Underwriting with a Debt Yield Metric

Over the last few years, I have observed more frequent use of a debt yield calculation as a part of commercial real estate (CRE) underwriting. The reason is due to the simplicity of the debt yield formula and its higher degree of consistency when compared to alternative underwriting metrics such as loan to value (LTV) and debt service coverage ratio (DSCR). Even so, I have not observed the addition of a debt yield metric to the CRE lending policies of community-based financial institutions (CBFIs).

So, what’s the big deal?  

My curiosity as to how a debt yield metric could add value to CBFI commercial real estate underwriting led me to create the example below. The example identifies and highlights the differences when applying the LTV and DSCR metrics in the underwriting of a credit opportunity as compared to a debt yield metric.

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Did you know….

Since its inception, Integrity Loan Review has been serving customers throughout the Upper Midwest including Wisconsin, Michigan, Iowa, Minnesota, and Illinois. We work with banks, credit unions, and financial institutions of all sizes from community banks to multi-billion dollar financial institutions to publicly owned institutions. Our customers have a wide variety of loan types and credit structures, including commercial real estate, commercial and industrial, agricultural, leveraged lending, asset-based lending and acquisition, and development and construction loans.

A lot has changed over the last few years – and those advancements and innovation in technology and communication has allowed for Integrity Loan Review to also evolve. Our services remain uniquely tailored to your financial institution while maintaining efficient and timely service directly from our ownership team. We believe our expertise plays an integral role in enhancing our customers’ risk management and credit department effectiveness.

Our advantage above others is a local feel with nationwide capabilities. We hope you continue to grow with us as we continue to broaden our reach!

Loan Review Policy

Loan review has become a mainstay third line of defense for loan portfolio risk management in financial institutions of all sizes.   Loan review has also taken on increased significance  as it is used both to ensure appropriate credit grading and to assist in the determination of loan loss allowance.  Regulators often assess an institution’s loan review program in reviewing the appropriateness of the loan loss allowance.

We believe the key to a successful loan review program starts with a sound loan review policy.  The policy should serve as the roadmap in which management, the board and regulators can point to in support of safe and sound risk management practices.

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Commercial Real Estate Evaluations and Validations

Gordy Welch from Lighthouse Real Estate Services shares his perspective on real estate evaluations.

In their April 2018 updated guidance the (The agencies)  “encourage financial institutions to make use of the following exceptions” related to (the use of) Evaluations and Validations. **

Transactions That Require Evaluations:  December 2010 and April 2018 Interagency FDIC appraisal guidelines permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions.

  • Has a transaction value equal to or less than the appraisal threshold of $500,000.**
  • Is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.*

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Portfolio Statistics

I am always amazed at the number of detailed statistics sports broadcasters report regarding a specific player or team.   It is almost unimaginable the amount of record keeping that takes place in sports today.  It is also amazing how much this data is mined to find relevant information to provide an advantage to a team or a player.   For example,  “Stat to know: The Packers’ Rodgers and Adams connected on 76.7% of their attempts this season, the second-highest rate among the 60 QB-WR duos with 150 attempts in the past 20 seasons.” per NFL Next Gen Stats[1].

[1] NFL playoffs: Packers-Rams matchup features clash of No. 1 offense, defense – Green Bay Packers Blog- ESPN

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