (gas or electricity) and then by the

service included. For example, if gas heat is included

in the rent, the item \"Heat\" is checked under the

heading, \"Gas.\"

\(3\) Item 39. Enter the balance of special assessments, if

any, the annual payment amount and the remaining term

of the special assessment. Check whether prepayable

or non-prepayable.

e\. Section E. Estimate of Annual Expense.

\(1\) Items 1-29. The estimating of project expenses will

be based upon actual operating experience of the subject

and supported by that of comparable projects.

An expense comparable analysis worksheet will be used

in the development of individual expense estimates

and only the totals estimated for Lines 21, 22, 28

and 29, trended to reflect operation of the project

at the time of endorsement, will be entered in Section

E of the Form HUD-92264. Actual operating expense

data from other projects will be carefully analyzed

and compared with the case under appraisal in order

to provide a basis for determining the reasonableness

of the estimate developed for the subject project.

In any case, data should be utilized prudently, keeping

in mind the similarities and differences between the

comparables and the subject property. Inaccuracies

or improperly supported estimates have a leverage

effect in the estimate of value many times their own

magnitude.

\(2\) The process that develops the final estimate of operating

expense is briefly stated as follows:

\(a\) All estimates must be based upon adequate data.

\(b\) Data concerning the comparable projects must be

sufficiently complete to factually support any

adjustments made to the expenses from a comparable

project because of differences in size, facilities

or services between the comparable and the subject

project.

\(c\) Adjustments are reflected on an expense comparable

analysis worksheet for noted differences between

the subject project and the comparables involved.

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1/84 8-8

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4566.1 REV-1

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(8-7) In this way the dollar amount representing actual

experience of the comparable property can be

increased or decreased to more nearly reflect the

anticipated experience of the subject project.

\(d\) Adequate file documentation must demonstrate the

reasonableness of the final total expense estimate.

\(e\) Before entering the estimate of total expenses in

Line E-29, the appraiser should review the analysis

for completeness and the conclusion for plausibility.

In addition to considerations mentioned above, the

final estimate must reflect other considerations,

some of which are:

1 An expense comparable analysis worksheet (HUD

Form HUD-92274, or equivalent format) will be

used in the development of individual expense

estimates and only the totals estimated for

Lines 21, 22, 23, 28 and 29, will be entered

in Section E of Form HUD 92264.

2 The effect of any commercial space upon the

total expense estimate must also be considered.

Where there are commercial facilities that do

not exist in the typical comparable, a separate

estimate should be developed for inclusion in

the total expense estimate. This should not

be the case for such normal operations as

laundry space which, because of the residential

nature, are reflected in most per unit expense

data. Documentation supporting the commercial

expense estimates must be attached.

3 The final correlation of the several indicated

total expense estimates should give greatest

weight to the more reliable comparables while

tempering estimates developed from individual

projects that have unusual expense components

that are difficult to refine.

\(3\) Item 21. Replacement Reserve. See paragraph 8-7r(5) of

this Chapter.

\(4\) Item 29. Total Expenses. The total dollar expense

estimated for the project will be compared with the

sponsor\'s estimate. If it is found that the sponsor\'s

total dollar expense estimate for the project could

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8-9 1/84

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4566.1 REV-1

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(8-7) be reasonably accepted based upon the appraiser\'s data

analysis, the sponsor\'s dollar expense may be accepted

for processing. If not, the appraiser\'s estimates

should be used. Any subsequent revision of the facilities

or services to be provided will require reanalysis.

\(5\) The only mandatory entries in Section E are lines 21,

22, 23, 28 and 29.

f\. Section F. Income Computations.

\(1\) Item 30. Enter amount from Page 1, Section C, line 32.

\(2\) Item 31. Occupancy Percentage and Rent Loss. It is

generally recognized that long term occupancy and rent

collection ratios will seldom exceed 93 percent for

rental income properties. However, where a higher

ratio can be documented, a ratio of 95 percent may be

used. Therefore, the occupancy percentage used should

not exceed 93 percent and will not in any event exceed

95 percent in processing. Any lower occupancy percentage

anticipated during the rent-up period will be reflected

in an Operating Deficit requirement calculated by the

mortgage credit examiner based on the appraiser\'s

estimate of when sustaining occupancy will be reached.

g\. Section G. Estimated Replacement Cost.

