I’ve been tasked with creating a benchmark template for Multi-Family and I need some help.
I am currently in my 6th month in a Bank Training Development Program and was recently tasked with working with the Chief Credit Officer on creating a benchmark template for Multi-Family RE. What are some key metrics/quantitative factors that should be included in a template that considers a Multi Family asset and the parent operating company. I have a base understanding of CRE but would really like to start this off on the right foot.
[{"id": "edigrgd", "text": "NOI, DSCR, LTV, interest and cap rate shocks...", "replies": [{"id": "edilkao", "text": "This is the most solid place to start. Not sure if your bank still uses debt yield, but I\u2019d consider that too if so. Some good variables to shock in addition are vacancy rate, OpEx ratio, and overall rents. I have taken on a similar project, and typically it can be done with a general RE cash flow that reconciles to a table of shock variables at different levels based on a baseline variable and shock margin that you input. The real work is just getting the formulas to do what you want them to. ", "replies": [{"id": "edkc7of", "text": "not OP, but what is a shock? Thanks.", "replies": [{"id": "edkcj93", "text": "No worries- shock translates to sensitivity analysis. A sensitivity analysis is a test of how the output of a particular variable tested at different levels effects different inputs of uncertainty associated with a particular deal. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "edimg67", "text": "This is the most solid place to start. Not sure if your bank still uses debt yield, but I\u2019d consider that too if so. Some good variables to shock in addition are vacancy rate, OpEx ratio, and overall rents. I have taken on a similar project, and typically it can be done with a general RE cash flow that reconciles to a table of shock variables at different levels based on a baseline variable and shock margin that you input. The real work is just getting the formulas to do what you want them to. ", "replies": [{"id": "edojrn5", "text": "Also value per unit, loan exposure per unit, amortization type (IO or 30yr, combo), maturity balance per unit. All of these can be used for benchmarking. ", "replies": [], "depth": 3}], "depth": 2}, {"id": "editzll", "text": "This pretty much covers the basics, if you\u2019re factoring your finance structure in then do a DCF analysis and play around with discount rates to find an IRR that makes sense ", "replies": [], "depth": 2}], "depth": 1}, {"id": "ediiovo", "text": "The statements for the parent owner will likely be much different than the property itself. Most CRE is owned by a single asset entity, so the only thing that the property owner typically has is the income statement for the property. The owner of that entity will get passive income from the property. \n\nSince you are at a bank, I'm going to assume you mean the individual property. You can google \"commercial real estate income statement\" for a rough idea.", "replies": [], "depth": 1}, {"id": "edixxc1", "text": "Consider a refinance risk analysis. I assume no income/expense growth for the term of the loan and then determine the max cap rate and max interest rate that reasonably refi's at 75% ltv. May only be useful if your bank does subordinate debt or bridge/construction loans, though. ", "replies": [], "depth": 1}, {"id": "edlz46x", "text": "Property cash flow analysis sensitizing DSCR against various loan constants, Debt Yield, LTV, LTC (particularly for construction loans)\n\nMarket analysis for greater market and/or submarket- Cap rates, vacancy rate &amp; rental rate trends, etc (CBRE semi-annual cap rate survey is great, my Division uses a database of bank appraisals in the market as well as Costar submarket reports)\n\nPerm market refi analysis (I use free rate reports from Cushman &amp; Wakefield as well as Northmarq Capital)\n\nSale of asset analysis (using NOI / market cap rate to get cap rate valuation, less any selling related brokerage costs)\n\nAt risk equity of the borrowing entity- Not just up front cash equity, but also ARE implied by Stabilized Property Value less Loan Commitment, as a %.... Generally MF ARE for commercial lending is between 20-40% these days. \n\n", "replies": [{"id": "edm5k7e", "text": "Really liked this one. Might run with a normalized DSC test based on the C&amp;W perm market rate reports as well. This gives me a solid base though. Thank you.", "replies": [], "depth": 2}], "depth": 1}, {"id": "edm5lv8", "text": "Appreciate all the feedback. Should have plenty to work with and move forward with.", "replies": [], "depth": 1}]