Commercial Real Estate Underwriting steps through the entire analytical process for a commercial real estate credit decision following the analytical sequence emphasized by the regulators in their October 30, 2009 policy statement. At the end of the eight online sessions, participants will know precisely how to assess the borrower, the guarantor, and the property - including the application and use of global cash flow techniques - and present their conclusions and recommendations in a generic credit write-up format.
Target Audience
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
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1. The Credit Write-Up and the CRE Analytical Process
... four essentials you shouldn't forget
In the first webinar session, participants identify the four essential issues that must be addressed in every credit write-up. They review the sequential analytical steps in the credit decision process as suggested by the Financial Regulators' Policy Statement. They identify obvious risk issues that emerge from a comprehensive examination of the financial statements for a prospective borrower. In addition, participants identify the relevant similarities and differences between and among the common types of business organizations - Subchapter C corporations, Subchapter S corporations, partnerships and limited liability companies (LLCs), and sole proprietorships - and they examine the purpose and key elements of a single purpose entity (SPE).
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology.
Objectives:
By the end of the webinar session, participants will be able to: - Identify the four essential analytical issues that must be addressed in every credit write-up, regardless of borrower, business organization, industry, or proposed credit facilities.
- Identify the suggested sequence of analysis - and key focal points - for a proposed commercial real estate transaction recommended in the Financial Regulators' Policy Statement.
- State the sequential analytical steps that assure each of the four essential issues are addressed - and the regulators' analytical sequence fully incorporated - in the analytical process leading to a credit decision.
- Identify the apparent severity of the risk issues and their implications for company management that emerge from examination of financial statements for a real estate developer.
- Identify the similarities and differences between and among the five most common business organizations -Subchapter C corporations, Subchapter S corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.
- Identify the purpose and key elements of a single purpose entity (SPE) and assess the differences in its financial statements from those for a real estate partnership with numerous income-producing properties.
Materials and Preparation for this Course:
- Credit Refresher on The Credit Write-Up
- Financial Regulators' Policy Statement on Prudent Commercial Real Estate Workouts
- Financial Statements for Sequoia Properties
- Excerpts from Sequoia Properties' Credit Narrative
- Exercise for the Session 1 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review the Federal Regulators' Policy Statement on Prudent Commercial Real Estate Workouts.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
2. Ratios, Borrower Cash Flow, and the First Way Out
... not all ratios and cash flows are equal
In the second webinar session, participants review the fundamental difference between description and analysis in presenting a financial statement review. They compute key financial ratios and identify likely borrowing causes and repayment sources based on the performance ratios. They examine and assess the computations of two popular cash flow measures - traditional "cash flow" or net income + non-cash charges and the Uniform Credit Analysis (UCA) cash flow statement. Participants identify borrowing causes and cash repayment sources based on the UCA cash flow statement. In addition, they explore the necessary adjustments to reported net profit to accommodate distributions, withdrawals, and loans to owners in establishing a borrower's ability to meet the two necessary conditions for business success.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well completion of Session 1.
Objectives:
By the end of the webinar session, participants will be able to:- Compute key financial ratios and identify their use in helping to establish the risk profile of a business, including implications for borrowing causes, repayment sources, and risks to repayment sources.
- Convert reported net income for non-Subchapter C corporations to actual business income, and understand the reasons for doing so, in assessing whether a company satisfies the first necessary condition for business success.
- Assess the benefits and limitations of traditional "cash flow" - net income + non-cash charges - in identifying borrowing causes and the cash sources of debt repayment.
- Assess the benefits and limitations of the Uniform Credit Analysis (UCA) cash flow statement in identifying borrowing causes and the cash sources of debt repayment.
- Identify the reasons for differences in risk assessment messages provided by traditional "cash flow" and the UCA cash flow statement and evaluate the possible adverse impact of relying on traditional "cash flow" to provide a measure of risk assessment.
- Explain the concepts underlying the second necessary condition for business success and determine whether the borrower was able to meet the condition.
