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The Real Estate Loan Underwriting Process
Since the process of underwriting a commercial real estate loan request is
similar in many respects from bank to bank, it may be helpful to potential
borrowers to learn the basic considerations of Dollar Bank lenders when
reviewing such a loan request:
Stability Of The Borrower
This is one of the most important aspects of real estate lending. Borrowers
must have a solid credit standing, a proven track record and an adequate
support staff. In addition to projecting the cash flow to be generated from the
project under consideration, cash flows of the borrower's other projects will
be reviewed in detail to determine if the borrower can meet all of its
obligations.
Property Valuation
An appraisal conforming to current regulatory requirements, and prepared by
an appraiser acceptable to the bank, will be required. It is possible to have a
loan request approved based upon the bank's internal analysis without a written
appraisal, but such an approval would be conditioned upon an acceptable review
of an appraisal prior to closing. As a matter of policy, and now as a matter of
regulatory compliance, banks are generally limited to a maximum loan-to-value
ratio of 85%.
Property Condition
The physical aspects of a project are reviewed in accordance with the
bank's inspection checklist. The bank will estimate the remaining economic life
of the property improvements and evaluate functional obsolescence.
Accessibility, parking ratios and compatibility of immediately surrounding
properties will also be assessed. Finally, environmental issues (hazardous
materials, wetlands, etc.) will be researched, with reliance upon independent
environmental assessments where necessary.
Project Economics
The bank will review historical and/or proforma income/expense statements
for the property supported by current rent rolls and copies of all leases.
Leases will be read carefully for terms and conditions, and the financial
condition of major tenants will be evaluated. Of particular importance are
lease items such as rent concessions, performance clauses and exit clauses.
Upon determining the Net Operating Income (NOI) of a project, which is the
projected income to be generated after operating expenses, the debt service
coverage ratio is calculated (NOl/annual principal and interest payments).
Typically, the debt service coverage ratio of a project should be 1.2 to 1 or
greater to be approved.
Market Analysis
A thorough review of the project's market area will be conducted by the
bank to include defining the market area and comparing the project to
competitive properties. Demographic trends will be analyzed and contrasted to
the project's position within the marketplace, and a determination will be made
as to the balance of the market's economic supply and demand.
As you can see, the underwriting process is thorough and, therefore, time
consuming. So please have patience when your bank is reviewing your next loan
request.
For more information
about Real Estate Lending at Dollar Bank, click here.
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