This document summarizes key topics covered in a seminar on appraisals for lending purposes, including using appraisals to evaluate loan repayment risk, property and market risks, categories of loan repayment risk (borrower, property, market), and the role of appraisals in lending decisions. It discusses how appraisals should provide sufficient information on the security property and competitive market to allow lenders to evaluate risks and make informed lending judgments. Specifically, it notes appraisals should consider physical, functional, legal and economic property characteristics, as well as competitive market supply and demand factors, that could impact a property's revenue production and ability to service debt.
Declining cap and interest rates, by Carlton RoarkCarlton Roark
Current challenges in commercial real estate include declining interest rates and capitalization (cap) rates. While low interest rates attract investors, they also lower cap rates on properties. For investors, cap rates measure return compared to other investments, but for lenders cap rates also indicate risk - lower cap rates may mean lower risk or artificially lowered returns. If a cap rate is too low for the perceived risk, lenders may view it as higher risk, especially as rates rise. Lenders mitigate risk from low cap rates by adjusting underwriting, like imputing higher vacancy rates, without borrowers' knowledge. This is important for borrowers to understand their lender's true view of risk.
This document discusses asset liability management (ALM) in banks. It covers the key components of assets and liabilities on a bank's balance sheet and how ALM aims to manage risks from changes in interest rates, exchange rates, credit risk, and liquidity. ALM matches assets and liabilities to minimize liquidity and market risk. It also covers liquidity management techniques like measuring net funding requirements using a maturity ladder to estimate cash inflows and outflows. Interest rate risk management includes analyzing gaps between interest rate resets on assets and liabilities. Foreign exchange risk from currency fluctuations is also discussed.
This document discusses quantitative portfolio management of default risk. It introduces a model for measuring default risk of individual assets based on the market value and volatility of the underlying company's assets. It describes how to infer asset values from observable equity characteristics. It also discusses measuring portfolio diversification through correlations between asset values and quantifying the expected and unexpected loss from defaults. The goal is to apply modern portfolio theory to debt portfolios in order to minimize risk and maximize returns through diversification.
This document discusses analyzing the relationship between underwriting techniques used by two credit managers at a mortgage company. It will examine if loans underwritten by one credit manager contain more conditions than the other, and if loans with higher credit grades or lower loan-to-value ratios receive fewer conditions. The analysis will involve comparing quantitative variables like credit grade, loan-to-value ratio, and number of conditions against each other using charts. It aims to determine if risk-based underwriting is consistently applied, or if one credit manager applies conditions inconsistently with risk levels.
The document outlines the key topics covered in the National Financial Literacy Assessment Test (NFLAT) conducted by the National Centre for Financial Education. The test aims to measure financial literacy among school students and encourage the development of basic financial skills. It covers concepts like money, budgeting, insurance, investments, banking, loans and more. Students are evaluated on their understanding of core financial terms and ideas including assets, liabilities, inflation, interest rates, mutual funds, stocks and bonds.
A study of categorization of investors into different risk profles Himanshu Singh
This Research Report will help to know more about financial risk profiles according to which investors can invest their money with appropriate strategy.
The document discusses different perspectives on financial instruments from legal and finance viewpoints. From a legal perspective, financial instruments combine ownership rights and debt obligations. However, finance professionals focus on the expected future cash flows and discount rates used to calculate present value. Pricing of financial securities tends to be relative based on sovereign debt rates. However, market prices do not always reflect fundamental valuations, leading to periodic corrections. [/SUMMARY]
Drafting the Math – Understanding Financial Covenants, Tests, and Benchmarks ...Richard Saad
While it is impossible to describe and explain all financial covenants, and the variations thereof, that are commonly seen in lending and transactional work, here's a brief explanation as to purpose, calculation, expression and rationale, with an example of application.
