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— Multifamily Properties Quarterly — October 2015
R
eal estate investment and
development depends on
readily accessible financing.
In today’s active market, the
ability to immediately access
funding can make the difference
in acquiring your project. Timely,
accurate and complete business
and personal financial statements
enable lenders to make fast credit
decisions. Equally important are
high-quality financial statements
that can withstand the scrutiny of
bank examiners and independent
loan reviewers after the bank makes
the loan.
Consistency is critical.
Leases, rent
rolls and operating statements are
the core financial statements for
investment real estate loans. This
information determines the sus-
tainability of the project cash flows,
which is essential for determining
debt service adequacy and is used
by appraisers for project valuation. If
the information is inconsistent, then
the loan analysis must be adjusted
to reconcile the differences – and
often results in a longer loan pro-
cess and, potentially, a reduced loan
amount. In addition, if the reported
information is materially inconsis-
tent with the appraiser’s market
data, the appraiser’s valuation can
be affected by the uncertainty in
information.
Supporting information such as
income tax returns and personal
financial statements also are sources
of possible inconsistency. If the oper-
ating statement shows a consistent
cash flow and the tax returns show
a loss (even after
adjusting for non-
cash items such as
depreciation), doc-
umenting a cred-
ible explanation for
the differences can
be time-consum-
ing and result in
more conservative
underwriting. In
addition, indepen-
dent loan reviewers
and bank examin-
ers can require the
lender to consider a loan with incon-
sistent, unsupportable differences
in data as effectively nonperforming
– even if you’ve made every single
payment on time.
The guiding principle is if your
financial statements are consistent,
with any material differences well
documented, you’ll enjoy a fast loan
approval process and be one of your
lender’s favored borrowers.
Use realistic projections.
Most
investors approach an investment
by developing projected financial
results justifying their expected
return on investment. In some cases,
the projections assume a change
to the underlying project resulting
in improved cash flows – capital
improvements and changes in ten-
ants or leasing practices are the
most common sources of value addi-
tion.
If your projections generally are
consistent with current market con-
ditions, it is easy for a lender to sup-
port the projections and the result-
ing cash flows. If your projections
are ahead of the market, then the
lender (and the appraiser) may need
to use more conservative assump-
tions and, thus, potentially alter the
credit analysis in a fundamental
manner.
Neatness counts.
If rent rolls, oper-
ating statements and other financial
statements are clear and easy to
understand, credit analysis is a snap.
Handwritten or incomplete entries
sometimes require follow-up inqui-
ries for clarification, which extends
the credit analysis timeframe. When-
ever possible, use any forms provid-
ed by your lender because the infor-
mation will flow perfectly into their
underwriting systems and tools.
Use professionals.
Let’s face it,
borrowers are focused on the core
business of acquisition and man-
agement. Hiring a support team of
financial professionals enables you
to rely on accurate financial report-
ing for your business decisions.
Migrating from self-managed finan-
cials to professionals can be chal-
lenging for some borrowers. That’s
why I maintain a list of qualified
property managers and accounting
professionals available to help bor-
rowers organize and streamline their
financial reporting.
Plan for the future.
Ongoing main-
tenance is important when it comes
to your financial statements. That’s
because most lenders require that
updated financial documents be
submitted on an annual basis per
loan covenants, even if you make
every loan payment on time. Failure
to meet your loan covenant require-
ments may have a negative impact
on your loan.
On a final note, you shouldn’t
underestimate your choice of lend-
ers when it comes to helping you
navigate through the loan process. A
strong lender/borrower relationship
starts with strong and well-orga-
nized financial information.
s
Mindy Koehnen
Vice president,
Bank Financial,
Greenwood Village
Investment Market
The guiding principle
is if your financial
statements are
consistent, with any
material differences
well documented,
you’ll enjoy a fast
loan approval
process and be
one of your lender’s
favored borrowers.
