Official Underwriting Sample Package Property: Sample Retail Owner Occupied Requested Loan Amount: $750,000 Property Located At: 100 Main Street Los Angeles, California 90012
Up to 2 Photos of the retail building on the cover page
Submitted By: John Smith Your Company 100 Main Street Any City, California 90001 Email:
[email protected] Phone: (713) 568-1837
Sample Retail Owner Occupied
Executive Summary
Property Type Requested Loan Amount Loan Purpose Loan Term (Years) Amortization(Years) Requested Interest Rate Loan To Value Debt Service Coverage Ratio Present Occupancy %
Retail $750,000 Refinance 5 25 6.250% 68.8% 1.44 100 $ 635,000
Existing Loan Balance
Underwriting Reserves Min. Vacancy Reserve Min. Management Fee
6.0% 4.0%
Replacement Reserve 0.15/SF TILC Reserve $ 0.60/SF
Here is where we create a summary of you project and add any important information that needs to be clarified or is not obvious.
Summary The purpose of the loan is to refinance this single-story retail building. The property is owner-occupied by ABC Rentals. This underwriting analysis is based on the property being rented at market rent, with no income or expenses attributable to the business. ABC Rentals has been in business since 1996; the net profit in 2002 was $123,000. The borrower owns several investment properties in the area. The borrower is looking to refinance the existing mortgage and use the remaining proceeds to purchase new equipment and remodel parts of the building. Generally, underwriting owner-occupied commercial real estate consists of two primary elements: (1) real estate value and (2) business value. For example, when analyzing an owner-occupied property, a lender may analyze the value of the real estate based on its ability to generate income under a market rent scenario. This procedure provides insight to the projected value of the real estate, and its ability to generate rental income, should it be leased to a tenant other than the owner-occupant; as what could be the case in the event of a foreclosure or if the owner-occupant business closes.
Once a determination of the real estate value is made, a lender may then analyze the owner-occupant's business to ascertain whether the business generates sufficient income to service the proposed debt. Therefore, the lender is assured that the debt service can be covered under both scenarios. Testing Value: The primary real estate underwriting test for owner-occupied properties includes an analysis of the property's ability to generate income under a "market rent" scenario-as if the owner-occupant was not the tenant and the Page 2 of 13
Sample Retail Owner Occupied space was leased to a non-owner tenant. To complete this analysis, the following must be known:
1. Estimated Market Rent for the owner-occupied space(s). 2. Typical lease structure for the owner-occupied space(s). a. Average lease term (that is customary for the respective market). b. Items paid by lessee (tenant) vs. lessor (landlord). Entering loan data into LoanSizer: Complete the Loan, Property and Building tabs as applicable. On the Rent Roll tab, enter the owner-occupant as a tenant.
Case 1 - Owner has a lease: In many cases, the owning-entity (the entity that owns the real estate) has a lease with the tenant-entity (the owning-entity's business); this is known as a synthetic lease and is commonly done for tax or accounting purposes. While this lease may be written at market rent, it is not an arm's-length transaction, and the rental income must be "marked-to-market." This is done by examining the market for comparable leases (similar properties that are leased to non-owning tenants), and entering the market rent in the Contract Rent fields.
Case 2 - Owner has no lease: In instances where the owning-entity has no lease with the tenant-entity, you must enter the owner-occupant as a tenant using market rent and a market lease structure. For example, if similar properties are leased at $4.00 per square foot per year, with a 3-year lease term, and real estate taxes, insurance and utilities are included, then you should enter the owner-occupant as a tenant under these lease conditions. This demonstrates a projection of how the property would perform if it was leased to a non-owner tenant.
The following describes the steps required to enter an owner-occupant tenant. Rent Roll tab: Tenant Name: Enter the name of the owner-occupant business. Contract Rent: Enter the estimated market rent [Note: make certain to apply the appropriate income modifier (e.g., $/Yr, $/SF/Yr, etc.)]. Leased Area: Enter the leased area in square feet. Contract Rent/SF: This field calculates automatically. Lease Start: Enter today's date. Lease Expire: Enter the projected lease expiration date. For example, if it is common for comparable space to be rented on a 3-year lease term, enter today's date plus 3 years. Occupied Since: Enter the year the owner-occupant took physical occupancy. Tenant Type: Enter the general use type. Est. Market Rent: Enter the estimated market rent. By default, LoanSizer auto-populates this field with the Contract Rent entered for the tenant. Suite: Enter the Suite Number, if applicable. Lease Options: Enter the typical number of lease options; if unknown, leave blank. Option Terms (yrs): Enter the typical option terms in years; if unknown, leave blank. Borrower Affiliated: Enter a check in this field to show the space is owner-occupied. Credit Rated: Enter a check in this field if the owner-occupant is credit rated (e.g., Standard & Poor's BBB- or above).