Declining cap and interest rates, by Carlton RoarkCarlton Roark
Current challenges in commercial real estate include declining interest rates and capitalization (cap) rates. While low interest rates attract investors, they also lower cap rates on properties. For investors, cap rates measure return compared to other investments, but for lenders cap rates also indicate risk - lower cap rates may mean lower risk or artificially lowered returns. If a cap rate is too low for the perceived risk, lenders may view it as higher risk, especially as rates rise. Lenders mitigate risk from low cap rates by adjusting underwriting, like imputing higher vacancy rates, without borrowers' knowledge. This is important for borrowers to understand their lender's true view of risk.
This document discusses asset liability management (ALM) in banks. It covers the key components of assets and liabilities on a bank's balance sheet and how ALM aims to manage risks from changes in interest rates, exchange rates, credit risk, and liquidity. ALM matches assets and liabilities to minimize liquidity and market risk. It also covers liquidity management techniques like measuring net funding requirements using a maturity ladder to estimate cash inflows and outflows. Interest rate risk management includes analyzing gaps between interest rate resets on assets and liabilities. Foreign exchange risk from currency fluctuations is also discussed.
This document discusses quantitative portfolio management of default risk. It introduces a model for measuring default risk of individual assets based on the market value and volatility of the underlying company's assets. It describes how to infer asset values from observable equity characteristics. It also discusses measuring portfolio diversification through correlations between asset values and quantifying the expected and unexpected loss from defaults. The goal is to apply modern portfolio theory to debt portfolios in order to minimize risk and maximize returns through diversification.
This document discusses analyzing the relationship between underwriting techniques used by two credit managers at a mortgage company. It will examine if loans underwritten by one credit manager contain more conditions than the other, and if loans with higher credit grades or lower loan-to-value ratios receive fewer conditions. The analysis will involve comparing quantitative variables like credit grade, loan-to-value ratio, and number of conditions against each other using charts. It aims to determine if risk-based underwriting is consistently applied, or if one credit manager applies conditions inconsistently with risk levels.
The document outlines the key topics covered in the National Financial Literacy Assessment Test (NFLAT) conducted by the National Centre for Financial Education. The test aims to measure financial literacy among school students and encourage the development of basic financial skills. It covers concepts like money, budgeting, insurance, investments, banking, loans and more. Students are evaluated on their understanding of core financial terms and ideas including assets, liabilities, inflation, interest rates, mutual funds, stocks and bonds.
A study of categorization of investors into different risk profles Himanshu Singh
This Research Report will help to know more about financial risk profiles according to which investors can invest their money with appropriate strategy.
The document discusses different perspectives on financial instruments from legal and finance viewpoints. From a legal perspective, financial instruments combine ownership rights and debt obligations. However, finance professionals focus on the expected future cash flows and discount rates used to calculate present value. Pricing of financial securities tends to be relative based on sovereign debt rates. However, market prices do not always reflect fundamental valuations, leading to periodic corrections. [/SUMMARY]
Drafting the Math – Understanding Financial Covenants, Tests, and Benchmarks ...Richard Saad
While it is impossible to describe and explain all financial covenants, and the variations thereof, that are commonly seen in lending and transactional work, here's a brief explanation as to purpose, calculation, expression and rationale, with an example of application.
Credit rating agencies play a key role in the modern financial system by providing ratings that assess the creditworthiness and risk of default for debt instruments. While ratings agencies increase market efficiency through widely available low-cost information, their business model is unusual in that issuers, not investors or users, pay for ratings. This can potentially compromise the independence and objectivity of agency ratings. The role of ratings agencies has expanded over time as regulations increasingly require their use in investment and lending decisions. Factors like independence, credibility, disclosure, and a developed debt market are important for ratings to effectively fulfill their function of informing investors.
The document provides information about credit rating agencies in India. It discusses how India was one of the first developing countries to establish a credit rating agency in 1988. It then outlines the key functions and importance of credit rating agencies, describing how they assess an entity's creditworthiness and ability to repay debt through financial analysis and assigning ratings. The document also details the credit rating process, highlighting the steps of data gathering, management meetings, rating assignment, publication and ongoing surveillance. Finally, it lists the major credit rating agencies operating in India, including CRISIL, ICRA, CARE, Duff & Phelps and Onicra.