Materials and Preparation for this Course:
- Credit Refresher on Accounting Profit and Business Profit
- Credit Refresher on The ABCs of Cash Flow
- Financial Statements for Sequoia Properties
- Exercise for the Session 2 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the two Credit Refreshers.
- Review the financial statements for Sequoia Properties.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
3. Guarantor Analysis, Global Cash Flow, and the Second Way Out
... ready cash is everything
In the third webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting profitability and cash flow. They construct a personal cash flow statement from personal financial statement and personal income tax return information. They estimate the amount of personal cash flow available to support business debt service in good times and in a business cash flow crisis, as well as estimate the amount of ready cash support a guarantor can provide in a business cash flow crisis. In addition, participants explore the construction of a global cash flow statement and assess its benefits and limitations as an analytical tool in reaching a credit decision.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Construct a personal cash flow statement using personal financial statement information and personal income tax return information.
- Identify the likely amount of personal cash flow available to support business debt service in good times based on the resulting personal cash flow statement.
- Identify the amount of ready cash available to a guarantor from business-related cash flow and from the liquidation of personal assets in a cash flow crisis and evaluate the estimate of ready cash against the cash needed to support the guarantor's life style and personal living expenses.
- Implement the analytical process for conducting global cash flow analysis for companies with common ownership, including the specific borrower.
- Construct global cash flows under various assumptions about the owners' ability to provide ready cash in a crisis, drawing on information in the personal cash flow statement and personal financial statement of the guarantor.
- Assess the use and application of global cash flow analysis in identifying likely cash pressures from one or more related parties that may impede the borrower's ability to properly service its interest-bearing debt.
Materials and Preparation for this Course:
- Credit Refresher on Global Cash Flow vs. Global Cash Support
- Excerpts from Financial Statements for Clovis Supply, Inc., Fresno Properties LLC, and Modesto Services, Inc.
- Personal Financial Statement and Personal Income Tax Returns for Fritz Schumacher
- Exercise for the Session 3 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review the personal financial statement and personal income tax returns for Fritz Schumacher.
- Peruse the excerpts from the financial statements for Clovis Supply, Inc., Fresno Properties LLC, and Modesto Services, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
4. The Appraisal Report and Approaches to Market Value
... spotlight on underlying assumptions
In the fourth webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting guarantor and global cash flow statements. They examine the information, evidence, or documents necessary to estimate property market value, cash flow, asset quality, access to the property and its stream of income in case of default. They review the sole purpose of the appraisal report and the three standard approaches to establishing market value with specific emphasis on the sales comparison approach to value, the validity of information for comparable properties, and the role of appraiser adjustments. In addition, participants examine the implications for the capitalization rate using information in the sales comparison approach to market value.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the information, evidence, or documents necessary to estimate a property's market value and net operating income, or cash flow, available to service interest-bearing debt.
- Identify the information, evidence, or documents necessary to assess the existing quality of the property and potential liabilities associated with it.
- Identify the information, evidence, or documents necessary to establish a lender's access to both the property itself and the property's stream of income in the case of default.
- State the sole purpose of the appraisal report, the three standard approaches for estimating market value of an income producing property, and the underlying concepts that support the sales comparison approach to value.
- Show how an appraiser's uses adjustments to conform comparable properties to the subject property and assess the implications for the capitalization rate.
- Assess the benefits, limitations, and use of the sales comparison approach to value in arriving at an estimate of market value for an income producing property.
Materials and Preparation for this Course:
- Credit Refresher on Net Operating Income or Market Value?
- Terms and Concepts - Commercial Real Estate
- Excerpts from Shadelands Glen's Appraisal Report
- Exercise for the Session 4 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Peruse Terms and Concepts – Commercial Real Estate.
- Peruse the extracts from the appraisal report for Shadelands Glen.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
Program level: Intermediate
Recommended CPE credits: 2.4
Recommended field of study:Specialized Knowledge
Advanced Preparation: Printing and reviewing course materials
Delivery Method: Group Internet Based
5. The Income Capitalization Approach and the Cap Rate
... what if or what is?
