A few months ago Fannie Mae tweaked its Physical Needs Assessment (PNA) guidelines. GRS Group’s Bill Tryon wrote in this space at the beginning of the year when revisions were first announced by the GSE. Now that the changes in PNA standards have been implemented for a few months, Steve Canty, a business development director at GRS Group, has had time to see the impact on commercial real estate’s multifamily sector. He spoke to us about what investors in these assets need to be aware of regarding Fannie’s adjustments and how GRS Group can help clients in this area.
Tell us about the new Fannie Mae PNA standards.
The new PNA has basically taken what Fannie Mae has seen over the years, either issues or things that they would like to add into the reports, and it has added complete sections to help out their report quality going forward. For example, they have added a whole segment about special hazards, wanting to know whether or not an asset is in a tornado zone, a wind zone, or a wildfire zone as well as energy sections, which they didn’t have before. In turn, it’s made for a more well-rounded Fannie Mae product.
What is the upside of this for multifamily underwriters?
The good parts of the new Fannie scope include making the table of contents uniform across consultants. Each consultant will need to follow the same basic outline for their physical-needs assessments, which leads to more consistency in product across the industry. In addition, the immediate tables and the replacement-reserve tables are uniform as well. So it makes it easier on the reader or underwriter to know where things are, even if they use different consultants.
And the downside?
There is a lot of information where it is hard to determine whether or not it really impacts the physical needs of the property. There is a lot of extemporaneous information in these reports that, at least at this point, does not really impact loan-dollar amounts. It’s just good extra information to have. It’s not really dialed into the physical needs of the property. That would be things like wanting to know if the lights have dark-sky technology or not, which is an interesting question, but it doesn’t really impact the physical needs because they don’t ask us to recommend that they install them at the end. They just want to know if they’re there or not.
Is this going to make the deal process more cumbersome?
Early on it has definitely made it more complicated. There is a lot more time and effort, from our perspective, that needs to go into setting up every deal versus before. And writing the reports with all of these extra requirements takes quite a bit more time to write and inspect as well. It is definitely costing more time and effort, from a consultant’s perspective, to get these reports out. Down the road, the whole process may be streamlined, but for now it’s still going to take longer to do a physical needs assessment.
Do you see it slowing down the aggressive deal flow that’s been happening in the multifamily sector at all?
These changes have increased the replacement reserve on each deal, which could impact the amount of loan dollars the borrower can get which might in turn cause the borrowers to shop around the deal. That trickle effect of the high reserves impacting the loan-dollar amount may give borrowers pause to go the Fannie route in the future. But they’re still going to do a ton of work.
What does GRS Group bring to the table to help its clients through this process?
It’s really our experience. Since they’ve changed over in February, we’ve done well over 100 deals, so we are pretty dialed into the new format. We have made templates for each different module that Fannie has in its new format, and we’ve done at least one deal for each different module or scenario. We’ve done as many Fannie deals as anyone out there since the changes came over. And our systems have been refined in the last four months since the change.
Do you see any other significant Fannie changes coming in the near future?
There may be a change to dial some of this back a little bit. I’ve heard rumors that Fannie is listening to comments on the new format, and they’re taking them into account, but we don’t know if they’re going to dial the requirements back or not. It just depends on how much volume they lose out of this. If they don’t lose any then it may stay the same.