\(1\) Items 36a through 52. The sole purpose of a replacement

cost estimate is to arrive at a summation value.

\(a\) Considerations. The cost estimate shall reflect

the general level of costs necessary to build a

similar project in new condition. A copy of the

estimate developed by the appraiser, including

the source of cost data must accompany this

submittal. The appraiser may utilize a cost

service index such as Marshall Swift or E. H.

Boeck in establishing such costs. Appraisers

with MAI or SREA designations who have demonstrated

experience in cost analysis may develop their own

cost estimates supported by comparable square foot

data.

\(b\) Inclusions. The estimate includes the costs for

the dwelling units, garages, stores and other

structures which are included as improvements to

the property. In addition, it will include the

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1/84 8-10

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4566.1 REV-1

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(8-7) costs for the on-site utilities and landscape work

required to construct such a project. The estimate

of costs for on-site utilities will include

extensions of pavements, walks, curbs and utility

lines beyond the project boundaries where necessary

to connect with facilities adjacent to the project

site. No attempt should be made in processing to

adjust for structural or material specifications

which are no longer typically used in the current

building industry.

1 All elements of cost will include but are not

limited to:

a Material and equipment.

b Fabrication and installation labor.

c Subcontracts.

d Sales tax.

e Workmens\' Compensation, Unemployment and

Public Liability Insurance.

f Social Security Tax.

2 Allowances for General Requirements, General

Contractor\'s Fee (Overhead and Profit), Architect\'s

Design Fee, Architect\'s Supervision Fee, Other

Fees and General Contractor\'s Bond Premium

will represent the current prevailing levels,

taking into consideration the project type,

size, complexity, structural system improvement

cost and any other local condition which may

influence these allowances.

\(2\) Item 36a - Unusual Land Improvements: Not Applicable.

\(3\) Item 36b - Other Land Improvements:

\(a\) Earthwork (i.e., excavation, cuts and fills).

\(b\) Site utilities (i.e., sanitary sewer, water,

storm drains, gas lines, electrical requirements,

etc.).

\(c\) Roads and walks (i.e., roads, walks, parking

areas, curbs and gutters, etc.).

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8-11 1/84

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4566.1 REV-1

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(8-7) (d) Site improvements (i.e., fences, playground

equipment, trash receptacles, lawn sprinklers,

swimming pools, wading pools, etc.).

\(e\) Lawns, planting (i.e., trees, shrubs, seeding,

sodding, etc.).

\(4\) Item 36c - Total Land Improvements: Total cost of all

items in 36b, Other Land Improvements.

\(5\) Item 37 - Main Buildings: Buildings which encompass

the actual living units of the project.

\(6\) Item 38 - Accessory Buildings: Adjoining buildings

such as utility buildings, carports, etc.

\(7\) Item 39 - Garage: Self-explanatory.

\(8\) Item 40 - All Other Buildings: Commercial buildings

such as stores, banks, barber and beauty shops, etc.

\(9\) Item 41 - Total Structures: Sum of Line Items 37

through 40.

h\. Fees. The total dollar amounts for each of the fees listed

below (Lines 42 through 48) may be determined by using a

percentage developed from field source information, i.e.,

Local Home Builders Associations, Association of General

Contractors, personal contact with various trade sources,

recognized valuation service publications, etc. The total

dollar amounts for each of the fees may be developed by means

other than using percentages if local practices so dictate.

\(1\) Item 42 - General Requirements: (job overhead)

The cost for General Requirements will include the

costs for those items normally incurred in the

construction of a project of the same type as the subject.

It will not include general overhead expense of

operating the contractor\'s home office. Items of

cost to be considered in determining General

Requirements allowance include, but are not limited

to, items such as:

\(a\) Supervision.

\(b\) Field engineering to provide grades and lines for

locating buildings, streets and walks on the site.

\(c\) Field office and equipment, phones, clerical help,

office supplies.

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1/84 8-12

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4566.1 REV-1

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(8-7) (d) Temporary sheds and toilets.

\(e\) Temporary heat, water, light and power for

construction.

\(f\) Cleaning and rubbish removal.

\(g\) Building permits.

\(h\) Medical and first aid facilities.

