CREJ - Multifamily Properties Quarterly - October 2015
Real 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 sustainability 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 process and, potentially, a reduced loan amount. In addition, if the reported information is materially inconsistent 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 operating statement shows a consistent cash flow and the tax returns show a loss (even after adjusting for noncash items such as depreciation), documenting a credible explanation for the differences can be time-consuming and result in more conservative underwriting. In addition, independent loan reviewers and bank examiners can require the lender to consider a loan with inconsistent, unsupportable differences in data as effectively nonperforming – even if you’ve made every single payment on time.
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 tenants or leasing practices are the most common sources of value addition. If your projections generally are consistent with current market conditions, it is easy for a lender to support the projections and the resulting cash flows. If your projections are ahead of the market, then the lender (and the appraiser) may need to use more conservative assumptions and, thus, potentially alter the credit analysis in a fundamental manner. Neatness counts. If rent rolls, operating statements and other financial statements are clear and easy to understand, credit analysis is a snap. Handwritten or incomplete entries sometimes require follow-up inquiries for clarification, which extends the credit analysis timeframe. Whenever possible, use any forms provided by your lender because the information 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 management. Hiring a support team of financial professionals enables you to rely on accurate financial reporting for your business decisions. Migrating from self-managed financials to professionals can be challenging for some borrowers. That’s why I maintain a list of qualified property managers and accounting professionals available to help borrowers organize and streamline their financial reporting. Plan for the future. Ongoing maintenance 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 requirements may have a negative impact on your loan. On a final note, you shouldn’t underestimate your choice of lenders when it comes to helping you navigate through the loan process. A strong lender/borrower relationship starts with strong and well-organized financial information.