Multifamily Underwriting: Underwritten NOI vs. the T-12, Sources and Uses, and Sponsor Liquidity
Most disappointment on a multifamily deal comes from three places: the lender's NOI is lower than your model, the equity check is larger than the down payment, and the sponsor tests are tighter than expected. Here's where each comes from.
Underwritten NOI vs. the Seller's T-12
Lenders start with the trailing 12 months and rent roll, then adjust. Typical adjustments:
- Income: current in-place rent (often the trailing 3 months annualized), not pro forma; actual vacancy and credit loss, often with a minimum vacancy factor; other income only if it's consistent.
- Taxes: reassessed at the purchase price. In California, Proposition 13 resets the base on sale, which can raise taxes significantly on a long-held asset.
- Insurance: current quotes, which in California may be far above the seller's history.
- Management: a market fee (often 3–5% of income) even if you self-manage.
- Replacement reserves: a per-unit reserve, commonly around $250–$350 per unit per year.
The loan sizes on that number, so model your deal the way the lender will before you set your offer.
Full Sources and Uses
Your equity check is everything the loan doesn't cover:
- Uses: purchase price, lender origination and fees, third-party reports, title, escrow and legal, rate-cap or rate-lock costs, upfront reserves (tax, insurance, replacement, and any immediate repairs), capex budget and any interest reserve, and acquisition or partner fees.
- Sources: senior loan, any seller note or preferred equity the lender allows, and sponsor and investor equity.
On a typical stabilized acquisition, closing costs and reserves often add a few percent of the purchase price on top of the down payment. On value-add, upfront capex that the lender holds back can add much more.
Sponsor Net Worth and Liquidity
- Net worth: agency and many bank lenders look for net worth at least equal to the loan amount.
- Liquidity: post-closing liquid assets commonly equal to around 9–12 months of debt service, or a percentage of the loan, after your equity is in.
- Experience: ownership or management of comparable properties. Partnering with an experienced key principal can satisfy the requirement.
Related: Commercial Multifamily Loans Guide · Non-Recourse Carve-Outs · How Placement Compensation Works
Figures are typical ranges, not quotes; every loan is subject to underwriting and approval.
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