\(i\) Temporary protection and fences.

This is typically expressed as a percentage factor

which is applied to the subtotal of Land Improvements,

Line 36c, and Structures, Line 41. However, a total

dollar amount may be entered if the source guide so

dictates.

\(2\) Item 43 - Builder\'s General Overhead: The cost for

Builder\'s General Overhead will be expressed as a

percentage which is the portion of general overhead

expenses necessary to conduct his/her business which

would directly concern the specific project under

consideration. This percentage is applied to the

subtotal of Land Improvements, Line 36c, Structures,

Line 41, and General Requirements, Line 42.

\(3\) Item 44 - Builder\'s Profit: The cost of Builder\'s

Profit will be expressed as a percentage typically

allowed on a comparable structure in that geographical

area both in size and cost as adjusted. This percentage

is applied to the subtotal of Land Improvements,

Line 36c, Structures, Line 41, and General Requirements,

Line 42.

\(4\) Items 45 and 46 - Architect\'s Fees: Design and

Supervision. The allowance shall represent the typical

fees paid for projects of similar design and services

rendered.

\(5\) Item 47 - Bond Premium: Appropriate information should

be obtained from local bonding and surety companies.

The amount of the premium will be computed by applying

the rates to the subtotal of Land Improvements,

Line 36c, Structures, Line 41, General Requirements,

Line 42, Builder\'s General Overhead, Line 43, and

Builder\'s Profit, Line 44.

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8-13 1/84

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4566.1 REV-1

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(8-7) (6) Item 48 - Other Fees: This is a lump sum allowance

which would pertain to the construction of this

specific project. Allowances may include but are not

limited to site and topographic surveys, test borings,

subsurface explorations, soil testings and utility tap

fees (other than those included in subcontracts).

\(7\) Item 49 - Total Fees: Self-explanatory.

\(8\) Item 50 - Total of All Improvements: Self-explanatory.

\(9\) Item 51 - Cost Per Gross Sq. Ft.: This is computed by

dividing Line 50, Total of All Improvements, by Line 33,

Gross Floor Area.

\(10\) Item 52 - Estimated Construction Time: This estimate

should represent the typical length of construction

time needed to build a project of the same size and

structure type as the subject project.

i\. Carrying Charges and Financing.

\(1\) Item 53. Interest is the amount which would be

estimated to accrue during the estimated period of

construction at the rate requested in Section G of

Form HUD-92013 but not to exceed the maximum interest

rate permissible under the HUD regulations. It is

computed on one-half of the loan amount for proposed

construction. For example, the interest based on a

\$2,600,000 mortgage, for an 18 month construction

period, and an 11.0 percent interest rate would be

calculated as follows:

One Half the Mortgage \$1,300,000

Interest Rate .110

\$ 143,000

18 month construction period

18 / 12 = 1.5 years 1.5

Interest during construction \$ 214,500

\(2\) Item 54. Taxes which would accrue during the construction

period are shown on a pro rata basis for the estimated

period of construction. Special assessments, if any,

will be estimated on a similar basis and included in

the tax amount.

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1/84 8-14

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4566.1 REV-1

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(8-7) (3) Item 55. Insurance includes fire, windstorm, extended

coverage, liability and other risks customarily insured

against in the community during construction. It does

not include workmen\'s compensation and public liability

insurance which are included in the cost estimate.

\(4\) Item 56. Mortgage insurance premium is the amount

estimated to be earned during the presumed construction

period. The amount is 0.5 percent of the permanent

loan amount per year. An additional 0.5 percent is

charged for any additional fractional period in excess

of each whole year.

\(5\) Item 57. FHA examination fee is 0.3 percent of the

presumed loan amount associated with constructing such

a project.

\(6\) Item 58. FHA inspection fee is 0.5 percent of the

presumed loan amount.

\(7\) Item 59. The financing fee is 2 percent of the loan

amount. This is an initial service charge and is not

to be confused with discounts. The maximum charge for

this fee is 2 percent and is limited by HUD regulations.

\(8\) Item 61. FNMA/GNMA Fee. The FNMA/GNMA Fee for

commitment and marketing (or equivalent placement fee)

is entered for all mortgagors. This fee is assumed to

be 1-1/2 percent of the mortgage amount.

