Help wanted for RE Debt interview/case please!

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Comments (8)

Apr 16, 2021 - 10:56am

1. NOI is your revenues less operating expenses. You're correct to exclude depreciation and mortgage expense.

2. I would personally include the security deposits as revenue, especially since they provided the information, but in reality some firms would exclude it from revenue for valuation purposes.

3. Since it sounds like they are just asking you to underwrite 2021 rent and not a multiple year cash flow, there's no need to discount anything to PV - your valuation of the property would be based on the forward looking twelve months (i.e. 2021) anyways. If they aren't asking for a multi-year cash flow, your valuation should just be a direct capitalization on the 2021 NOI.

4. Historical vs. Underwritten - Historical is the 2020 actuals they provided, underwritten is going to be the NOI you calculate based on the 2021 rent roll/expense forecasts they gave you.

5. Considering they gave you the actual monthly payments for the loan, you don't NEED to build an amortization table for LTV and DSCR, but I'd advise you do it anyways because it's not hard and shows you went the extra mile. Your LTV calculation is correct, DSCR needs to be flipped - it is a multiple, so your NOI divided by your total annual debt service (i.e. principal and interest payments).

6. Other relevant metrics - debt yield (NOI/loan amount) and loan constant (debt service/loan amount).

Apr 16, 2021 - 12:25pm

Thank you for this, super helpful!

I was wondering in terms of qualitative analysis, would the Borrower's other properties/financial profile be relevant to the loan? Or is the loan only able to be repaid by the commercial mortgage it is linked to (I'm unsure of industry practice)? Would be helpful to hear if there are any other factors besides absolute cash flow that go into looking into underwriting a loan. 

Apr 16, 2021 - 12:48pm

Depends entirely on the deal, lender, borrower, and market. Given its a pretty small scale borrower from the info you provided, I'd expect it to be a recourse loan where the borrower's other assets and financials are taken into account, but on an non-recourse loan not so much. 

Apr 16, 2021 - 1:05pm

Thank you, are there key categories of debt/loans or debt terms I should look into for CRE?

I also wanted to ask more on the discrepancies on Historical VS Underwritten/Forward Looking NOI. Given that the Rent Roll provided only shows rent / sq ft and recoveries and no operating expenses, should I apply the % of historical revenue that op ex was a percentage for them to be comparable? Given that there is a discrepancy, do base rent/recoveries ranges change often?

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