In the fifth webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting the sales comparison approach to market value. They review the concepts underlying the income capitalization approach to value. They examine the components and considerations that shape and determine a capitalization rate. They review the rationale and limitations in using stabilized values for the key valuation assumptions under the income capitalization approach and the resulting implications for market value, property cash flow, financing, and debt service capability. In addition, participants explore the benefits and limitations of using the income capitalization approach in estimating market value for an income producing property.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Understand and explain the basic concepts and critical assumptions that underlie the income capitalization approach to estimating market value.
- Understand and explain the concepts underlying the conversion of a stream of income to an asset value, including key assumptions about movements or changes in the stream of income, in the interest rate structure, and in the applicable time horizon for a given stream of income.
- Identify the components that comprise an investor's rate of return on an income producing property and explain the relationship between the capitalization rate and the general structure of interest rates, yields on investments in comparable risk assets, and specific income producing property risk considerations.
- Identify differences, if any, between actual data for operating expenses and rental income and estimates for operating expenses and rental income used in arriving at an estimate of market value under the income capitalization approach and explain the rationale for using stabilized rather than actual values in the process.
- Assess the implications for market value, net operating income, financing amounts, and debt service capabilities from the use and application of actual versus stabilized values for rental rates, vacancy levels, and operating expenses.
- Assess the benefits, limitations, and practical use of the income capitalization approach to value in arriving at an estimate of market value for an income producing property.
Materials and Preparation for this Course:
- Credit Refresher on Net Operating Income or Market Value?
- Terms and Concepts - Commercial Real Estate
- Excerpts from Shadelands Glen's Appraisal Report
- Rent Rolls for Shadelands Glen
- Exercise for the Session 5 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Review the Credit Refresher.
- Read “Capitalization Rate”, “Income Capitalization Approach to Valuation”, and “Rent Rolls” in Terms and Concepts – Commercial Real Estate.
- Peruse the rent rolls for Shadelands Glen.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
Program level: Intermediate
Recommended CPE credits: 2.4
Recommended field of study:Specialized Knowledge
Advanced Preparation: Printing and reviewing course materials
Delivery Method: Group Internet Based
6. Underwriting Standards, Actual vs. Stabilized NOI, and Breakeven Analysis
... cash flow trumps market value
In the sixth webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting the income capitalization approach to value. They explore the application of a lender’s underwriting guidelines to a proposed financing under both stabilized assumptions for net operating income and actual net operating income. They review break-even computations and how they are used in estimating an income producing property’s prospects for withstanding market disruptions, particularly a disruption from an increase in its vacancy rate. In addition, participants explore the considerations that determine an investor’s decision to purchase an income producing property, given alternative investment opportunities.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower’s prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Use the debt service constant in computing debt service and maximum financing amounts, given a debt service coverage (DSC) minimum.
- Apply a lender's underwriting guidelines to a proposed property acquisition and determine whether loan-to-value (LTV) and debt service coverage (DSC) requirements are met, using the appraiser's estimate of market value as the starting point in the assessment process.
- Use the debt service constant for a given set of financing terms to estimate the maximum term debt that can be supported by an income producing property's stabilized and current net operating income (NOI).
- Apply breakeven analysis in assessing an income producing property's ability to withstand market disturbances under both stabilized and current NOI.
- Estimate an equity investor's rate of return from property cash flow under differing assumptions about property value, financing, and net operating income.
- Identify the range of considerations that determine an investor's decision to acquire an income producing property, including alternative yields from investment in comparable risk assets and the role of property price expectations - either positive or negative.
Materials and Preparation for this Course:
- Credit Refresher on Net Operating Income or Market Value?
- Terms and Concepts - Commercial Real Estate
- Excerpts from Shadelands Glen's Appraisal Report
- Shadelands Glen - Historical Operating Results
- Rent Rolls for Shadelands Glen
- Exercise for the Session 6 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:- Read "Break-even Rental Rate" and "Break-even Vacancy Rate" in Terms and Concepts - Commercial Real Estate.
- Review the rent rolls for Shadelands Glen.
