Commercial real estate types: Underwriting the most difficulty
Hey guys,

In your opinion, which type is the most difficult to underwrite aside from land?

Multifamily, industrial, office, medical, retail etc..
[{"id": "hk2s2gf", "text": "I think any building (retail/industrial/office) with multiple tenants on different lease structures can be tough.", "replies": [{"id": "hk5x5aq", "text": "Man, I recently looked at a 4-unit strip center with two tenants on full gross, one on modified gross with expense stop on RE tax, and one on full NNN + reimbursements. Managing that would be a headache", "replies": [], "depth": 2}], "depth": 1}, {"id": "hk2ycy5", "text": "Small retail properties with no anchor... vacancy &amp; turnover assumptions make or break it", "replies": [], "depth": 1}, {"id": "hk2yinb", "text": "Retail and office. Hotel can be a bitch though", "replies": [{"id": "hk2z50k", "text": "I feel like lodging became way worse/harder since the start of COVID.", "replies": [{"id": "hk310qv", "text": "It was. I did like 20 hotel deals in the last 15 months and they were all difficult no matter the size from $20 million to $300 million", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hk30b7e", "text": "The one with the least amount of information. Essentially, class C anything.", "replies": [{"id": "hk4ij2s", "text": "Lol", "replies": [], "depth": 2}], "depth": 1}, {"id": "hk3437g", "text": "I'm biased because I'm a hotel appraiser, but I've always been told hotels, specifically resorts and big group boxes. Generally speaking I can charge higher fees for hotel appraisals versus what others can for office, retail, etc., but obviously it depends on the specific property.", "replies": [{"id": "hk507la", "text": "I actually like underwriting big box hotels &amp; resorts more than limited service (well at least pre pandemic). It was kind of nice that you\u2019d have pace reports going out 3 years in some of this stuff with fully baked business, makes it a lot easier to UW operations if you know that like 50% of next years rooms have already been rented", "replies": [{"id": "hk5xd7i", "text": "I agree. Hotels are typically pretty consistent year-to-year with income and expenses. Comp sets from STR reports are a god send too", "replies": [], "depth": 3}, {"id": "hmff5n0", "text": "What's your fee per property or full year take home? Do you do appraisals on properties up for auction pre bid?", "replies": [{"id": "hmfgbjr", "text": "Oh I work on the principal side. I just get paid base + bonus + promote. I\u2019ve never hired a 3rd party to do underwriting and honestly couldn\u2019t tell you what the lender appraisal costs, I think it\u2019s usually like $10k. I\u2019ve never commissioned a buy side appraisal in my life.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hmfevab", "text": "What's your fee per property  or full year take home? Do you do appraisals on properties up for auction pre bid?", "replies": [{"id": "hmfj4ur", "text": "Fees vary widely from $4500 for a really straightforward local limited service hotel, to $20k+ for complicated larger assets. Vast majority of work is for lenders and special servicers (due to COVID). Can do an appraisal for any reason, so would need more info to really answer your second question.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hk3a3wf", "text": "Value-add Bridge on Multifamily is very tough to underwrite. Lots of factors come into play such as new tax values, rent projections, insurance/expense projections, lease up, capex costs, take-out financing etc.", "replies": [{"id": "hk3dxgq", "text": "This is the space I am the most interested in. How you manage to quantify factors such as rent projections and capex costs? Curious about your thoughts on this.", "replies": [{"id": "hk3fb9n", "text": "I'm on the mtg. brokerage side but we fully underwrite for our DUS lenders. For rent projections, we look at area comps - preferably within a 0.5 mile radius, similar vintage, unit mix, etc. Our client usually gives us their Capex budget based on how much $/door they are expecting to spend. \n\nThe tricky part is projecting rent, occupancy, and expenses to determine a stabilization time and the expected exit price for a refinance. We use agency expense comps for most of this. \n\nPM if you have any other questions", "replies": [{"id": "hk3vfuj", "text": "Thank you, this is very insightful. And will do.", "replies": [], "depth": 4}], "depth": 3}, {"id": "hk5c9u0", "text": "I\u2019m on the principal side, we run rent comps and do some market research for rent forecasts we focus on mainly 3 markets so we kind of have a feel for how well or how much we can push rents we still try to be on the conservative side though. as for Capex we do our own construction so we go tour the property or just drive it and see what we need to or want to spend money on, depending on the size of the property we built a \u201cconstruction cost\u201d model using previous properties info to give us ranges on expected capex costs", "replies": [], "depth": 3}], "depth": 2}, {"id": "hk50hxj", "text": "Bridge loans are easy to UW, just make sure you\u2019re good with your basis if you need to take it back\u2026 unless your detachment point is like 95% you\u2019re going to be fine if you\u2019re cool with the sponsor as a credit risk.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hk4c6h9", "text": "Sarcastically, anything with a complicated set of books and records which are handwritten rather than on computers. \n\nRealistically, I'd go with a large specialty resort in the middle of nowhere that was built using non-traditional materials and has some geographic feature central to its attraction that cannot be replicated. \n\nMy personal hell though is any office building where some tenants are on +E, some are NNN, and some are whatever cocked-up arrangement the LL came to with the tenant 15 years ago that no one really understands. Bonus for more than 50 tenants", "replies": [], "depth": 1}, {"id": "hk4iw6i", "text": "Bridge deals and multi-tenant retail (shopping center, malls, etc.) probably for me", "replies": [], "depth": 1}, {"id": "hk4o6wv", "text": "Mineral rights", "replies": [], "depth": 1}, {"id": "hk4zwmn", "text": "60+ tenant office building", "replies": [], "depth": 1}, {"id": "hk5adrw", "text": "Large regional malls. Also, multi-tenant office properties with 350 different reimbursement structures.", "replies": [], "depth": 1}, {"id": "hk5bn2t", "text": "Whatever combines 2 or 3 of these.", "replies": [], "depth": 1}, {"id": "hk5y3im", "text": "A few years ago, I looked at a mall that had some large tenants on $1/year leases and others on below market gross leases, medium-sized tenants on modified gross leases, small tenants on NNN + recoveries, and one other large tenant on full percentage rent. The in-house leasing broker definitely earned his commissions lol", "replies": [], "depth": 1}, {"id": "hk6pyf8", "text": "I\u2019ve personally completed the underwriting for all of the above, plus everything else, including:\n\nHotels? Obviously \n\nGolf course? Sure, that one time \n\nMedical research office with disposable human remains as an operating expense? Super gross site visit, but yeah \n\nBowling alley? Yes\n\nHomeless shelter? Definitely \n\nGas Station? Hundreds \n\nI can underwrite *anything*. What makes underwriting difficult are 1) moving parts of a transaction and 2) the ability of the audience to understand your underwriting. \n\nI once had my underwriting turned down by loan committee for a slam dunk multifamily new construction deal in east Dallas. That was hard. My underwriting was convincing and compelling, yet the decision was made not to move forward. Another decision was made that day as well: I lost interest in working with people who didn\u2019t understand the DFW market. Fast forward 5 years and that project that was turned down is now super successful.", "replies": [], "depth": 1}, {"id": "hk9qi1e", "text": "I think the level of difficulty is driven less by asset class than it is by the unique characteristics of the asset itself, (i.e., sponsorship, tenant mix,  durability of income, sub-market economics, etc...). IMO the bespoke nature of each asset is what drives how difficult it is to underwrite the property overall.", "replies": [], "depth": 1}, {"id": "hkc5kh8", "text": "Thanks for your response guys &amp; gals!", "replies": [], "depth": 1}]