Have had some recent experience underwriting senior debt for a traditional recourse lender (bank), and my experience there was very much that underwriting the guarantor and borrower was WAY more important than underwriting the actual collateral. Basically if the appraisal said the property had an as-is value of $20MM, that's what the bank used, even if there was major tenant roll coming up or if the cap rate being used seemed unrealistic (i.e. office properties being valued at sub 7 caps, etc.).
By comparison, for a debt fund/non recourse lender, where the collateral I assume becomes more of a focal point than seeking repaying from a personal guarantee, how does the borrower underwriting process differ? For example, are credit reports run if the debt is non recourse? Are tax returns necessary? Where do the needs list items differ, if at all? Does a non recourse lender still request the same items more or less?
For non-recourse financing, the underwriting process indeed shifts focus significantly compared to traditional recourse lending. Based on the most helpful WSO content, here's how the borrower underwriting process and needs list typically differ for non-recourse lenders:
Collateral-Centric Underwriting:
Borrower Underwriting:
Tax Returns:
Needs List Differences:
Focus on Legal and Structural Protections:
In summary, while non-recourse lenders may still request some borrower-related items, the emphasis shifts heavily toward the collateral's performance and market viability. The underwriting process becomes more property-focused, with less reliance on the borrower's personal financial backing.
Sources: So you want to work in CRE Debt? Here are the options..., Private Credit Resources and Prep, Unscrupulous Brokers, Lazy Financiers,...Prudent Investors?, Credit Analyst Q&A, Credit Analyst Q&A
For a FNMA/Freddie loan, you don’t need to collect tax returns on the sponsorship. They do prefer a resume or at least a detailed bio on the Key Principals and management company . On the individual level, you need a PFS, schedule of real estate owned, liquidity verification, and explanation of any contingent liabilities. Credit checks are run via a Credit Authorization form that the borrower signs (includes drivers license and SSN). Third party reports include an appraisal, PCA/ESA (with radon testing), ALTA survey, and zoning report. Property level items include rent roll, T-12, 3 years of operating statements, delinquency report, and CapEx history.
Fannie Mae will let repeat borrowers lock their rate without receiving any of the third party reports, as long as they have the sponsor’s financial due diligence (PFS/REO/liquidity), lender inspection, and a title commitment. The rest can be received later. When doing this, the borrower acknowledges that they are risking their good faith deposit if the deal doesn’t close close for some reason (legal, environmental). They are also essentially signing off on the form loan docs since they may not get all (or any) of the doc mods they request post rate lock.
Can you explain contingent liabilities and why they’re relevant and an example of this?
A contingent liability would be any loan that has recourse to the Borrower if they were to default on the loan. Not only could the lender go after the property itself, but also the Borrower’s personal assets (bank accounts, home, cars, etc). If someone is worth $20MM but has a $10MM contingent liability (recourse construction loan or bank debt), lenders take this into consideration. Borrowers would much rather just hand over the keys to the property if things go sideways than have to put their personal assets at risk.
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