- Review the 2016, 2017, and annualized 2018 operating statements for Shadelands Glen.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Credit College : Real Estate
Program level: Intermediate
Recommended CPE credits: 2.4
Recommended field of study:Specialized Knowledge
Advanced Preparation: Printing and reviewing course materials
Delivery Method: Group Internet Based
7. Management Assessment, Competitive Forces, and Projected Performance
... management makes it happen - or not
In the seventh webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting the application of underwriting standards. They examine the management capabilities essential for business success. They explore the competitive forces that will likely impact key Business Drivers. They examine the methodology for shaping Business Driver values for a "most likely" projection scenario for the borrower. In addition, participants assess the projected UCA cash flow statement in identifying borrowing causes and likely repayment sources. Further, they explore a range of common non-financial red flags that may emerge and impact the borrower's operating performance in the coming period.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to: - Identify management capabilities that must be in place and working effectively for a company to succeed in both good and bad times.
- Identify the competitive forces at work in the borrower's market and assess their likely impact on key Business Drivers and subsequent financial performance.
- Implement the methodology for shaping assumptions about future Business Driver values in a "most likely" projection scenario for the borrower that includes projected revenues and expenses for the income producing property.
- Use projection results and the projected UCA cash flow statement to determine borrowing causes and cash repayments sources.
- Assess historical and projected UCA cash flow statements to identify the likely amount of additional short and long term interest-bearing debt required by the borrower and compare those amounts with the borrower's requests.
- Identify non-financial red flags that may apply to the borrower, including the subject property, and assess their likely impact on borrowing causes and repayment sources in the next operating period.
Materials and Preparation for this Course:
- Excerpts from Financial Statements for Clovis Supply, Inc., Fresno Properties LLC, and Modesto Services, Inc.
- Personal Financial Statement and Personal Cash Flow Statement for Fritz Schumacher
- Excerpts from Shadelands Glen's Credit Narrative
- Financial Statements for Sequoia Properties
- Exercise for the Session 7 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Review the 2018 operating results for Clovis Supply, Fresno Properties, and Modesto Services.
- Review Fritz Schumacher’s personal financial statement and 2018 personal cash flow statement, which were addressed and examined in Session 3.
- Examine the Credit Narrative for information about Sequoia Properties’ management competence and abilities.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
8. Repayment Risks, Covenants, and the Credit Write-Up Revisited
... covenants and the unforgettable essentials
In the eighth and final webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting projections. They examine documentation relevant to the income producing property. They identify the projected borrowing causes, likely cash sources of repayment, risks to the cash repayment sources, and practical mitigants to repayment risks for the borrower. They assess the most persuasive arguments in support of the loan request and the most persuasive arguments opposed to the loan request. In addition, participants examine the impact on the credit decision if the owners were to create a special purpose entity (SPE) to house the proposed acquisition. As a final step in bringing closure to the Credit College, they review the four essential analytical issues that must be addressed in every credit write-up.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial real estate borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify documentation necessary to determine the quality of the subject property as well as assure lender access to the subject property and its stream of income in the event of default.
- Identify the projected borrowing causes, likely cash repayment sources, risks to the cash sources of repayment, and practical mitigants to those risks.
- Assess a range of arguments in favor of the loan request and a range of arguments opposed to the loan request, based on the analytical conclusions for the borrower.
- Identify the single most persuasive argument in favor and the single most persuasive argument against the loan request.
- Assess the likely impact on the credit decision if the owners were to create a single purpose entity (SPE) to house the proposed acquisition of the apartment complex.
- Implement the analytical decision process and state the rationale and critical importance of each of the four analytical essentials that every credit write-up must address in reaching a credit decision.
Materials and Preparation for this Course:
- Credit Refresher on Non-Financial Red Flags
- Terms and Concepts - Business Organizations
- Reference Guide on Loan Covenants and Risk Mitigants
- Excerpts from Sequoia Properties Credit Narrative
- Solutions for Session 7
- Exercise for the Session 8 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review excerpts from the Credit Narrative for Sequoia Properties.
- Review Session 7 written solutions.
- Read "Special Purpose Entity" in Terms and Concepts - Business Organizations.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Real Estate Underwriting
