9 Class Hours

Instructor: Richard Hamm

Commercial real estate (CRE) loans continue to be large and important components of the total loan portfolios of most banks.  Even in situations where a CRE loan is not being made, often the evaluation of the owner/guarantor involves dealing with extensive real estate holdings or investments.

In their purest form, CRE loans involve income-producing properties where rent received from unaffiliated third parties is the primary source repayment.  Other forms of CRE loans involve manufacturing plants and warehouses for use by the businesses that own the property and where the income of the business is the bank’s analytical focus.  Still other CRE situations involve specialized properties, such as hotels, convenience stores and churches.  This diverse range of lending requires special skills and experience, centered around nine “keys” to successful CRE lending.  Accordingly, using seven of the nine steps, by the end of this class participants will be able to:

  1. Identify the major, bank-wide risk areas in CRE lending, along with ways to mitigate or reduce the risks [enterprise risk management (ERM)]
  2. Develop CRE cash flow in two steps: Net operating income (NOI) and cash flow available for debt service (CFADS)
  3. Identify the non-financial risks to CRE loans, along with ways to mitigate or reduce the risks
  4. Differentiate the CRE analysis and underwriting process by property or project types and explain the importance of monitoring trends within the property types
  5. Explain the concept of sponsorship (borrower/owner/guarantor financial strength and experience)
  6. Describe key issues in developing a comprehensive or global analysis of a CRE situation
  7. Identify key appraisal and environmental policies and regulations

Two additional steps are more appropriate for a loan portfolio management class and can be discussed as time permits:

  1. Describe the steps to administer and monitor CRE loans post-closing
  2. Identify the primary steps to maintain CRE portfolio diversification, including portfolio stress-testing

In addition to the objectives based on the nine keys, participants will also (take-aways):

  • Calculate and evaluate the NOI and CFADS of an income-producing property, plus related ratios such as debt service coverage (DSC) and loan to value (LTV)
  • Conduct and evaluate – at the transaction level – stress testing of the analytical ratios
  • Explain the capitalization (“cap”) rate and its function in valuing a commercial property

The class will include an analytical case, a group exercise and group discussion to achieve these objectives.

Annual School Session

Second Year, First Week Elective Course

Lending Track