Income / Expense tab: When entering income and expenses for an owner-occupied property, enter only the income and expenses that are attributable to the real estate, not the operating business. The goal is to develop a snapshot of the net income the property would produce if it was leased under a market rent scenario. Items related to the operating business (e.g., gross sales receipts, payroll, health insurance, employee benefits, etc.) should not be include in the real estate analysis.
Common "Income" items: - Base rent - Expense reimbursements (if comparable leases indicate that certain expenses are reimbursed)
Common "Expense" items: Real estate taxes - Property insurance Page 3 of 13
Sample Retail Owner Occupied - Utilities - Repairs and Maintenance Management fees Advertising and marketing General and administrative Underwriter Info tab: Loan Term: Enter the desired term in years. Interest Rate Index: Select the appropriate index (e.g., Prime Rate, 10 Yr US Treasury, etc.). If unknown, select "To Be Determined". Current Index Yield: Enter the current yield of the selected index (e.g., if the present yield of Prime Rate is 4.0%, enter 4.0). Interest Rate Spread: Enter the requested interest rate spread (this is similar to a "margin"); the sum of the Current Index Yield plus the Interest Rate Spread will equal your requested interest rate. Other fields: Unless you have a specific reason to change the remaining fields, use the Suggested values.
Loan Results: You loan results will be displayed in the Originator Loan Results window on the top right of the screen. These loan results display the calculations based on an analysis of the property under a market rent scenario which demonstrates the projected ability of the property to generate rental income.
For owner-occupied properties, lenders will often want to review the financials of the owner's business to gauge its financial strength and ability to service the proposed loan. As the business analysis is not real estate-related, this analysis can not be completed in LoanSizer. When submitting an owner-occupied property to a lender, it is helpful to include a description of the owner-occupant's business. Your description should include the following information: Type of business - Years in operation - Profit and Loss statements (for 3 years) - Balance Sheet - Summary of Borrower's experience
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Sample Retail Owner Occupied
Underwriting Analysis Loan Information Underwriting Results Property Type Loan Purpose
Retail
Max. Loan @ Min. DSCR Max. Loan @ Max. LTV
$862,839 $871,769 1.44 68.8% 12 DSCR @ Proposed Loan LTV $59,854 @ Proposed Loan Proposed $4,988 Annual Debt Svc Proposed $676,026 Monthly Pymt
Refinance
Loan Term 5 yrs Loan Amortization
25 yrs
Loan Type
Fixed
6.250% Requested Interest Rate Interest Rate Index Current To Be Determined Index Yield 5.000% Interest Rate Spread Existing Loan Balance Last Appraised Value
Balloon @ Maturity
1.250% $635,000 $0
Value Analysis 3
Direct Capitalized Value Direct Capitalization Rate
Underwriting Constraints Max. LTV Min. DSCR Min. Vacancy Reserve Min. Management Fee Interest Accrual Method Interest Rate Rounding TI/LC Stress DSCR Rent Roll Start Date Avg. Lease Term (months)
Value at Market Cap Cap Rate @ Appr. Value
80.0% 1.25 6.0% 4.0%
$1,089,711 9.00% $1,089,711
4
Requested LTV Est. 68.8% Terminal LTV 62.0% 0.07980 Loan Constant
Actual 360 No Rounding 1.10 11/13/2005
Loan Conclusion
36
Requested Loan Max. 5 Allowable Loan
Expense 3.0% Replacement Growth Rate Reserve TILC Reserve 0.15/SF $$ 0.60/SF
Notes:
Calculations Notes 1. DSCR @ Proposed Loan (NCF / Annual Debt Svc) 2. LTV @ Proposed Loan (NOI - Cap Ex / Cap Rate) 3. Cap Calculations based on (NOI - Cap Ex) 4. LTV Calculations based on (NOI - Cap Ex) 5. Max. Allowable Loan is the lesser of Max. Loan @ Max. LTV, Max. Loan @ Min. DSCR or Requested Loan.
