Underwriting treatment of passive losses from a syndication

[Will Dixon]

I am currently going through underwriting for the first time. I was able to meet the income qualifications for the loan I am seeking, but found it very odd how underwriting treats passive losses for income qualification purposes. I was wondering if someone familiar with the process could shed some light on this.

I am an LP in a syndication that began in 2019. I reported a loss on my tax return of -$4,116 from the investment. I would venture to say the investment was cash flow positive, but the loss cals from accelerated depreciation taken in the first year as a result of a cost segregation. The investment itself is distributing 13% CoC annually. On my loan paperwork, it lists other income/loss of -$343/mo (-$4,116/12).

This totally contradicts how my own rental property was treated for income qualifications. NOI of -$49k was adjusted to $46k by adding back depreciation, taxes, interest, and insurance. $6,600/mo of income qualification based on 7 months of occupancy.

Why are these rental activities treated so differently for underwriting purposes? Are there any ways to provide support to an underwriter to either disregard a passive loss from a syndication or maybe treat it as a positive value if you could provide support from the partnership tax return? I understand distributions is a gray area to treat as a cash flow since they could just be returning your initial investment.

Are the government regulations being painted with too broad of a brush stroke?

TIA

[Andrew Postell]

@Will Dixon the way a conventional, conforming loan (Fannie/Freddie residential loan) is underwritten is entirely different than a commercial loan....or a loan you would get on a 5+ unit property.  And yes, even if it's a commercial loan from Fannie Mae or Freddie Mac.  So it's not up to the lender or underwriter when they qualify you for a residential loan with Fannie/Freddie....it's up to Fannie/Freddie.  So the underwriting method is called from outside that lending institution and residential is based on your personal income, your personal tax returns, and your personal credit, etc.   

Now, one side bar here - if you have a standard W2 job from a company that you do not OWN....then any loses from a Schedule E company do not matter.  So if it's a syndication, then it is likely strutured as a Partnership or Corporation that is reported under "PART II" of your "SCHEDULE E" on your personal returns.  If you have a W2 job, then that loss does not have to be counted.  And ANOTHER side bar here - not every lender will follow that rule.  But some will.  So if you are W2, check with you lender on this rule when seeking residential loans and only work with ones that won't count it as a loss....if that scenario applies to you.

Hope all this made sense.  Thanks!