\(9\) Item 62. Title and Recording. This expense is the

cost typically incurred in connection with a mortgage

transaction and generally includes such items as

recording fees, mortgage and stamp taxes, cost of

survey and title insurance including all title work

normally involved from initial through final endorsement.

\(10\) Item 64. Legal Expense. Legal expenses are those

expenses typically incurred by a sponsor for legal

services necessary in the creation of projects similar

to the subject in the competitive locality in which

the project is located. Legal expenses are separate

from organization expenses and must be estimated and

listed separately.

Since different types of proposals and/or sponsorships

will require varying legal services, this estimate must

be based on market data.

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8-15 1/84

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4566.1 REV-1

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(8-7) Legal expenses include the fees usually required for:

\(a\) the employment of counsel for legal services in

connection with organizing a mortgagor entity;

\(b\) all legal services normally incurred in connection

with initial and final closing; and

\(c\) legal services for normal interim activities in

the creation of a project.

\(d\) For example, legal services in connection with

organizing the mortgagor entity ((a) above)

qualify only to the extent that the entity formed

is typically needed for the creation of the subject

project. The cost to create ornate corporate

structures, useful to the sponsor for personal

reasons over and above the creation of the project

(e.g., personal tax shelters, trusts, etc.), is

not allowable. Legal services for initial and

final closing ((b) above) include the analysis

of the closing requirements and preparation and

review of the required documents, supervision of

their execution and appropriate distribution.

\(e\) Filing fees and title expense are not part of

these fees since they are allowed in Title and

Recording expense. Legal expense may include

normal legal services typically required in the

acquisition of land, but negotiation for acquisition

or zoning, examination of title on purchase or

defense of title after purchase, are not recognizable

in legal expense on Line 64 since they are

attributable to the cost of the land to the owner.

\(12\) Item 65. Organization Expense. Organization expense

must be estimated and listed separately and, as with

legal expense, must be based on market data. The

estimate must properly reflect the kind and size of

project and type of sponsorship involved in the subject

project.

\(a\) Organization Expense is the cost of the services

typically required to initiate a project, organize

its planning, financing and construction, and

control and management of the construction of the

project through final endorsement. Services and

costs included under Organization Expenses are

those customary to the organization and construction

of projects of similar size and complexity in the

locality of the subject project.

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1/84 8-16

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4566.1 REV-1

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(8-7) (b) More specifically, organization expense will

reflect the time and effort expended for the

administrative aspects involved in the creation

of a project. For example, the following, although

not a complete listing of items that qualify for

organization expense, will serve as a useful

guide to identify the type of actions and efforts

that qualify for legitimate consideration under

this item:

1 Collecting and assembling data and documentation

for requests for FHA mortgage insurance

for all stages of processing, including analysis

of market need, selection and optioning of

site and project design considerations.

2 Assembling of the necessary data and documentation

for mortgage closings from various parties

involved in a project; arranging for execution

of documents; and attending to closings.

Particular care must be exercised here by the

appraiser to insure that only the administrative

aspects are reflected so that there will be

no duplication of allowances under Item 64,

Legal Expenses.

3 Controlling and accounting for disbursement

of mortgage proceeds and working capital.

4 Placing mortgagor\'s hazard and liability

insurance; coordinating building release for

occupancy.

5 Paying for and assisting auditor to obtain

necessary information for FHA cost certification.

6 Continued contact and dealing with HUD through

to final endorsement as normally indicated

for typical projects.

\(13\) Item 66. Cost Certification Audit Fee. This is a cost

typically incurred by in hiring a CPA to audit the

books of account and issue an opinion for mortgagors

involved in the development of multifamily projects.

\(14\) Items 68 through 71 are inapplicable in computing

replacement costs for 223(f) projects.

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8-17 1/84

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4566.1 REV-1

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(8-7) (15) Item 72. Total Estimated Development Cost is the sum

of Lines 50, 63, 67, 68, 69, 70 and 71.

\(16\) Item 73. Land (Warranted Price of Land), enter the

amount from Page 3, Section J, Line 9.

\(17\) Item 74. Total Estimated Replacement Cost of Project

is the sum of Lines 72 and 73.

\(18\) Section G will be completed using the replacement cost

formula mortgage assuming a 90 percent mortgage.

