• Shockproof! Training
  • 1.866.237.7228
  • Non-Member

    Membership Check

    Please enter your email address and we will check to see if a membership exists for your organization.

    Check Cancel
  • Account
    • Sign in

      If you have an account, please enter your login information.

      Sign-in

      Find Enrollments

      To quickly access links to materials or Session Access instructions, enter the email address used when enrollment was performed.

      Click "Find Now" to begin search.

      Find Now

      Forgot your password?

      Please provide your email address and we'll email you a reminder.

      Send it to me!

      Subscribe

      Please provide the information below to receive our mailings.

      Subscribe!
      Account Options
      1. Sign In... enter the resource center
      2. Access Materials... find my enrollments
      3. Forgot password?... memories fade
      4. Subscribe... to receive our mailings
      5. Contact us... if you have any questions, just ask
      6. Create a User Account* requires membership
  • Sign-in
  • Home
  • Products
  • Learning Paths
  • Calendar
  • Pricing
  • Communications
  • Contact Us
  • Help
  • About Us
  • Membership Check
  • Account

Instructor Blog - Credit College - Commercial Real Estate

  1. Home
  2. Communications
  3. Instructor Blog
  4. Credit College - Commercial Real Estate

Session #6: Underwriting Standards. Actual vs. Stabilized NOI, and Breakeven Analysis


  • admin

  • 12/1/2021 4:03:10 PM

  • 533

  • Credit College - Commercial Real Estate
  • Copy / Share Link

Q: Can you go over the parameters of analytical and descriptive statements in your opinion? How do you assess statements as they are presented in a package? What is your point of view in general as you review statements?

 A: First, it is important to recognize that both descriptive and analytical statements are important components of any analytical write-up. The descriptive statement provides facts without assessment. The analytical statement provides the relevance or importance of the facts in the descriptive statement. It is absolutely critical the appropriate facts are stated in a write up - as the first necessary step - and then that the relevance or importance of those facts are clearly stated by answering the "so what?" question.

Our focus in these sessions is to alert participants to the distinction between a descriptive statement and an analytical statement. In addition, we stress how important it is to avoid providing only facts without an associated analysis of those facts. Facts only become elevator analysis. The reader is told that key performance measures improve or deteriorate but is not informed about the significance of the movement in the performance ratio to a) the borrowing cause, b) the cash sources or repayment, c) the risks to a cash source of repayment, or d) the mitigants to the risk or risks.

Q: Could you please explain the difference between debt constant and the multiplier? Thank you.

A:  The debt constant is a unique number for every combination of a) the interest rate, b) the amortization period, c) and the payment frequency. Once identified, a lender can use it to determine the annual debt service for a proposed amount of debt. If the debt constant is for equal quarterly payments, the annual debt service is divided by four to get the amount of equal quarterly debt service. If the constant is for equal monthly payments, the annual debt service is divided by 12 to get the amount of equal monthly payments.

In our initial example, we used the debt constant for an interest rate of 6.00% with a 25-year amortization period, and equal monthly payments, which is 0.077316.  To determine the annual debt service with this pricing for a term loan of $4,181,250, we multiply the term loan amount by the debt constant to get annual debt service of $323,278 and monthly debt service of $26,940.

We then illustrated how lenders can use the debt constant to determine how much debt a given amount of net operating income (NOI) can support. To compute this amount, we divide the available NOI by the debt constant.

Q: On Break Even Vacancy why do we have to do 1.00 minus a value?  Basically, why do we have to deduct the fraction from the 1.00? What does that 1 represent? Thank you

A:  In effect, we first determine what percentage of potential gross income is absorbed by the sum of operating expenses and debt service. We then subtract this percentage amount from 1.00 to estimate the percentage of potential gross income that could be lost before the sum of operating expenses and debt service just match potential gross income. In this instance, potential gross income could fall by 6.8% before operating expenses and debt service were just covered by gross potential income - not much wiggle room if market conditions turn adverse.

Another approach to get at the same issue is to measure the sum of operating expenses and debt service against potential gross income. Using the same example, we see that potential gross income exceeds the sum of operating expenses and debt service by $35,825. This latter amount represents revenue from just two apartments, so if the property lost two tenants, it would be roughly at break-even.

