Question for those who underwrite CRE loans for a bank?
Are you underwriting to confirm the value of the property as laid out in the appraisal or underwriting from the perspective of “if the Bank had to take over the property?” 

Regarding the first part, when deriving the Bank’s pro forma, do you simply rely on the assumptions used in the appraisal’s direct cap approach, or do try to plug in more conservative assumptions for vacancy, management fee, and reserves?
[{"id": "hkmot0i", "text": "When I work on credit deals I asses (1) asset risk (2) sponsor risk. On (1) take the UW beat the crap out of it to test downside scenario and see what you think the loan is really going to do to confirm that it\u2019s not coming back and if it is you\u2019re comfortable at that basis. Usually start with the sponsors pro forma and go from there. On (2) it\u2019s just generally looking into the sponsor and getting comfortable with them that if the going gets tough they\u2019re going to fight it out, do the right thing for the asset, and baring a catastrophic event won\u2019t give the deal back. \n\nIn performing credit you really don\u2019t want to ever take the deal back - that\u2019s not the goal. If you\u2019re in distressed credit you\u2019re kind of doing the inverse to confirm it\u2019s coming back and you want it at the price you paid for the loan but that\u2019s a different beast. \n\nAnyways hope this is helpful.\n\nETA - if you think there are any pitfalls in the loan if you\u2019re doing bridge lending (If I do credit it\u2019s usually super high octane mezz B stuff) I\u2019ll usually bake in credit protection - interest reserves, cash flow sweeps, stuff like that that triggers where I think it\u2019s going to hit on my downside underwriting to make sure that no matter what happens I don\u2019t lose $$$ and still get to a mid teens return on my loan. This isn\u2019t necessarily just a bridge loan / last $ mezz thing - but is even more important if you\u2019re going to lend like 70-90% attach/detach on someone\u2019s deal - make sure that the downside doesn\u2019t blow you out. Credit enhancement is key if there\u2019s anything funky with the loan (or your position in the stack)", "replies": [], "depth": 1}, {"id": "hknahk1", "text": "I work for a private lender and I see 3 things, the asset, the tenant and the market. \n\nWhat I want to know is if the worst case scenario was to happen, would I recover the money and the interest? And, how long would it take for it to happen?\n\nMany times the deal makes sense, but you see the demographics and you see how much risky it would be. For example, I recommended to pass in a construction loan for a condo that was selling over $500 sq ft in the middle of Florida. There were simply no comparables besides their own sales and all was dependent on one single employer in the area. It simply was too risky and that market too flimsy for demand of that product.", "replies": [], "depth": 1}, {"id": "hko8orl", "text": "I work as a Regional President of a bank and we have a very large CRE loan portfolio. \n\nWe are cash flow lenders, then collateral,  then sponsorship. The project needs to cash flow independently (although there are times that we rely on the guarantors strength to underwrite the request).\n\nUsually we require a history that shows supportive cash flow at an acceptable level (usually at 1.25:1).\n\nHope this helps.", "replies": [], "depth": 1}, {"id": "hkomfop", "text": "The bank has to do its own proforma, usually based off the borrowers.  The appraisal typically is not ordered until the commitment letter is signed (otherwise the borrower has no written obligation to cover the appraisal cost).  Bank can't issue a commitment without doing its underwriting.  But the appraisal really matters, and the appraisal NOI from the income approach is a common comparison post closing to monitor loan performance (and to decide when you need to update the appraisal).", "replies": [], "depth": 1}, {"id": "hkyqwhx", "text": "From my experience, it really all depends on how strong the underwriter/lender is. I can make a compelling argument for/against each and every one of your points. Sure, bank policy says to do this, but that\u2019s just a policy waiver.", "replies": [], "depth": 1}]