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.
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).
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.
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.
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.
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.
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.
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.
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.