lev-os Managing Commercial Real Estate Lending
When To Use
- Underwriting a new CRE loan (acquisition, refinance, or construction)
- Evaluating an existing borrower's request for modification or extension
- Conducting annual or triggered loan review on a CRE portfolio credit
- Assessing collateral adequacy after appraisal update or market shift
- Preparing a credit memo or loan committee presentation for CRE exposure
Inputs To Gather
- Property information: Address, property type (office, retail, industrial, multifamily, hospitality, special-purpose), gross/net leasable area, year built, recent capital improvements
- Rent roll: Tenant names, lease start/expiration dates, base rent, CAM/NNN reimbursements, renewal options, tenant credit quality
- Operating statements: Trailing 12-month and 2–3 years historical income/expense (include management fees, reserves, real estate taxes, insurance)
- Appraisal or broker opinion of value: As-is value, as-stabilized value (if applicable), cap rate applied, comparable sales
- Borrower/sponsor financials: Personal financial statement, global cash flow schedule, liquidity, net worth, CRE experience, contingent liabilities
- Environmental reports: Phase I ESA at minimum; Phase II if RECs identified [VERIFY: lender policy on Phase II triggers]
- Loan request terms: Requested amount, LTV, amortization, interest rate structure (fixed/floating), term, recourse/non-recourse, prepayment provisions
- Market data: Submarket vacancy, absorption trends, comparable rental rates, planned supply pipeline
Workflow
Screen the deal against policy limits
- Confirm property type is within appetite; check concentration limits by geography, property type, and single-borrower exposure
- Validate loan size against hold limits and participation/syndication strategy
- Flag any policy exceptions early (e.g., LTV above guideline, speculative construction) [VERIFY: institution-specific lending policy thresholds]
Analyze property cash flow
- Reconstruct net operating income (NOI): start with effective gross income, deduct vacancy/credit loss (use market vacancy if higher than actual), deduct operating expenses
- Stress-test NOI: model rent rollover risk at expiration, apply expense growth, test downside vacancy scenarios
- Calculate debt service coverage ratio (DSCR) on both actual and stressed NOI — minimum thresholds typically 1.20x–1.35x depending on property type [VERIFY: lender DSCR floors by asset class]
- For construction loans, evaluate projected stabilized NOI and lease-up timeline
Assess collateral value and LTV
- Review appraisal methodology (income approach, sales comparison, cost approach); reconcile with internal underwriting assumptions
- Determine appropriate LTV — typical maximums: 75% stabilized, 65–70% construction [VERIFY: regulatory and policy LTV limits]
- If value appears aggressive, request additional comparables or order a review appraisal
- Confirm compliance with interagency appraisal guidelines (transactions over $500K for regulated institutions) [VERIFY: current appraisal threshold per regulatory guidance]
Evaluate borrower/sponsor strength
- Compute sponsor global cash flow: aggregate income from all sources minus debt service on all obligations
- Assess liquidity relative to loan size and unfunded commitments; note reliance on projected income vs. verified sources
- Review CRE track record — prior projects of similar type/scale, any history of defaults or modifications
- Determine guaranty structure: full recourse, partial recourse, or non-recourse with carve-outs (bad-boy guarantees)
Complete environmental and insurance review
- Confirm Phase I ESA is current (typically within 180 days of closing, with reliance letter to lender) [VERIFY: lender-specific shelf life requirements]
- If recognized environmental conditions exist, determine remediation cost estimates and require escrow or insurance coverage
- Verify insurance requirements: property/casualty, liability, flood (if in SFHA), builder's risk (construction), business interruption for income-producing collateral
Structure loan terms and covenants
- Set LTV, DSCR, and debt yield triggers for cash sweep, lockbox activation, or default
- Define reserve requirements: tax/insurance escrows, replacement reserves (typically $0.15–$0.30/SF for commercial), TI/LC reserves for office/retail
- Specify reporting covenants: annual operating statements, rent rolls (quarterly for larger credits), borrower financial statements, insurance certificates
- Address prepayment provisions: yield maintenance, defeasance, or step-down penalties based on capital markets execution
Prepare credit memo and recommendation
- Summarize deal structure, risk rating recommendation, key strengths and mitigants
- Present sensitivity analysis: DSCR and LTV under base, downside, and severe stress scenarios
- Identify exceptions to policy with justification
- State clear recommendation: approve, approve with conditions, or decline
Output
A structured CRE credit memo or loan review report containing:
- Executive summary: Loan amount, property, sponsor, purpose, recommended risk rating
- Property and market analysis: Property description, tenant summary, submarket conditions
- Cash flow underwriting: Reconstructed NOI, DSCR at actual and stressed levels, debt yield
- Collateral analysis: Appraised value, LTV, valuation methodology assessment
- Sponsor analysis: Net worth, liquidity, global cash flow, experience
- Environmental/insurance status: Phase I findings, insurance adequacy
- Loan structure: Terms, covenants, reserves, guaranty
- Risk assessment: Key risks with mitigants, sensitivity table, policy exceptions
- Recommendation: Approval terms or decline rationale
Quality Checks
- NOI reconstruction ties to source operating statements; any adjustments are explained and justified
- DSCR and LTV calculations are independently verifiable from stated inputs
- Rent roll expiration schedule is current and accounts for all major tenants
- Appraisal date is within acceptable window; cap rate is consistent with market comparables
- Sponsor financial data is dated within 90 days of underwriting [VERIFY: lender staleness policy]
- Environmental report has lender reliance letter and is within shelf-life requirements
- All policy exceptions are explicitly identified with compensating factors
- Stress scenarios test at least one turn of vacancy increase and 50–100 bps cap rate expansion
- Risk rating is consistent with institution's rating framework and supported by quantitative metrics