Course overview: Underwriting Standards, Actual vs. Stabilized NOI, and Breakeven Analysis

 

Categories
  • Commercial Real Estate(33)
    • Commercial Real Estate(32)
    • Questions: Commercial Real Estate - Hands On(1)
  • Contractors(52)
    • Understanding and Analyzing Contractor Financial Statements: Part I of II(32)
    • Understanding and Analyzing Contractor Financial Statements: Part II of II(20)
  • Covenants(11)
    • Complex Loan Structuring(1)
    • Covenant Testing(1)
    • Covenant Use in Controlling Cash Outflows(5)
    • Financial Gap Ratio(1)
    • Financing Gap revisited(1)
    • The Financing Gap Ratio - defined(1)
    • UCA cash flow and debt service coverage?(1)
  • Credit College - Accounting Essentials(107)
    • Session #1: Financial Statement Structure and Composition(39)
    • Session #2: Double Entry Accounting, the Accounting Equation, and Debits and Credits(24)
    • Session #3: Critical Accounting Principles and Assumptions and More Debits and Credits(23)
    • Session #4: Recording Transactions and Creating the Balance Sheet and Income Statement(21)
  • Credit College - Cash Flow(14)
    • Session #1: UCA Cash Flow Statement, Traditional "Cash Flow," and EBITDA(8)
    • Session #2: Cash Impact Analysis, Borrowing Causes Revisited, and Management Assessment(2)
    • Session #3: FASB 95 Statement of Cash Flows Conversion to UCA Cash Flow Statement(1)
    • Session #4: Cash Flow Proxies, Debt Capacity, and the UCA Cash Flow Statement(3)
  • Credit College - Commercial Business(208)
    • Session #1: Analytical Decision Tree and the Credit Write-Up(29)
    • Session #2: Financial Statement Review and Ratio Analysis(43)
    • Session #3: Cash Flow Analysis and Borrowing Causes(34)
    • Session #4: Management Assessment, Projected Cash Flow, and the First Way Out(20)
    • Session #5: Guarantor Analysis and the Second Way Out(30)
    • Session #6: Non-Financial Red Flags and Performance Implications(13)
    • Session #7: Identifying and Mitigating Repayment Risks(21)
    • Session #8: The Credit Write-Up Again(18)
  • Credit College - Commercial Real Estate(218)
    • Session #1: The Credit Write-Up and the CRE Analytical Process(28)
    • Session #2: Ratios, Borrower Cash Flow, and the First Way Out(33)
    • Session #3: Guarantor Analysis, Global Cash Flow, and the Second Way Out(40)
    • Session #4: The Appraisal Report and Approaches to Market Value(9)
    • Session #5: The Income Capitalization Approach and the Cap Rate(24)
    • Session #6: Underwriting Standards. Actual vs. Stabilized NOI, and Breakeven Analysis(54)
    • Session #7: Management Assessment, Competitive Forces, and Projected Performance(16)
    • Session #8: Repayment Risks, Covenants, and the Credit Write-Up Revisited(14)
  • Credit College - Credit Basics(93)
    • General(1)
    • Session #1: Understanding Financial Statements and Business Organizations(34)
    • Session #2: Personal Qualities and Competitive Advantages(8)
    • Session #3: Critical Ratios and The First Necessary Condition for Business Success(28)
    • Session #4: Non-Financial Red Flags, Cash Flow and Second Necessary Condition for Business Success(22)
  • Credit College - Taxes(213)
    • Analysis Using Business Tax Returns(1)
    • Converting business income tax returns into accrual financial statements(1)
    • Employee Retention Credit (ERC)(1)
    • Session #1: Business Income Tax Returns(21)
    • Session #2: The Section 179 Deduction(29)
    • Session #3: Understanding Schedules K-1(19)
    • Session #4: Personal Income Tax Returns and Cash Flow(14)
    • Session #5: Schedule M-1 and the Accrual Income Statement(25)
