Hello all,
I've asked a lot of questions here before and always found great answers, so I'm back once again. First, a bit of background:
I've worked in commercial real estate for a few years now. I spent a year working for a family owned real estate developer - they hadn't ran operating budgets in 5 years (family owned) so I came onboard and built them and did the usual budgeting process of comparing actuals to budget and figuring out where the variances were.
For the last 3 years I've been in corporate real estate at a professional services firm. I manage a portfolio of 20+ offices globally (rent and capital expenses) with the usual actual versus budget variance managing. I also review leases, work on stay versus go analyses when a lease comes up, and work on theoreticals for budgeting purposes when we're poaching talent (common in the field).
I had a networking coffee with a very senior person at an investment platform. I was just hoping to have some knowledge dropped on me, but he seemed to take a big liking to me and mentioned that another one of their business lines was hiring and that he'd love to recommend me to the group head and set up an interview.
This specific business line is basically a flow business - they issue conduit loans (CMBS) for mid-market sized multi-family deals ($70MM and below). These are then sold to Freddie Mac and the firm keeps the spread.
To my specific question: I've never done any underwriting, which from what I understand, is exactly what this group does. How the hell do I go about learning more so that I do not sound like an unprepared idiot when I meet the group head for this business line? I've seen lots of material online for 3 statement models and real estate acquisition models, but I can't find much on how the underwriting process for real estate debt works other than the standard LTV and DSCR calculations. What else (at a basic level) do I need to know to at least be prepared to talk to this woman?
I'm obviously going to be very upfront that I don't have any underwriting experience, but I want to be as well prepared as possible. If any one could point me in the right direction for a basic guide as to how commercial real estate underwriting works, I'd very much appreciate it.
Thanks in advance!!
I don’t do CMBS but I underwrite balance sheet loans with a bank. DSCR, debt yield, LTC, and LTV are the project specific metrics.
We do a lot of loans with no repayment guaranties so a majority of our underwriting is feasibility analysis. We use CoStar and REIS to generate extensive lists of sales and lease comps, and market/submarket analyses to ensure proforma rents are attainable and/or anticipated cap rate/sales price is realistic. We will look at a project’s specific location and design attributes: for example, if it’s industrial we look at the site’s clear height, proximity to major interstates, the airport, and end users; if it’s retail, we look at traffic counts, right-in/right-out vs full-movement access, surrounding demographics, and parking ratio.
With interest rates on the rise, we assess forward interest and cap rate risk. We will sensitize rates and find breakeven points.
I’m sure there are others on this site who do work closer to what you might do and can add more color.
Thanks! This is pretty helpful. From the way you describe it, this doesn't sound super challenging - a lot of the effort seems to be in the market analysis to make sure that the cap rate is in line with reality. From the way it was described (which again, was over a coffee and by a person who does not work in this LOB) I don't believe they invest in straight up development deals, its more mortgages to finance outright purchases of existing properties. From that perspective, I don't think LTC is super relevant, is it? They have other platforms that invest in other areas of the capital stack like mezz debt and equity but that wouldn't be who I'd be under.
You’re correct in that it’s not very challenging. I would say the biggest challenges I have are finding comps for marginal deals or conveying that the sponsor has a good deal in a not so good market. I missed the part of your OP that stated it’s strictly multifamily. With MF, you’ll be looking at how many comparable units there are in the area, their vacancy rates, and average rents. I don’t know too much about it, but I know unit layout/design can have an impact on performance and distance to public transportation can be big too. A lot of other people on this site deal specifically with multifamily so hopefully they can add.
Good luck!
do you underwrite construction loans? How did you learn to model draw schedules, interest capitalization and some of the nuances that goes along with new construction as opposed to stabilized properties. Would appreciate any pointers!! Thank you!
^this. Also, don't necessarily downplay your strengths. you have experience analyzing ad understanding property performance. In underwriting you assess risk. You can easily relate these two.
Good add. Underwriting RE debt isn’t rocket science. If these guys are halfway-sophisticated, they’ll have all the tools you need and prior examples to learn from. You’ll be able to pick it up fast and your working knowledge of property performance will come in handy.
Thanks. I'm going to sell myself and my experience as well as I can, but I want to be prepared. If I was going for an acquisitions job I'd be brushing up on my acquisitions models. I don't know what to brush up on for this, which is why I made the post. Just want to know what I should be studying, if that makes sense.
Isn't this agency lending? Or will you work with multiple property types?
From what I understand (as noted above in a separate comment, I'm still fuzzy on some details) this would not be issuing debt for portfolios but on a property by property basis.
With RE debt underwriting, it is all about controlling the downside. Try to learn about how you can structure the debt differently to make the deal more aggressive or conservative.
Since you said it is CMBS, make sure you understand defeasance, yield maintenance, and are familiar with current bond yields.
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