When it comes to underwriting commercial real estate (CRE), getting the most accurate picture of risk possible is essential. Seasoned lenders have fine-tuned a ‘secret sauce’ built on tried-and-true processes, tools, and good old-fashioned intuition. But the fact of the matter is, even when you get it right, it generally takes a lot of time and a lot of work.
That’s where technology can help. Whether you’re fully on board and have already embraced new tech, or you’re still not sure where it fits in — there’s much to be gained by modernizing your CRE workflow. Here’s 5 key steps to assessing risk, and how Blooma can help you level up your lending.
First thing’s first: you’re going to want to get as much information possible on the going rate for the property in question. Getting a wide range of sales and rent comparables for the area will give you a quick and clear picture of property value.
At deal creation, Blooma automatically pulls rent and sales comps for the subject property and ranks them based on pre-determined scoring metrics (these are set by you). Blooma is designed to do the information gathering from trusted sources, allowing you to apply that information in your overall analysis. Even better, you can sort, filter, and edit the entire list – including and excluding comps as you see fit to find your perfect mix.
You’ll also get a comparables summary that identifies useful data points like, average component square footage, average dollar / square foot, and average dollar / unit. These averages are then applied to the property unit mix to provide the going market revenue and sales comp valuation for your property. Pretty neat, huh?
A proforma is one of the most important components of a commercial real estate transaction because it projects the potential cash flow of a property. The problem is, putting one together takes a lot of time.
Blooma creates a proforma income valuation on your behalf by pulling market data to determine factors like revenue, expenses, NOI, and cap rate. The best part is that it is completely editable so it can be customized as you see fit. If you’ve got a model you’re already using, Blooma can map all of the proforma data to your existing template – no lift required.
The debt service coverage ratio (DSCR) helps lenders assess the risk associated with a given property as it measures a borrower’s ability to repay the loan based on the property’s income and performance.
Blooma calculates the DSCR for the collateral, borrower and guarantor / sponsor of the loan. You can also perform single and multi-variable stress tests at the deal level. The single-variable stress test shows the value that can be reached before the minimum set DSCR threshold is broken. The multi-variable test calculates DSCR if there are changes in vacancy, revenue, expenses and cap rate of the property.
In addition to DSCR, you’ll want to calculate the LTV. LTV, or Loan-to-Value, indicates the borrower’s debt relative to the value of the collateral. Determining the LTV for a given property helps a lender gauge the risk and structure of the loan, as well as decipher if the property is worth the investment.
Blooma calculates 6 different LTVs within your deal based on the valuations the system provides. You’ll have the option to choose which valuation and LTV you want to use when analyzing your deal. Blooma provides both multi-variable and single variable stress testing for the proforma LTV at a deal level, too.
The biggest takeaway here though is peace of mind. Data is only as good as the timestamp associated to it. Blooma pulls real-time data and calculates metrics like DSCR and LTV throughout the life of your loan – from pre-flight through to close.
All of these factors are important to assess the value of a CRE loan, but when push comes to shove, market data can make or break a deal. Even when the numbers check out, market trends and larger forces at play might indicate something different. This is especially relevant today as we face an unprecedented number of global events that are having an impact on local CRE markets. Getting a good understanding of where the market is at is critical, but that puts a huge emphasis on the types of data you’re looking at, what sources you’re using, and how current it is. And collecting all the information is no small task.
Blooma pulls in thousands of data points per deal to help ensure the lender is getting the most accurate assessment possible with the least amount of effort and time.