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$750,000 $750,000
Sample Retail Owner Occupied
Rent Roll Loan Name Sample Retail Owner Occupied ABC RetailBorrower Name Property Type Retail
Building:
Retail Owner Occupied Sample
Leased Area
Lease Start
Suite Tenant Name
Lease Expire
Annual Rent $/Yr
Annual Rent $/SF/Yr
Market Rent $/SF/Yr
ABC Rentals 20,000 1/1/2006 1/1/2009 125,000 6.25 6.25 1996
Totals Tenant Improvement & Leasing Commisssion Net Rental Area (SF) Occupied Area (SF) Vacant Area (SF) Physical Vacancy (%) Economic Vacancy (%) Avg. Overall Rent/SF * Potential Gross Income
20,000 20,000 0 0.00 0.00 $6.25
Renewal Probability(%) 60 40 Rollover Probability(%) TI $3.50 Cost New TI Cost $1.25 Renewal LC Cost New(%) 4.0 1.8 LC Cost Renewal(%)
$125,000 *Avg. Overall Rent/SF does not include income from vacant area.
Notes
We can underwrite your Loan Using CMSA Underwriting Guidlines for non-recourse financing options. This means that the income from your project is used to qualify for the loan rather than you. The lower the income, the less the property will qualify for. The higher the income, the more the property will qualify for. You can also use this report to negotiate with your seller.
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Occupied Since
Sample Retail Owner Occupied
Operating Statement Loan Name Sample Retail Owner Occupied Borrower Name ABC Retail RetailProperty Type
Income/Expenses
2002
2003
YTD Annual
2004
Base Rent 130,000 125,000 94.5 125,000 94.5 Expense Reimbursements 7,220 7,220 5.5 7,220 5.5 Percentage Rent Parking Income Other Income Vacancy & Coll. Loss 7,933 6.0 7,933 6.0
Effective Gross Income 137,220 124,287 100.0 124,287 100.0 Real Estate Taxes 5,520 5,686 4.6 5,686 4.6 Property Insurance 1,700 1,751 1.4 1,751 1.4 Utilities 6,740 6,942 5.6 6,942 5.6 Repairs and Maintenance 1,500 1,545 1.2 1,545 1.2 Janitorial 500 515 0.4 515 0.4 Management Fees 4,971 4.0 4,971 4.0 Payroll and Benefits Advertising and Marketing Professional Fees
1,500 1,545 1.2 1,545 1.2
General and Administrative 250 258 0.2 258 0.2 Other Expenses Ground Rent Total Operating Expenses 17,710 23,213 18.7 23,213 18.7 Net Operating Income 119,510 101,074 81.3 101,074 81.3 Leasing Commissions 12,000 0.6 12,000 0.6 Tenant Improvements Cap Ex. (Repl. Reserves)
3,000 0.2 3,000 0.2
Extraordinary Capital Exp. Total Capital Items 15,000 12.1 15,000 12.1
Net Cash Flow 119,510 86,074 69.3 86,074 69.3
Notes
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Trailing 12
Appraisal Originator U/W % %
Final U/W
Sample Retail Owner Occupied
We Can Underwrite Your Loan using Recourse or Non-recourse Financing
Loan Detail
Loan Borrower Information Loan Name Sample Retail Owner Occupied
Borrower Name ABC Retail Borrower Type Corporation Ima First Name Middle Initial Last Name Borrower 100 Main Street Address 1 Address 2
Loan Amount $750,000 Recourse Option Recourse Broker Information Company Name Your Company Contact Address John Smith 100 Main Street Address 2 City
City Los Angeles State California 90012 Zip (310) 555-1212
Any City
Telephone Fax
State California Zip 90001
E-Mail Net Worth FICO $250,000 Score 685
Telephone (888) 737-9977 Fax E-mail
[email protected]
Has borrower filed No bankruptcy
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Sample Retail Owner Occupied
Property Information Property Name Property Type Property Sub Type No. of Buildings
Retail Owner Occupied Sample Retail Free Standing Retail
1 0.0 Land area included with property (acres) Appraised Value Appraisal Date Date of Last Sale Sale Price at Last Sale Property located in Central Business District Did you make physical inspection of the property Property Management Contract in place Ground Lease Expiration Date
12/1/1999 $600,000 No No No
Refinance Loan Existing Purpose Loan Balance $635,000 Loan Maturity Date 11/11/2004 Current Interest Rate Were Improvements Made Est Cost of Improvements Made Can Improvement cost be documented
Property is Owner-Occupied Property has Highway Access Property is Corner-Located Property has Highway Visibility No. of Loading Docks Dock Level Average Daily Traffic Surrounding Land Use
8.75% Yes $15,000 Yes
Yes No No No
Don't Know Similar Retail
Notes
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Sample Retail Owner Occupied
