In the past month, Fannie Mae has issued preferred equity guidance and has updated its adjustable rate loan document forms to account for the change in LIBOR administrator.
Preferred Equity Requirements:
On March 31, Fannie Mae published preferred equity guidance in its Seller/Servicer Guide. Fannie Mae defines Preferred Equity as being equity investments in which the equity owner is entitled to preferred returns relative to the other equity owners in a borrower entity. Fannie Mae draws a distinction between “Soft Preferred Equity” and “Hard Preferred Equity” that distinction is tied to the rights of the preferred equity holder to receive its payments regardless of the availability of property cash flow to support those payments. If a Preferred Equity holder has rights to preferred returns regardless of available property cash flow, the Preferred Equity is considered “Hard Preferred Equity” and if it does not have those rights, it is considered to be Soft Preferred Equity. Fannie Mae has clarified in these provisions of the Seller/Servicer Guide that it will treat “Soft Preferred Equity” and “Hard Preferred Equity” differently. Fannie Mae further clarified that cases of Soft Preferred Equity that are Preferred Equity only because they involve promoted interests or priority waterfalls will be left to the DUS lenders to evaluate and review. Other forms of Preferred Equity will be subject to more extensive requirements and may disqualify a borrower structure from qualifying for financing.
LIBOR Administration References:
Fannie Mae also recently published updated forms to update references to the administrator of the London Interbank Offered Rate (LIBOR). As is fairly well known, effective February 1, 2014, the British Banker’s Association ceased to be the administrator of LIBOR and was replaced in that capacity by ICE Benchmark Administration Limited. The adjustments to Fannie Mae’s form adjustable rate loan documents simply documented that change. The forms impacted by this change are Schedules 2 and 3 of the Multifamily Loan and Security Agreement.