Underwriting my 10000th deal of the week (feels that way anyway). I get packages, and when possible I ask for a full set of financials. Not because I need to, but to assess how much of what I'm looking at is fabricated crap.
I worked in public accounting for a few years. Now in CRE, a good deal of the people I deal with don't have a firm grasp of accounting concepts. It goes without saying that the majority of financial statements don't tie. Interestingly enough, I never have had anyone I've dealt with on the financing side ever come back to me and say "hey this doesn't tie out", hell I'm not sure they even look at the BS or CF statement.
It makes me wonder if investors perform any of the DD on the financial statements. Granted the type of due diligence that goes into CRE is vastly different from your standard operating entity. I'm sure the more sophisticated institutional level investors dive deeper and may catch it, but I have yet to hear someone call BS.
How many complete and utter bullshit operating statements do you see on a regular basis? Ever call someone out on it? How often do you really look at the other statements?
I called BS on the financial statements of a deal when I was at Freddie Mac. My boss completely ignored me and approved the deal. Generally speaking, I try to divorce myself a bit from the financials given and just use them as a guide, not as gospel.
I feel like on the FNMA side it may be met with more scrutiny. Personally don't see a lot of deal flow through DUS, but have had a couple. I hate the whole premise of CRE financing can revolve around smashing a square peg into a round hole. Was there a big relationship behind the deal you called BS on?
Not sure what the regulatory environment/internal policy looks like where you're working, but for the most part when financing CRE projects we always require operating statements, tax returns, and audited financials. I think my employer requires all of the aforementioned financials because they are doing their best to jump ahead of the FLA and ECOA.
When delving into the tax returns we sometimes find a different story from their operating statements and, in some cases, their audited financials. I have yet to see them call any particular customer out on the matter but the issue does arise more than I would have expected.
The reality is, a lender can underwrite to whatever level it wants to underwrite to. If you receive audited financial statements you can still underwrite higher or lower revenue, higher or lower operating expenses, add in reserves, and increase or decrease vacancy. Even accurate financial statements are just a guide for a loan underwriter.
While this is true, I don't think it's wrong if it's properly noted and labeled, not just a deleted row in an excel file. It's the same story when you look at acquiring a business. You remove discretionary and non-recurring items to arrive at how the entity should/could/would operate. But these should be highly scrutinized and reviewed.
Also, I hate underwriting to tax returns especially on smaller owner/operators. Truth is I expect deviation there, most people will stuff as many expenses as they can into the returns to minimize their tax liability. But I understand why for sake of conservatism why a lender would want to use the tax returns as the basis for deriving CF.
...so long as said lender gets 4506s filed for each year return he underwrote to, to ensure what was provided to him was what was actually filed. I've had deals where this was not the case; (prospective) borrower provided doctored returns, we busted him with the 4506s.
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