Completion of this section is facilitated by use of

the Replacement Cost Formula Format. (See Appendix 10

for format and instructions for its use.)

j\. Section H. Maximum Permissible Rental Analysis

\(1\) Item 1. Rent Formula Residential Total Per Month.

Administratively, HUD imposes a limit upon the return

a sponsor can expect from the residential portion of

a HUD-insured project. This is accomplished by use

of a \"Formula\" to establish the maximum residential

gross income that may be collected to permit this

limited return. This calculation is made on every

rental case processed and the amount of the indicated

monthly maximum gross rent is entered on this line.

(See Appendix 9 for format to be used in arriving at

this amount).

\(2\) Items 2 and 7 are not applicable to Section 223(f)

processing.

k\. Section I. Estimate of Operating Deficit

\(1\) The appraiser will not fill in this section; however,

for the purpose of assisting the Mortgage Credit

processor in estimating the amount of the operating

deficit escrow, the appraiser will enter in Remarks,

Section O, of the Form HUD-92264 an estimate of the

time required for the subject project to reach

sustaining occupancy based on an analysis of market

absorption data.

l\. Section J. Project Site Analysis and Appraisal

\(1\) Item 1. Is Location and Neighborhood Acceptable.

Analyze the location of the site relative to the needs

of the tenants for transportation, schools, shopping,

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1/84 8-18

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4566.1 REV-1

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(8-7) community centers and churches. Determine if any

special hazards or nuisances, such as flooding, exposure

to aircraft, railroad or highway noise levels, noxious

odors, chemical fumes or other similar conditions,

affect the subject site. The existence of any of

these conditions and their effect on the site should

be carefully considered before determining acceptability.

If a separate environmental study has been completed,

the appraiser may obtain a copy from the lender to

assist in this area. Examine existing and proposed

land uses in the neighborhood to determine whether

they are compatible with the subject development.

\(2\) Item 2. Is Site Adequate in Size for Proposed Project.

Determine if the site is adequate in size, shape,

exposure and contour for the continued marketability

of the proposal. Compare the density of the proposed

project with that of similar successful projects

operating in the same market area. Sites which are

too large or too small will tend to cause difficulties

for a project over the long run.

\(3\) Item 3. Is Site Zoning Permissive for Intended Use.

Determine if the present structure(s) and the number

of units are in compliance with current zoning.

\(4\) Item 4. Are Utilities Available Now to Service the

Site. Determine whether the water, sewer, gas and

electrical facilities are adequate to handle the needs

of the project.

\(5\) Item 5. Is there a Market at this location for the

Units at the Market Rents by Comparison shown in

Section C. Analyze all available data concerning

market conditions for the area in which the project

is located and determine if demand potential exists

for the type and number of units at the rents indicated

by the Market Rent Comparison. Examine Economic and

Market Analysis reports, data from building departments

on new construction absorption and vacancy reports

and rental schedules in the subject area when performing

this analysis.

NOTE: If a negative answer is indicated for an item

from J1 through J5, explain under Remarks.

\(6\) Item 6. Site Acceptable for Type of Project Proposed

Under Section \_\_\_\_\_\_\_\_\_. Not applicable.

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8-19 1/84

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4566.1 REV-1

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(8-7) (7) Item 7. Site not Acceptable for Reasons Stated Below.

Self-explanatory.

\(8\) Item 8. \"Value Fully Improved.\" Enter in the top row

of Item 8 the location of project. The Land Use

Intensity Number \_\_\_\_\_\_\_\_ is left blank. Use the rest

of Item 8 to estimate the market value of the site in

a fully improved condition by the market comparison

approach. Copies of the land sales data cards/sheets

of the comparables used in processing are to be attached

to the Form HUD-92264. The Value Fully Improved estimated

for the subject site must be the value for the intended

use for which the mortgage is to be insured (i.e., its

value when used for walkup apartments, if that is the

use intended; or for elevator apartment structures,

if that is the use intended). In the event that a

higher and better use for the land is found in the

market, the land value shall not be estimated for such

higher and better use, but rather for the same use for

which the buildings are being valued. For mortgage

insurance purposes, it is clearly not desirable to have

the land valued for one use, while the improvements

are valued for another use.

