Lender underwriting parameters depend on the degree of exposure to a client or sector and the investment criteria. This can include transaction size, the degree of leverage, geography, asset type, and the lender’s investment horizon.
Some REF lenders target only real estate development projects, while others limit their exposure to investing only in operational assets. Some invest in either senior loans, mezzanine debt or only bridge finance, while others invest only in particular asset classes, geographies or counterparty risk.
Some banks extend floating-rate short- to medium-term amortizing senior loans, while institutional investors such as pension and insurance funds typically provide longer-term fixed-rate nonamortizing term bullet loans to match their long-dated liabilities. Stricter capital requirements in recent years have had a significant impact on the lending capacity and risk appetite of banks as traditional lenders.
Senior lending predominates (46% of respondents) followed by stretch senior (23%) and whole loans (18%).
The US-based National Association of Realtors reported that in 2016 loan underwriting standards caused 59% of the commercial real estate financing failures, 35% failed due to lack of financing, 15% due to appraisals/valuation and 14% of the deals failed to secure refinancing. Stringent loan underwriting results in increased debt service coverage ratios and lower loan-to-value ratios for new loans, which negatively impacting refinancing amounts.
Economic obsolescence and deteriorating property finances were the second and third main reasons for appraisal issues, accounting for 14 percent and 13 percent of respondents, respectively.