You are a loan officer at a local bank (Bank ABD). The Vice President of the bank asks you to conduct a prelimiary underwriting analysis for a commercial loan. The property is a single tenant retail building. More informaiton about the property and the borrower is given below. You shoud analyze the three options based on different assumptions on loan terms provided by the Vice President (see "Underwriting Analysis" sheet). Also, the underwriting guidelines for LTV, DSCR and debt yield by Bank ABD are provided in the "Underwriting Guidelines" sheet. The borrower plans to purchase the property for $2.7 million, and has requested a loan for 1.89 million (see Option 1 in"Underwriting Analysis"sheet). Option 2 and option 3 are options also considered by the Vice President. Your task: to determine annual debt service, DSCR, and debt yield for each option. From a lender's perspective, which loan option should you recommend to the Vice President? And why? Your recommendation should be based on the underwriting guidelines, and your analysis on LTV, DSCR, and debt yield.

A Teaching Example for Underwriting a Retail Property. The assumptions are made for teaching purpose. Item Property Wendy's (Franchise) Questions/issues to be considered Credit/Non-Credit? Borrower Address: Traffic Counts/ Demographics 495 Bridge Ave Daily traffic count: 56,000 cars Price: $ 2,700,000 Is this high/low? Net Rentable Area: 3,500 Big/small for resteraunt - Wendy's Price/SF: $ 771.43 Is this high/low? NOI: $ 142,000 Rent/SF? Lease Type: NNN Is owner responsible for roof? Year Construction: 2002 Condition of building Any capital improvements since constuction Lot Size (acre): Land to Building ratio: 1.07 13.32 Highest and best use play? Excess Land Area Price SF/Land: $ 57.93 It there a redevelopment option? Wendy's Credit Rating: B (by Standard and Poor's) Bond issuance? Lease Start Date: Lease Expiration Date: December 1, 2003 November 30, 2026 How many remaining years in the lease? Credit Guaranty: Franchise Wendy's until 12/31/2024 The underwriting guidelines for Bank ABD are given below. Mininum DSCR for 25 year amortization Minimum DSCR for 20 year amortization Maximum LTV 75% 75% 1.25x 1.20x 1.20X 1.20X Property Type/ Use Multi-family 10 units or less 11 units or more Retail: Strip Centers Anchor Tenants Single Tenants Credit Tenants Warehouses Standard Office Buildings Standard Gas Stations: Hotels 70% 70% 65% 75% 1.25X 1.25% 1.25X 1.25X 1.20x 1.20x 1.20X 1.20x 80% 1.20x 1.20x 70% 75% 65% 1.20x 1.25x 1.35X 1.20x 1.20x 1.35X A credit tenant means a tenant that is rated at least Baa3 by Moody's and BBB- by Standard & Poor's. DSCR = NOI/Annual Debt Service (or ADS) LTV = Loan Amount/Property Value The expected debt yield for Bank ABD for a loan less than $10 million is about 9%. Debt Yield = NOI/Loan Amount. The differnece between debt yield and LTV/DSCR is that debt yield does not take into consideration cap rates, interest rate or amortization. These are the three options based on different assumptions on loan terms provided by the Vice President. Please make a recommendation on which option should be offered to the borrower. Option 1 - Client Request Option 2 Option 3 10 years Rate Loan Loan maturity Rate Amortization Value Loan $1,890,000 Loan maturity 10 years 4.00% Amortization (month) 300 Value $ 2,700,000 $ 142,000 Implied Cap 5.26% Annual DS ? DSCR ? LTV 70% Debt yield ? Loan $1,755,000 Loan maturity Rate 4.50% Amortization 300 Value $ 2,700,000 NOI $ 142,000 Implied Cap 5.26% Annual DS ? DSCR ? LTV 65% ? $1,620,000 5 years 3.75% 240 $ 2,700,000 $ 142,000 5.26% NOI ? Implied Cap Annual DS DSCR LTV ? 60% ? Your task: to determine annual debt service, DSCR, and debt yield for each option. From a lender's perspective, which loan option should you recommend to the Vice President? And why? Your recommendation should be based on the underwriting guidelines, and your analysis on LTV, DSCR, and debt yield. Please write your answer in the box below and provide a short explanation for why you choose the option. A Teaching Example for Underwriting a Retail Property. The assumptions are made for teaching purpose. Item Property Wendy's (Franchise) Questions/issues to be considered Credit/Non-Credit? Borrower Address: Traffic Counts/ Demographics 495 Bridge Ave Daily traffic count: 56,000 cars Price: $ 2,700,000 Is this high/low? Net Rentable Area: 3,500 Big/small for resteraunt - Wendy's Price/SF: $ 771.43 Is this high/low? NOI: $ 142,000 Rent/SF? Lease Type: NNN Is owner responsible for roof? Year Construction: 2002 Condition of building Any capital improvements since constuction Lot Size (acre): Land to Building ratio: 1.07 13.32 Highest and best use play? Excess Land Area Price SF/Land: $ 57.93 It there a redevelopment option? Wendy's Credit Rating: B (by Standard and Poor's) Bond issuance? Lease Start Date: Lease Expiration Date: December 1, 2003 November 30, 2026 How many remaining years in the lease? Credit Guaranty: Franchise Wendy's until 12/31/2024 The underwriting guidelines for Bank ABD are given below. Mininum DSCR for 25 year amortization Minimum DSCR for 20 year amortization Maximum LTV 75% 75% 1.25x 1.20x 1.20X 1.20X Property Type/ Use Multi-family 10 units or less 11 units or more Retail: Strip Centers Anchor Tenants Single Tenants Credit Tenants Warehouses Standard Office Buildings Standard Gas Stations: Hotels 70% 70% 65% 75% 1.25X 1.25% 1.25X 1.25X 1.20x 1.20x 1.20X 1.20x 80% 1.20x 1.20x 70% 75% 65% 1.20x 1.25x 1.35X 1.20x 1.20x 1.35X A credit tenant means a tenant that is rated at least Baa3 by Moody's and BBB- by Standard & Poor's. DSCR = NOI/Annual Debt Service (or ADS) LTV = Loan Amount/Property Value The expected debt yield for Bank ABD for a loan less than $10 million is about 9%. Debt Yield = NOI/Loan Amount. The differnece between debt yield and LTV/DSCR is that debt yield does not take into consideration cap rates, interest rate or amortization. These are the three options based on different assumptions on loan terms provided by the Vice President. Please make a recommendation on which option should be offered to the borrower. Option 1 - Client Request Option 2 Option 3 10 years Rate Loan Loan maturity Rate Amortization Value Loan $1,890,000 Loan maturity 10 years 4.00% Amortization (month) 300 Value $ 2,700,000 $ 142,000 Implied Cap 5.26% Annual DS ? DSCR ? LTV 70% Debt yield ? Loan $1,755,000 Loan maturity Rate 4.50% Amortization 300 Value $ 2,700,000 NOI $ 142,000 Implied Cap 5.26% Annual DS ? DSCR ? LTV 65% ? $1,620,000 5 years 3.75% 240 $ 2,700,000 $ 142,000 5.26% NOI ? Implied Cap Annual DS DSCR LTV ? 60% ? Your task: to determine annual debt service, DSCR, and debt yield for each option. From a lender's perspective, which loan option should you recommend to the Vice President? And why? Your recommendation should be based on the underwriting guidelines, and your analysis on LTV, DSCR, and debt yield. Please write your answer in the box below and provide a short explanation for why you choose the option