Sources and Uses for A Refinance: A Case Study

Background

I had been working with a client for over a year and a half to plan for the refinance of his multifamily property. He originally purchased the asset with a bridge loan, and it was time to transition into permanent financing.

The Analysis

As part of our underwriting process, I put together a detailed sources and uses chart. We concluded that a new loan would not only pay off the existing bridge loan, but also allow him to pull out equity to pay off several other unrelated loans. Everything penciled out cleanly—on paper, we were ready.

The Surprise at Closing

Prior to closing, we hit an unexpected snag: the equity cash-out was going to be $70,000 less than anticipated. What happened?

The loan was through Fannie Mae—which was the best execution available. It offered the highest loan proceeds, lowest interest rate, and longest amortization. However, Fannie Mae requires a Property Condition Assessment (PCA), which evaluates the physical condition of the property and identifies any “immediate repairs” that need to be addressed in the near term (typically within 1–12 months).

In our case, two major items flagged by the PCA were:

1. Parking lot repairs

2. Foundation work

   
   

To ensure these repairs are completed, Fannie Mae holds back a portion of the loan proceeds in a repair escrow. Once the borrower completes the repairs, any unused funds may be released. This holdback structure incentivizes borrowers to make repairs quickly and cost-effectively.

The Lesson Learned

I was already familiar with this requirement from Fannie Mae. What I could have done better was prepare the client for this possibility.

While the exact amount of the required repair escrow is unknowable until the PCA is completed, I could have better managed expectations. The property was in good shape—fully renovated units, well-maintained overall—but even properties in good condition can require immediate repairs by the PCA.

What I’ll Do Differently

Going forward, I plan to include a placeholder line in the sources and uses chart titled “Immediate Repair Budget” with a value of $0. I'll explain to the client that:

• This amount is currently unknown

• It could end up being $0— but probably not

• They should expect that something might be flagged, and that there may be a corresponding holdback

  
  

This simple adjustment will help clients be more emotionally and financially prepared for last-minute adjustments at closing.

Final Note: Context Matters

Bridge lenders also typically require a PCA and identify immediate repairs. But since borrowers using bridge loans are usually planning value-add improvements anyway, these repairs often overlap with the borrower’s renovation budget. As a result, the immediate repair holdback doesn’t come as a surprise—it’s often already baked into their strategy.

With a refinance, however, the borrower already owns the property and may not believe anything needs to be repaired at their property. If they weren’t planning to make additional improvements, a lender-required repair holdback can feel like an unexpected cost. That’s where proactive expectation-setting becomes helpful.