Andrews: Know where the numbers will move, and why
In my column last week, I discussed how bank underwriters and appraisers adjust actual occupancy figures downward to a sustainable level of operating income when looking at an apartment complex. I thought it would be appropriate to follow up this week by giving a reminder of how those folks will look at historical operating expense figures when determining loan size and debt coverage compliance. And guess what: they will increase low historical figures to market averages. For example, an apartment complex may be showing historical expenses of $2,500 per unit, per year, but the underwriters and appraisers will increase the figure upwards to $4,000 if most complexes are operating in that range, or to adjust for extraordinary circumstances. Some of these adjustments are made because the property owner self-manages the complex and does not charge a management fee, whereby the underwriter needs to add a standard fee to expenses (this is for underwriting purposes only—the lender does not insist that a fee actually be paid). Another upward adjustment can be made for below-value tax assessments or other temporary situations. Then there are always the reserve accounts for capital expenditures, leasing commissions, tenant finish and other line items that might not show up in a particular year but nonetheless need to be accounted for in the underwriting. Borrowers should discuss these underwriting procedures with their lenders early in the loan application process so that everyone is on the same page and there are no unwelcome surprises when the loan is being sized up.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Real Estate Services, and he can be reached at firstname.lastname@example.org.)
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