CRE Underwriting and Credit Analysis
Hi all,
First time, long time. I graduated this year and only recently got a job as an analyst for a small regional bank. I know the time will come but without having hundreds of deal reps under my belt, what would be the best way to learn or teach myself how to review a loan request and analyze the credit to determine if it's worth spending time on it or not? I know the senior people have a natural talent to go along with their years of experience but I want to give myself any opportunity to learn how to be a better credit analyst and identify risks and mitigants of a deal.
What are some tips or exercises you guys would recommend to help shorten the learning curve, outside of live reps? What are important things to review or identify at first and second glance?
To sharpen your skills in CRE underwriting and credit analysis, here are some actionable tips and exercises based on the most helpful WSO content:
1. Understand Key Financial Metrics and Analysis
2. Develop a Risk Assessment Framework
3. Practice Modeling and Analysis
4. Study Industry-Specific Nuances
5. Leverage Resources and Self-Training
6. Focus on Risk Mitigation
7. Build a Strong Foundation in Debt and Lending Products
8. Hone Your Analytical and Decision-Making Skills
By consistently applying these strategies, you'll accelerate your learning curve and position yourself as a strong credit analyst in the CRE space.
Sources: Credit Analyst Q&A, Overview of Leveraged Finance, Credit Analyst Q&A, Analyst Interview - Common Questions
First - this comment: ["what would be the best way to learn ... if it's worth spending time on it or not?"] piqued my curiosity. As an analyst, this is (typically) not your prerogative. If a lender brings a deal to the bank, you're to work on it until it gets shut down by credit or rejected by the borrower. Your bank may do things differently since its a small regional, but that would be surprising to me. Might be worth clarifying what the expectations are from your lenders. If you are in an analyst pool, that can tend to be an echo chamber where everyone complains about working on deals that go no where and "wasting their time" and being frustrated at how DuMb ThE lEnDeRs ArE for not seeing HoW bAd these HoRriBlE dEaLs are!!!!1. The analyst is the low person on the totem pole and the job is to work the deals. If I'm reading your situation wrong, disregard, but I've seen this many times. If I'm reading it right, don't get sucked into that vortex.
With that being said, in CRE (in context of commercial lending at a small regional bank) the business is very formulaic. The ratios that drive appetite are DSC, LTC/LTV, and debt yield. Probably an additional metric that will be transaction-specific based on property type or something but realistically... if you have a deal that misses the mark on any two of those things: it's probably not going anywhere without some other type of credit enhancement. The importance of those ratios is proportional to the size of the transaction for what should be obvious reasons.
Second, not the response you want but there really isn't any substitute for time in the seat. Best thing you can do is just ask for more work and ask lots of questions of both the RM and the credit folks decisioning the deals. If you're really ambitious you could pull a report showing the biggest exposures in the bank/region/market you support and then go find the credit packages in file that were used to approve those deals. Read what they wrote about those deals and look for themes common to what you're working on.
Third, best exercise you can do on any deal crossing your desk is to verify every fact and assumption. Take nothing for granted. Simple example:
That's a series of questions related to two single numbers that make up one of the most important ratios in a CRE deal and you can see there's nuance to each one that can't necessarily be taken at face value. Do this exercise for every number that is meaningful in the analysis and you'll be a better analyst. But it will take time.
Thank you. I should clarify that I wasn't trying to bypass my responsibilities but rather look for ways to accelerate or support my learning that I'll get on the job. The qualitative info you provided is super helpful but I agree that the reps and pattern recognition are what will really help me become a better UW and real estate person.
Best way to learn is by reviewing as many real deals as you can and asking seniors how they think through risk. Patterns start to click fast once you’ve seen enough reps.
"What are important things to review or identify at first and second glance?"
Before you dive into all the ratios noted above, you need to familiarize yourself with the most important factor in real estate...Location Location Location!!!. The best thing you can do to shorten the learning curve is get to know the markets your bank is targeting. e.g. trendy neighborhoods, bad neighborhoods, gentrifying neighborhoods, overbuilt neighborhoods, paths of growth, high/low barriers to entry, demographics, crime stats, school districts, etc. Eventually you should be able to tell right away if a property is in a location you'd be comfortable pitching to committee.
i never cared about location that much working at a lender doing credit uw. Location will impact the rents achieved at the property, so that 'analysis' the market has already done for you via the rent roll that you receive and the rents within
What about crime?
Thank you, this is helpful and the old real estate adage. Outside of location, what would you say is important to past the sniff test of a deal or request in order for you to allocate more resources to it?
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