Banks continue to deal with commercial real estate (CRE) loans as a major portion of their loan portfolios. Also, many borrowers still have large holdings of income-producing or rental real estate.
Whether directly financing these assets or including the income stream(s) in your overall credit analysis, it is important to understand key analytical concepts utilized in evaluating CRE cash flow.
This program covers the key variables and concepts for determining CRE cash flow and transaction-level stress-testing. We'll learn that CRE cash flow involves more than earnings before interest, taxes, depreciation and amortization (EBITDA) for a debt service coverage (DSC), and that we should be using the updated cash flow to help update the underlying collateral value as part of ongoing loan monitoring.
Making the connection between updated cash flow and an updated value estimate involves a capitalization (cap) rate.
What You'll Learn:- Cash flow or net operating income (NOI) concepts
- Understanding key variables: vacancy, management fees and replacement reserves
- The missing link: Using NOI along with a cap rate to estimate current property value
- Moving from NOI to cash flow available for debt service (CFADS) and DSC
- Stress-testing of debt service coverage (DSC) and loan-to-value (LTV) at transaction level
- How to use a sample worksheet to explore the major issues, including stress-testing, demonstrated with a case example
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