\(9\) In Item 8, under the heading, \"Adjustments,\" are found

the more significant forces which influence land value,

i.e., time, location, etc. Consider each of them when

estimating value, whether sales price per foot or sales

price per unit is used as the basis for comparison.

Adjustments are made from the comparison property to

the subject.

\(a\) Apply the \"Total Adjustment\" found for each

comparable to the comparable\'s sale price per

square foot or per unit to find the \"Adjusted

Price\" for the comparable.

\(b\) Multiply the area of the subject site by the

comparable\'s adjusted square foot price or number

of subject\'s units times the comparable\'s adjusted

unit price to find an \"Indicated Value by Comparison\"

for the subject.

\(c\) Follow this procedure for each comparable to

arrive at a range of values from which the value

of the site fully improved is estimated by

correlation and entered in item 9, Value of Site

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1/84 8-20

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4566.1 REV-1

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(8-7) Fully Improved. This value estimate is based on

the assumption that any off-site work has been

completed and any unusual site conditions corrected.

\(d\) Pertinent remarks explaining all adjustments must

be made in the remarks section or in an accompanying

memorandum.

\(10\) Item 10. Value \"As Is.\" It is not necessary that

this item be used in establishing a land value for a

Section 223(f) proposal. Enter N/A for \"Not Applicable.\"

\(11\) Item 12. Acquisition Cost (Last Arms-Length Transaction).

The transaction which first brought the sponsor into

effective control of the subject property (whether the

control was direct or indirect) is the last arms-length

transaction. No matter how many transactions are made

subsequently between persons, corporations, or trusts

controlled by the sponsor, these subsequent transactions

shall not be considered \"arms-length.\" Interview

principals, brokers or other persons who have knowledge

of the price paid for the property in the last

arms-length transaction. Record in Item 12 the names and

addresses of the principals, the price paid, date of

sale and sources of information.

\(12\) Item 13. Other Costs. Not applicable for Section

223(f) processing.

\(13\) Item 14. Value of Land and Cost Certification. Not

applicable for Section 223(f) processing.

\(14\) Remarks. Use this section to make pertinent comments

concerning any item in the analysis and appraisal of

the site. If necessary, attach a separate memorandum

to the Form HUD-92264 with a notation under this heading

to see the attached memorandum.

m\. Section K. Income Approach to Value

The annual net income remaining after payment of expenses

is considered to be the principal source of value of the

property. Value arises from the right to receive this

income stream, and multifamily housing is simply one of

several possible investments which may be made for the

purpose of producing income or yield on an investment.

The value of real estate then is the present worth of the

benefits of ownership as anticipted by those investors,

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8-21 1/84

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4566.1 REV-1

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(8-7) buyers, and sellers who constitute the market. Capitalization

is the process of expressing future benefits in dollars and

discounting them to present worth at the capitalization

rate which is necessary to attract capital to similar

investments.

\(1\) Item 1. Estimated Remaining Economic Life. In using

the income approach to value, the appraiser will first

estimate the remaining economic life of the subject

property and enter the estimate in the space provided.

The last years of economic life are more difficult to

predict than the first years. For this reason, the

appraiser must use caution, and avoid overly long

estimates of remaining economic life especially for

old buildings in old declining neighborhoods. Also,

because of the uncertain nature of the last years of

economic life, when the estimated economic life of

the buildings is not sufficient to support a mortgage

term of 10 years, the property is not eligible for

mortgage insurance pursuant to Section 223(f).

\(2\) Item 2. Capitalization Rate Determined by. The

appraiser is to check the appropriate box.

\(3\) Item 3. Rate Selected. Enter here the rate-selected.

Complete documentation supporting rate selected must be

submitted as an attachment to the Form HUD-92264. The

rate selected by the appraiser should reflect the more

liberal 90 percent of acquisition cost mortgage permitted,

if the project meets the eligibility requirements

for a Target Preservation Area project.

\(4\) Item 4. Net Income (Line F34). Self-explanatory.

\(5\) Item 5. Capitalized Value (Line 4 - Line 3).

Self-explanatory.

\(6\) Item 6. Value of Leased Fee (if any). The cap rate

selected for capitalization of the leased fee must not

exceed the interest rate on the coinsured mortgage.

