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Underwriting CRE Deals During a Pandemic: What to Know and What To Do

Over the 17 years of brokering commercial real estate loans, we have picked up on some patterns. Rates go up and down and are in constant motion; lenders become liberal and then stingy again; the markets are in constant motion. These conditions are especially true in 2020, where we saw some drastic swings in the lender appetite and underwriting guidelines (sometimes from day to day!). Our saving grace (and a significant difference from the 2009 event) was that rates stayed low, making many transactions feasible. In this environment of shifting sands and high levels of scrutiny that underwriters are giving to rent rolls and P&Ls, we must take some time to ensure we fully understand the sellers’ documentation (or understanding your own P&Ls) before submission as you seek financing.

I have seen many different profit and loss statements over the years, ranging from handwritten estimates on a yellow pad to copies of tax returns to very sophisticated and detailed spreadsheets. No matter the format provided, the number one goal is to show the underwriter exactly how the property itself performed in an easy to understand way. Underwriters and Loan officers are extremely busy and looking at numerous loan requests at any given time. They may not have the ability to break down a complicated spreadsheet or figure out a real write off versus a paper write off on a tax return and will most likely error on the side of caution and consider it all valid. This, of course, will most likely result in lower loan proceeds than you would want. Here are the most common areas we see confusion in a P&L statement:


● Monthly income doesn’t tie out to recent rent roll/Lease summary (either too high or too low)

● All income is reported in one line (Unit Rent, RUBS, pet, parking, NNN, deposits, etc.)

● RUBS or NNN, while collected, aren’t reported as income (netted out of the utility expense line item, for example)

● Another property income is included.

● Onsite manager compensation not correctly reported.


● Capital Expenditures are included in Repair and Maintenance (both supplies and labor)

● Seller specific items are included (automobile, travel, meals, cell phone, etc.)

● Expenses from another property (hazard insurance, landscape contracts, R&M, etc.)

● Unusual, one-time expenses included (appraisal fee, audit expenses, etc.)

The fun transactions are when we have several of the above factors in one profit and loss. The best way to discover these items before sending them to a prospective lender is to ask for the individual months separately. It then becomes easy to see trends, one-time expenses and do a proper line by line analysis. It is also critical to know how your lender will treat each of these items so you can better understand how to present it to them. For example, some lenders won’t count income that isn’t correctly broken out on the profit and loss statement, so if the seller lumps all revenue together in one line labeled “Rent”, they won’t give you credit for the RUBS, pet rent, parking or laundry income. It would be essential to get more detailed information from the seller so that it can be accurately broken out and presented to the lender. Of course, this step can become very tedious and time-consuming but is worth the effort in the end.

Knowing just how critical this topic is to obtaining financing, we perform this level of detailed analysis on every single transaction. Based on what we can put together, we then consider which lender is best suited to dealing with the numbers provided. While rate and term are certainly important factors in choosing a lender, their ability to get the transaction closed is even more critical. In a purchase transaction with exchange funds on the line, we generally don’t have the luxury of being able to “try it out” with several lenders before finding someone that can perform. No one can afford to receive a decline notice with two weeks left on the contract, especially if it could have been known or discovered upfront.

About the author:

Michael Coffee is a Senior Commercial Loan Officer with Commercial Lending Group, Inc. He has served the CRE industry for 17+ years, providing financing for all asset types with a specialized focus in Multi-Family. He brings unique problem-solving skills to each transaction and is passionate about delivering the right solution for each investor.

Contact Michael Coffee for your commercial real estate financing needs.

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