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Professionals who manage commercial real estate underwriting are tasked with assessing the value of a unique piece of property. They must also grapple with the time-consuming process of conducting a background check on potential investors to verify their credit history. This ensures that commercial real estate loan underwriting can be safely conducted. Nevertheless, this process requires due diligence and careful consideration on the part of underwriters.
Underwriters and CRE investors seeking a loan should review the following tips and guidelines before making a final financial decision which could have sizable consequences.
Assessing the value of a piece of commercial real estate is a complex task. Commercial real estate underwriting involves looking into the previous value assessments of a property, the current income stream it generates and a host of other issues. Underwriters may need to determine whether local tax regulations are likely to change in the near future, for instance. Thus, it is critical to understand and appreciate the role of uncertainty in the underwriting process, as not everything can be predicted with precision.
McKinsey’s analysis on the impact of the COVID-19 pandemic on the commercial real estate industry drives home the importance of uncertainty. Underwriters who made important CRE decisions just a few years ago may now be suffering due to unforeseen economic developments induced by an economic shutdown. When determining how to underwrite commercial real estate, always factor in uncertainty when assessing a property or a potential financial partner’s background.
Real estate owners seeking to sell a piece of property are not always forthcoming about the problems plaguing that piece of land. Commercial real estate underwriting cannot always be a trusting process; underwriters should consider hiring a third-party inspector to review a property before closing a major deal. Organizations like the CCPIA exist for this very reason.
Visual inspections of property and historical research into a piece of land can identify previously unknown problems to underwriters before they make a financial commitment. Commercial real estate underwriting guidelines should always include at least one survey of the property conducted by an impartial expert who is not a party to the transaction. Investors seeking a CRE loan should also consider hiring an impartial third party to help them secure better terms for a loan.
The commercial real estate loan underwriting process cannot eschew careful stress-testing. This is the process whereby a bank or lender determines whether an important loan within its portfolio is liable to become riskier over time due to unforeseen developments. The RMA Journal has published a thorough review of commercial real estate stress-testing methods that should be carefully considered when formulating commercial real estate underwriting guidelines.
Commercial real estate underwriters and potential CRE investors alike must consider whether a property is compliant with ADA and building codes. Commercial real estate loan underwriting that does not factor in code compliance will be incredibly risky. Underwriters should familiarize themselves with standards established by laws such as the Americans with Disabilities Act of 1990. Knowing how to underwrite commercial real estate also entails digging into local building codes to ensure local compliance is guaranteed before closing a deal.
Finally, commercial real estate underwriting guidelines must consider environmental risks facing a given piece of property. Flooding, earthquakes, wildfires and other natural calamities can seriously alter the prospective profitability of a property. The underwriting process should carefully consider the likelihood that a given state or region where the property is located will suffer from such an environmental risk while the deal is still underway. Local infrastructure projects and efforts to mitigate natural disasters being pushed by local, state and federal lawmakers should also be considered.
Extensia Financial is the ideal partner for credit unions seeking to expand their lending footprint in the commercial real estate industry. Extensia’s experts guarantee that deals can be quickly and confidently closed by conducting comprehensive risk assessments. With reliable underwriting guidelines that ensure no step of the process is overlooked, Extensia can guarantee that regulatory requirements are being met before a commercial real estate deal is concluded.
By handling the entire servicing of a loan, Extensia offers flexible and affordable services to borrowers seeking to gain traction within the commercial real estate industry. Contact Extensia today to begin mastering the commercial real estate underwriting process.