    • Session #6: Business Income Tax Returns and Ratio Analysis(58)
    • Session #7: Business Income Tax Returns and Cash Flow Analysis(23)
    • Session #8: Cash Based Income Tax Returns(21)
  • Credit Curriculum(1)
  • Credit Write Up(33)
    • Analytical Focus in the Credit Write Up(27)
    • Description and Analysis in the Credit Write-Up(6)
  • Debt Capacity(9)
  • Financial Analysis(55)
    • ACS (Accounting Standards Codification) 842(1)
    • Analysis when one spouse is not a guarantor(1)
    • Auto Dealer analysis(1)
    • Auto Dealership/UCA/Floor-Plan debt(1)
    • Capital Gains(1)
    • Cash distributions, Business cash flow and Guarantor global cash flow(1)
    • Corporate tax return or CPA prepared financial statements?(1)
    • CPA firms and legal firms(1)
    • Credit Analysis Question(1)
    • CSVLI - Cash Surrender Value of Life Insurance(1)
    • Depreciation FAQ(1)
    • Distributions(1)
    • Distributions taken from prior year earnings(1)
    • EBITDA, Defined(1)
    • ESOP financing(1)
    • FAQ - calculating Business Profit (1)
    • Financing Needs(2)
    • Flooring Lines(1)
    • Funded Debt to EBITDA(1)
    • Gain on sale and traditional cash flow(1)
    • Insurance Company statements(1)
    • Language of Business On-Line Classroom Q & A(1)
    • Lending to a Start-up(1)
    • Market and industry data sources(1)
    • More on Depreciation(1)
    • Participations and private equity firms(1)
    • Pitfalls of Partial Analysis(4)
    • Prior Period Adjustments to Retained Earnings(1)
    • Ratios and Messages about Profitability and Cash Flow(12)
    • Schedule L(1)
    • Section 263A(1)
    • Self-Employment Tax(1)
    • Session #1: Business Income Tax Returns(1)
    • Session #2: The Section 179 Deduction(1)
    • SG&A% - Another FAQ(1)
    • SG&BC Course Progress Check Question(1)
    • Syndicated Loans(1)
    • Tax Returns vs. Accrual Statements in Assessing Borrower Risk(2)
    • UCA debt coverage ratio for an interim(1)
  • Five Cs of Credit(10)
  • Fund Accounting(52)
    • Fund Accounting and Municipality Analysis: Part I of II(31)
    • Fund Accounting and Municipality Analysis: Part II of II(20)
    • GASB 68(1)
  • Global Cash Flow(51)
    • Borrower with many corporations(1)
    • Global Cash Flow(50)
  • Healthcare(18)
    • Assessing Hospital Financial Performance(6)
    • Assessing Medical Practices(9)
    • Forces Impacting Hospital Financial Performance(3)
  • Loan Documentation(53)
    • Commercial Loan Documentation(30)
    • Commercial Real Estate Loan Documentation(23)
  • Minimum Financial Data(14)
  • Not for Profit Analysis(24)
  • Personal Income Tax Returns and Cash Flow(65)
    • Session #3: Understanding Schedules K-1(27)
    • Session #4: Personal Income Tax Returns and Cash Flow(38)
  • Problem Loans - Loan Classification(2)
  • Projections(22)
    • Projections and Repayment Sources: Part I of II(13)
    • Projections and Repayment Sources: Part II of II(9)
  • Spreading Financial Statements(6)
  • Stress Testing(1)
  • Testing(2)
    • Exams(1)
    • How do the Credit College exams work?(1)
  • Trusts(2)
    • Trust Returns(1)
    • Trusts(1)
  • UCA Cash Flow(58)
    • Advanced UCA Cash Flow: Part I of II(51)
    • Advanced UCA Cash Flow: Part II of II(4)
    • Related Party Transactions and the UCA Cash Flow Statement(1)
    • Sales Neutral Business Cash Income(1)
    • UCA Cash Flow and Agricultural Loans(1)
  • Working Capital and UCA Cash Flow(27)
Shockproof! Training

PO Box 30304 Walnut Creek, CA 94598
1.866.237.7228 support@shockproof.com

  • About
  • Career Opportunities

© Copyright 2001-2025 Shockproof! Training