Is the term "Underwriting a deal" used in Commercial Real Estate leasing context?
I wanted to clarify the terminology / industry lingo. In leasing context, what's the process of deal analysis called / leasing a space to the tenant called?
[{"id": "gqeuo1b", "text": "Eh we usually just say \u201ccheck their credit.\u201d", "replies": [{"id": "gqevlkp", "text": "Right. I guess if you're to do a comprehensive analysis, say for a property that generates income in $ millions.", "replies": [{"id": "gqewbma", "text": "In what context. Like are you a leasing agent trying to \u201cunderwrite\u201d a single tenant?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gqew3dv", "text": "You might say that of a multi-million dollar lease transaction with a significant buildout. Hard to \u201ccheck credit\u201d on a corporation although there is D and B as well as checking their SEC reports. - at the end of the day it is financial analysis on the tenant and also over the NPV and risk / return of the deal entirely. \n\nChecking credit is common parlance for shop leasing, residential or small office.", "replies": [{"id": "gqf6o1s", "text": "Can confirm. I underwrite tenant credit all the time and use the term underwrite liberally", "replies": [], "depth": 2}], "depth": 1}, {"id": "gqew8ow", "text": "Underwriting a deal is essentially the process of conducting a financial analysis... the deal could be mortgage, there are mortgage underwriters. I\u2019m an acquisitions guy for an investment firm, I underwrite deals. Property owners can do a lease analysis, or underwrite the lease. Not black and white terminology, just clarify what you\u2019re implying.", "replies": [], "depth": 1}, {"id": "gqezn8t", "text": "I'd say \"underwrite a tenant\". When you underwrite a deal or underwrite a property, you're looking at the deal/property's ability to generate the expected income to service the debt and pay out the expected cash flow.\n\nWhen it comes to a lease, you're looking at the tenant's ability to pay the rent and other amounts due under the lease.", "replies": [], "depth": 1}, {"id": "gqezpel", "text": "Due diligence", "replies": [], "depth": 1}, {"id": "gqfczrj", "text": "PERE background - We/I would use the term loosely to refer to financial (and marketing) due diligence. If we are looking at a large anchor tenant or potential tenant for spec...I would refer to \u201cunderwriting\u201d a deal. As mentioned above, nothing is standard (or correct) in CRE!  Half of our metrics are non-GAAP/IFRS. We just make it up things as we go...right? Ha.", "replies": [], "depth": 1}, {"id": "gqfuhab", "text": "I worked on the leasing side for a while and \"underwriting\" was not a term that got used, although that is essentially what was being done. It usually just involved calculating their net effective rent after accounting for build out, lease commission, rent escalations, free rent, etc. \n\nBut at the same time, I don't remember what we called it.", "replies": [], "depth": 1}, {"id": "gqg2viq", "text": "I've seen this term used by asset managers (institutional or larger investments) as a way to evaluate the impact of a proposed lease on the property and ultimately portfolio. Think of it as a way to look at all aspects of a lease on not only the immediate cashflow but the building value over the intended hold period to exit. Fixed and variable rent, recoveries, TI allowances, and future options all go into the analysis - and all of this is being compared with market options and future use. For instance, it might make more sense for the asset manager to decline a lease if they believe there will be a better alternative tenant at some point in the future. Tenant quality (financials) are broadly considered but usually not part of the calculation unless it's a \"credit\" tenant (generally means the business is publicly held and/or a credit rating by a major agency) or in a high-risk category.", "replies": [], "depth": 1}, {"id": "gqibcoo", "text": "I exclusively do tenant rep leasing and never heard anyone use the term underwrite a deal when referring to leasing. We call it lease analysis, financial matrix, cash flow analysis", "replies": [], "depth": 1}, {"id": "gqzqvr0", "text": "It can be used to guarantee rent for a vacancy. For example if you were selling a 5 tenant property, but one tenant was vacant, you, as the seller, would underwrite that tenancy for a period (say 2 years). You would then try to find a tenant to take over from your tenancy. From the purchasers point of view, they buy a fully leased property. From yours, you sell the property easier and probably at a lower yield (higher value), but have the rental obligation for X years if you can't lease it.", "replies": [], "depth": 1}]