The ground rent must not exceed the \"as is\" value of

the land times the selected cap rate.

n\. Section L. Market Comparison Approach to Value

\(1\) Principle of Substitution. The comparison approach to

value is based upon the principle of substitution

which states that a prudent person will not pay more

to buy or rent a property than it will cost to buy or

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1/84 8-22

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4566.1 REV-1

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(8-7) rent a comparable substitute property. The objective

of this approach is to deduce from other sales the

amount which the subject property would bring on the

market. In theory, the best comparable sale would be

an exact duplicate of the subject property and would

indicate, by the known selling price of the duplicate,

the price for which the subject property could be sold.

\(2\) Units of Comparison. In comparison, the entire project

does not offer a convenient basis for comparison with

other entire projects since possible differences in

size, composition, areas, units and rooms are almost

unlimited. For this reason, it is customary to express

the market prices found in market comparables in

units of comparison. Some frequently used units of

comparison are: sale price per living unit, sale

price per room, sale price per square foot, gross

income multiplier (GIM) and effective gross income

multiplier (EGIM). Market comparison approach to

value should have analyses of at least two different

units of comparison, one of which should be the gross

income multiplier or the effective gross income multiplier.

It should be noted that, when using the GIM or EGIM,

no adjustment for time need be made, since the GIM or

EGIM from the comparable will produce a current indicated

value by comparison for the subject when it is multiplied

by the current gross income or effective gross income

expected for the subject project.

\(3\) Supporting documentation must be submitted with the

completed Form HUD-92264. If the space for remarks is

inadequate, an attached sheet, with appropriate notation

in Section O that an attachment is involved, is necessary.

The indications of value by various units of comparison

are correlated into one indication of value by direct

sales comparison and it is entered in Item L9 \"COMPARISON

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o\. Appraisal Summary (Line 9).

\(1\) Enter here, on the appropriate space, the dollar amount

estimated from each of the three approaches to value

as applicable to Section 223(f). Since these amounts

are estimates they should be rounded down to the

nearest hundred.

\(2\) Capitalization. The estimated annual net income

remaining after payment of expenses is transformed

into the estimated market value by capitalization, in

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8-23 1/84

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4566.1 REV-1

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(8-7) accord with Chapter 7 of Reference 9 of the Foreword.

Since in 223(f) it is the estimate of market value by

capitalization which is desired, it is suggested that

the selected rate be extracted from market transactions

of comparable properties as a composite overall

capitalization rate, as described in paragraph 7-4 of

Reference 9 of the Foreword, or extracted from market

transactions as a cash flow to equity rate and that cash

flow rate be used to construct an overall rate as shown in

paragraph 7-5. Each of these rates is readily extracted

from sales of comparable properties and will produce

values reflecting the comparable sales. The Cash

Flow to Equity Rate Method is generally the most

responsive to fluctuating mortgage rates and terms.

\(3\) The appraiser should enter the Total Estimated Replacement

Cost of the Project (without depreciation) as Summation;

the value indicated by the income approach as Capitalization

and the value indicated by direct sales comparison

as Comparison. These possible indicators of value

must be correlated into the final estimate of value.

The Summation estimate will determine the final estimate

of value only when it is less than other indicators

of value. In most instances, the final estimate of

value will be best determined by the indications of

value by direct sales comparison or by capitalization.

The appraiser should select a final estimate of value

between that indicated by comparison and that indicated

by capitalization, giving more weight to the approach

supported by the best data.

p\. Section M. Cost Not Attributable to Dwelling Use. If a

mortgage limitation less than the applicable statutory

limit has already been established, it may be noted here.

In that event, this section of the form need not be completed.

Otherwise, the information must be provided as the form

requires.

\(1\) The items to be included are considered without regard

to their on-site location or whether the space, facility

or improvement is income producing. Included are such

items as: special exterior land improvements; commercial

spaces and facilities, including prorated amounts for

foundations, heating, air conditioning, corridors,

halls, lobbys, landscaping; on-site parking, garages

and carports including walks and driveways leading to

them; swimming pools with related facilities and

necessary appurtenances; interior works of art and any

other improvements not specifically for dwelling use.

