Here are the Fannie Mae guidelines for legally non-conforming properties:If the Property's characteristics are legally non-conforming, you must:ensure the Borrower executes the Modifications to Multifamily Loan and Security Agreement (Legal Non-Conforming Status) (Form 6275);confirm whether, if fully or partially destroyed, the Property's Improvements can be fully rebuilt to the pre-casualty condition per current laws, zoning requirements, and building codes; and if the Property’s Improvements cannot be fully rebuilt to the pre-casualty condition, evaluate if the as-rebuilt Property will support the Mortgage Loan at the current Tier, and document your analysis in the Transaction Approval Memo.To assess the Borrower's ability to rebuild Improvements on a non-conforming Property to a level that will support the Mortgage Loan at the current Tier, you should consider: conducting a threshold analysis to determine the resulting actual amortizing DSCR if the reconstructed Improvements cannot be rebuilt as-is per current law; the likelihood of a casualty event (e.g., wind, earthquake, fire, flood, mine subsidence, etc.); the percentage of damage to the Improvements at which the Property’s jurisdiction will require the Property be rebuilt to current zoning and land use requirements (i.e., the destruction threshold); which Property characteristics the destruction threshold percentage applies to, such as market value, assessed value, replacement cost, or unit count; for Properties with multiple buildings, if the destruction threshold percentage applies to each building, or all buildings as a whole; the replacement cost to rebuild per current requirements for zoning, and land use; the Property’s continued marketability, and economic viability; the amount and type of Borrower-maintained insurance coverage required per Part II, Chapter 5: Property and Liability Insurance, Section 501.02C: Ordinance or Law Insurance; insurance loss proceeds payout, compared to increased rebuilding costs, including from building code changes, Americans with Disabilities Act compliance, and the municipality's local zoning requirements (e.g., green compliance for new buildings, etc.); the sufficiency of estimated insurance proceeds from ordinance or law insurance and other coverages to repay the Mortgage Loan in the event of partial or full casualty, or condemnation; and for a Tier 3 or Tier 4 Mortgage Loan, if requiring execution of the Limited Payment Guaranty (Form 6020.LPG) would mitigate the risk of the as-rebuilt Property not supporting a Tier 2 Mortgage Loan.

Do a comp analysis to see what the market picked up and at what price, of apartment same type/age in the area.

It might be wise to have a contingency fund or plan in case costs exceed your initial estimates.Market Analysis: Ensure the rental demand in your area will support the rents you’re projecting.

You are spot on and this is the kind of detailed analysis we are looking into now! 

I know because some of the filings I've done on behalf of clients involve quite a bit of legal analysis BEFORE filing.Stanley F.

Use this as a basis for your analysis numbers for land prices. 

When a cost segregation study is also considered on the newly acquired property, additional analysis is recommended before finalizing the Sec. 1031 tax basis calculations.

Lenders might also require a history of rental income on the property or at least a market rent analysis to support the numbers.Given that you’re also looking for down payment assistance, which typically comes with its own set of lender requirements, your options might be a bit more limited.

That should be the analysis you do in order to get comfortable with the deal.

It would be interesting to do an analysis on the 10-20 year return pattern of cashing out a portion of your funds, pay the tax and invest in potentially better performing assets vs the REIT returns.