Building Information Retail Owner Occupied SampleBuilding Name Address 1 100 Main Street Address 2 City State 1 Zip
Los Angeles California 90012
No. of Stories Year Constructed Year 1995 Don't Renovated Know Average Overall Appearance and Marketability
Covered Parking Spaces Designated 0 10 100 % Uncovered Parking Spaces Designated 100 % 0 0 20,000 SF Sprinkled HVAC Elevators Escalators Gross Building Area Notes
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Sample Retail Owner Occupied
Tenant Improvement and Leasing Commission Analysis Sample Retail Owner Occupied Loan Name ABC RetailBorrower Name RetailProperty Type
No. Year Total SF Expiring
NRA Expiring
Tenant Improvement Cost New Renewal Total $
Leasing Commissions New Total $Renewal
Total TI & LC Cost
DSCR Threshold Analysis DSCR Deficiency $ To Threshold NCF after TILC During Loan Term
1 98,074 1.64 0 2005 2 98,074 1.64 0 2006 3 98,074 1.64 0 2007 4 98,074 1.64 0 2008 5 20,000 100% 28,000 15,000 43,000 6,000 3,937 9,937 52,937 45,137 0.75 20,702 2009 6 98,074 1.64 0 2010
20,000 28,000 15,000 43,000 6,000 3,937 9,937 52,937 535,507 20,702 Total
Totals Total TI $/SF Over Loan Term Average TI $/SF/Year
$43,000 $0.43
Total LC $/SF Over Loan Term Average LC $/SF/Year Total TI LC $/SF Over Loan Term Average TI LC $/SF/Year DSCR Threshold
$9,937 $0.10 $52,937 $0.53 1.10
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Sample Retail Owner Occupied
Underwriting Comments Loan Name Sample Retail Owner Occupied ABC Retail Retail Property Type Borrower Name
DSCR Threshold Based on the current and projected Net Cash Flow, the property does not maintain the required DSC throughout the term of the loan. Consider a TI/LC reserve to mitigate this deficiency as illustrated in the TI/LC Analysis Report. Base Rent Variances For leased units, consider the effects of potential lease rollovers and re-tenanting issues. A lower percentage of scheduled rollovers typically indicates a lower downtime and decreased overall loan risk. A higher percentage may indicate excessive downtime and increased overall loan risk. Critically assess the economic impact of extended vacancy upon projected lease expirations. Consider the property's 'Highest and Best Use' when assessing probable rollovers.
Property Location Note whether the property is located in a Central Business District (CBD). Generally, properties located within a CBD have greater absorption as compared to properties located outside of a CBD. For properties located outside of a CBD, consider the economic effects of longer vacancy periods during times of lease expirations. Property Condition Consider the property's date constructed, last renovation, and the physical condition of the property. Provide comments regarding the property's condition as it relates to acceptable market standards. Note if any deferred maintenance items exist. If the property is in need of renovation, or if it exhibits deferred maintenance items, clarify these issues and assess this potential effect on the underwritten cash flow.
Property Management If the property is professionally managed, comment on the quality of the property management company. Consider the company's qualifications and experience, ability to attract quality tenants, tenant mix, minimization of lease rollovers. If the property is self-managed, critically assess the qualifications and experience of the self-manager. Based on the complexity of the property being managed, a certain level of property management experience may be expected of the self-manager.
Credit(FICO) Score Consider the borrower's credit (FICO) score. Assess and comment on the payment history and the overall credit profile of the borrower. Property Inspection If you have completed a physical inspection of the property, carefully review your notations made during your inspection. Generally, a physical inspection of the property aids the underwriter in estimating the costs of replacement reserves and the presence of any deferred maintenance. If you have not made a physical inspection of the property, verify the quality and competitive aspects of the collateral by obtaining recent color photographs illustrating the property.
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Sample Retail Owner Occupied
Photos
View of subject property from parking area.
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