Underwriting and commercial real estate valuation are two important aspects of the commercial real estate industry. Underwriting involves the process of assessing the risk associated with a loan or investment in a commercial property. This involves analyzing the financial statements, credit history, and other relevant information of the borrower or property owner. The underwriter then determines the terms of the loan or investment, including the interest rate, repayment schedule, and collateral requirements.

Commercial real estate valuation, on the other hand, involves determining the current market value of a commercial property. This is typically done by analyzing the property’s income potential, physical condition, location, and comparable sales in the area. Valuation is important for investors, lenders, and property owners who need to understand the value of their investment or collateral.

Both underwriting and commercial real estate valuation are critical for the success of commercial real estate transactions. Accurate underwriting helps lenders and investors manage risk and make informed decisions about loans and investments. Accurate valuation helps property owners and investors determine the best price for a property and make informed decisions about buying, selling, or leasing commercial real estate.

What is underwriting?

Underwriting is the process that buyers and lenders use for commercial real estate valuation and to determine an optimal financing structure to maximize that value over the lifetime of the investment. It involves verifying all of the factors that impact risk and reward to mitigate against investment downside.

Another way to look at underwriting is as a determination of the creditworthiness of a loan collateralized by the subject commercial real estate. How certain are the property’s projected cash flows expected to cover the debt service associated with the buyer’s purchase? Does the buyer have enough excess equity to cover the debt service should the commercial property’s income drop?

What do lenders need to know to underwrite an accurate commercial real estate valuation? They want to confirm that both the buyer and the property are creditworthy for making the investment.

Underwriting in Commercial Real Estate

To be a valuable commercial real estate advisor you’ve got to know the ins and outs of underwriting: commercial real estate valuation better than anyone. If you don’t know commercial real estate underwriting factors on the fly, you’ve got some work to do.

Here are the most important elements of underwriting:

1. Property location and market conditions
2. Property type and age
3. Property size and condition
4. Tenant quality and creditworthiness
5. Lease terms and rental rates
6. Property income and expenses
7. Loan-to-value ratio
8. Debt service coverage ratio
9. Borrower’s creditworthiness and financial strength
10. Economic and regulatory environment.

There are a variety of different ways to approach underwriting: commercial real estate valuation including:

1. Comparable Sales Approach
2. Income Capitalization Approach
3. Direct Capitalization Approach
4. Gross Income Multipliers (GIM)
5. Cost Approach

Each method has its appropriate place in commercial real estate valuation depending on the situation and factors pertinent to any given property and the relevant area. The more of these valuation approaches that are utilized when valuing a property the better. The more points of reference you have, the more credible your conclusion.

The same goes for business valuation. If you are considering selling a business too, understanding valuation is equally as important, but even a bit more challenging.

Underwriting: Commercial Real Estate Valuation

Underwriting is the process buyers and lenders use to value a commercial real estate property. It is largely based upon the likelihood of future income potential as an investment.

Buyers need to accurately value a commercial property to assess a viable capital structure that enables them to optimize their return on investment. Lenders will further analyze the relevant financial assumptions for the property, compare the subject property to market factors and assess the buyer’s ability to service the debt over the projected loan term.

While underwriting may seem like an exact science due to all of the calculations, tables, charts and graphs, it is really only a methodology to assess the risk associated with a commercial mortgage backed loan.

Other factors include analyzing market trends and data, as well as conducting property inspections to determine impact on value, if any. The results of the valuation will inform underwriting decisions for potential loans or other capital structure considerations for a transaction.

Comparable Sales Approach

Commercial real estate valuation methods consider multiple factors, including relevance. The comparable sales approach, or ‘comparison method,’ ‘market approach,’ or the ‘market data approach’ considers market values of comparable properties or ‘comps.’

This valuation method is the most applicable in a stable market with sufficient recent sales which allow for adequate comparisons. It is commonly the first approach at valuation for office buildings, retail, multifamily and industrial properties.

The process is to research relevant comparable recent sales of similar properties in close proximity to the subject property. Consider property location, size, amenities, market environment and any other relevant factors. Establish the trends this data supports, apply the numbers to your subject property and you’ll have your first look at property value.

You’re ready to sell a commercial real estate property

Income Capitalization Approach

This is a project that aims to develop a methodology for valuing commercial real estate properties. The project involves analyzing market trends and data, as well as conducting property inspections to determine the value of a property. The results of the valuation will inform underwriting decisions for potential loans or investments in the property.

Direct Capitalization Approach

This is a project that aims to develop a methodology for valuing commercial real estate properties. The project involves analyzing market trends and data, as well as conducting property inspections to determine the value of a property. The results of the valuation will inform underwriting decisions for potential loans or investments in the property.

Gross Income Multipliers

This is a project that aims to develop a methodology for valuing commercial real estate properties. The project involves analyzing market trends and data, as well as conducting property inspections to determine the value of a property. The results of the valuation will inform underwriting decisions for potential loans or investments in the property.

Cost Approach

This is a project that aims to develop a methodology for valuing commercial real estate properties. The project involves analyzing market trends and data, as well as conducting property inspections to determine the value of a property. The results of the valuation will inform underwriting decisions for potential loans or investments in the property.