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1/84 8-24

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4566.1 REV-1

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(8-7) NOTE: Items that are not included in the basic

estimate, such as: special purpose commercial

equipment and finishes, coin operated washers

and dryers, will not be considered as cost not

attributable. Structures, spaces and mechanical

rough-ins for such improvements will be considered

as cost not attributable to dwelling use.

\(2\) Special exterior land improvements. These are defined

as on-site features provided to enhance the environment

and livability of the project and neighborhood but

which are unusual and in excess of those typically

encountered in projects of the same rental range.

The percentage factor is computed by dividing the

total cost of Cost Not Attributable to Dwelling Use by

the total cost of Land Improvements, Line 36c and

Structures, Line 41.

\(3\) Off-site requirements. In the event off-site requirements

are necessary, the following items, although outside

project boundaries, will be considered to serve the

project: utilities, walks, curbs, gutters, streets,

drainage structures and landscaping.

q\. Section N. Not applicable to Section 223(f).

r\. Section O. Remarks. The appraiser enters here any relevant

remarks, including, but not limited to:

\(1\) The appraiser\'s statement of actual occupancy, and

estimate of time required, if any, to reach sustaining

occupancy.

\(2\) The estimated cost of required repairs supplied by the

cost analyst. (Additional repairs or improvements

proposed by the sponsor are included, since they will

be considered in the value, and required by the commitment.)

\(3\) The estimates amounts for legal, organizational (if

applicable) and title and recording expenses based on

the maximum insurable 223(f) loan.

\(4\) The appraiser\'s determination of the tentative maximum

coinsurable mortgage amount. In support of this

determination, the appraiser should attach a trial

copy of Form HUD-92264A with criteria 3, 4 and 5

completed.

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8-25 1/84

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4566.1 REV-1

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(8-7) (5) The amount of the required initial deposit to the

replacement reserve. In addition to the annual deposit

which is required throughout the life of the mortgage,

an initial deposit may be necessary.

\(a\) The annual amount which is to be deposited in

the Replacement Reserve Fund is .0060 multiplied

by Item G-41, Total Structures, on Form HUD-92264.

However, since many shortlived items of equipment

may have used a good portion of their useful

life at the time of appraisal, it is necessary

to make an initial deposit into the Replacement

Reserve Fund at time of closing. The amount of

this required initial deposit is computed by the

appraiser taking into account the cost and useful

life information regarding replaceable items

received from the cost processor, the architect,

or the engineer\'s survey.

\(b\) If, for example, equipment 10 years old had a

normal life of 12 years, 10/12 or 83 percent of

its useful life has been used, and an initial

deposit of 83 percent of the cost to replace

this equipment is needed at closing to prevent

the Replacement Reserve Fund from becoming insolvent

in two years.

\(c\) The initial deposit to the Replacement Reserve

Fund may be calculated by either a physical

takeoff of the items to be considered in the

replacement reserve or by multiplying the dollar

amount established as Total Structures (Line

G-41) by .004 and multiplying the result by the

age of the project, not to exceed 15 years,

rounded to the nearest full year.

\(d\) Options. In determining the method to be used in

computing the initial deposit to the Replacement

Reserve Fund, the appraiser should consider

effective age of the items considered in establishing

the Reserve Fund. It would be inequitable, for

example, to compute the amount of the reserve

using the age method described in (c) above for

a 15 year old project if most of the Replacement

Reserve items had just been replaced. Conversely,

the deposit for a 3 year old project with extreme

wear or very low quality appliances might be far

below the needed reserve amount if the deposit

was calculated on the physical age of the project.

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1/84 8-26

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4566.1 REV-1

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(8-7) (e) Deposit of fund. This fund must be deposited in

an account (which may be interest bearing) insured

by an agency of the Federal Government, so arranged

that it is at all times under the control of the

lender.

\(f\) Attachments. The appraiser must attach the

worksheets used in calculating the deposit to the

Form HUD-92264.

\(6\) Where applicable, identification should be provided

that the project is located in a Target Preservation

Area.

8-8. NARRATIVE SUMMARY. In addition to the preparation of the Form

HUD-92264, the appraiser will prepare a brief narrative summary

of important conclusions including a correlation and final

estimate of value. The narrative should also make reference to

the replacement reserve deposit and expand on the computation

methods and conclusions as necessary. Both the Form HUD-92264

and this report must be signed by the appraiser.

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8-27 1/84