Three Underwriting Tweaks Maximize Income-Property Loans
Chicago, Illinois, October, 2006 — Mortgage markets are flushed with cash. Borrowers have the upper hand in crafting financing options across nearly all underwriting variables including pricing, term, leverage and documentation provisions.
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In fact, fine-tuned underwriting based on specific market support and intelligent underwriting often yields results of at least an eighth of a percent or more in reduced rates, as well as increased leverage levels in excess of 75% of purchase price/value. More specifically, the following three underwriting tips lead to more favorable financings:
1) Vacancy – Adjusting vacancy levels where appropriate (five to seven percent is optimum). The “standard” for a particular market may be inaccurate if the property is located in a strong submarket. Use direct comparable properties along with third-party market reports.
2) Cash Flow Trending – Interpolate improving monthly cash flow vs. annual cash flow — particularly important for properties with frequent performance adjustments such as hospitality and multifamily assets. Less important if strong market fundamentals are occurring over a gradual timeline or with long-term leases featuring minimal rollover.
3) Audit - Detailed review of income and expenses. Key variables include rents, management, utilities, supplies and various vendors. Best performed by a qualified third-party firm which is independent of sponsorship. Aggressive outsourcing often can help reduce costs, particularly for larger portfolios. A utility audit is also a more common format of expense monitoring. Capital budgets should be reviewed; reserve requirements can account for as much as 10% of cash flow.
By and large, most borrowers will maximize the above-mentioned variables. “Borrowers that are not in the market frequently or lack the sophistication of large organizations should hire consultants including mortgage bankers and other service providers offering instant expertise,” suggests Nat Zvislo, research director for the Real Estate Capital Institute.
The Real Estate Capital Institute monitors debt and equity yields and overall rate movements dating back to 1983. Specific information on various property yields is posted at www.reci.com. Daily market information is available by calling 7RE-CAPITAL (773-227-4825) — the Real Estate Capital Rateline.