Long horizon simulations for counterparty risk Alexandre Bon
The Challenges of Long Horizon Simulations in the context of Counterparty Risk modeling : CVA, PFE and Regulatory reporting.
This joint presentation reviews the key decisions that need making regarding the choice of risk factor evolution models and calibration methods. In particular, we will analyse the performance of classical historical calibration methods (such as Maximum Likelihood and the Efficient Method of Moments) in estimating the volatility and drift terms of the Hull & White class of Interest Rate models ; both in terms of convergence and stability.
As most methods perform satisfactorily for volatility but disappoint on the mean reversion estimation, we propose a new modified Variance Estimation method that significantly outperform the classical approaches.
Lastly, after reviewing historical economic evidence of mean-reversion dynmics in high interest rate regime, we propose modifying classical models by making mean reversion non-linear and accelerating for high rates - that can be referred as "+R" models.
This model address unrealistically large and persistent interest rates values often observed at high quantile in PFE and CVA simulations.
Credit rating agencies play a key role in financial markets by providing independent ratings of financial instruments. Their ratings help investors assess risk and make investment decisions. Over time, credit rating agencies have become important due to various factors such as regulations requiring certain investment minimum ratings, and the growth of securitization and global capital markets. However, their business model, where issuers pay for ratings rather than investors, creates a potential conflict of interest that could compromise rating objectivity. Credit ratings communicate an agency's opinion on the probability that a debt issuer will default, but they are not guarantees or recommendations, and do not consider all risk factors in an investment.
The document provides financial information for XXX Constructions Pvt. Ltd for the fiscal years 2013 through 2016. It includes key metrics such as net sales, operating profit, PAT, cash profit, margins, tangible net worth, total liabilities, and ratios such as TOL/TNW. XXX Constructions is an Indian mining and construction company that diversified into Africa in 2012 by establishing a subsidiary in Zambia. The financial position of the company appears stable with consistent sales growth and profits over the period analyzed.
Quantifi Whitepaper: The Evolution Of Counterparty Credit Riskamoini
This white paper explores the evolution of approaches to counterparty credit risk management in major banks over the past two decades. It traces how models have progressed from simple reserve-based approaches to active simulation and hedging of counterparty exposures. Recent priorities include incorporating wrong-way risk, collateral risks, and clearing more products through central counterparties to reduce capital charges under Basel III. Overall banks have converged on actively managing counterparty risk through central simulation and hedging functions.
The candidate has extensive experience securitizing and packaging mortgage loans into mortgage-backed securities (MBS) to provide financing to the mortgage market. They have expertise in analyzing groups of loans that meet criteria for securitization and understanding the various risks involved like prepayment, market, and credit risk. The candidate has also priced various fixed income securities including MBS and participated in to-be-announced (TBA) transactions on the polypath system to estimate interest rates and hedge exposure. They are interested in a new project utilizing their analytical skills and concepts like weighted average life and coupon to design models and solutions.
Credit default swaps (CDS) emerged in the 1990s as a way for banks to transfer credit risk without selling loans. The CDS market grew rapidly after 2000 as it became more standardized and parties unrelated to referenced assets began speculating. By 2007, the notional value of CDS exceeded the value of underlying assets by $20 trillion as speculation increased. Problems with subprime mortgages and related collateralized debt obligations exposed issues as CDS sellers struggled to pay claims. Insurance companies faced risks both as CDS buyers and sellers, with potential losses if counterparties or referenced assets defaulted. The rapid growth and increased speculation in CDS contributed to systemic risks revealed by the financial crisis.
This document outlines the payment schedule for a 30-year residential mortgage loan of $1,540,000 with an interest rate of 3.25%. Over the first 12 months, the borrower's principal balance is reduced by $30,832.72 through monthly payments of $6,702.18, with the majority going toward interest. The schedule runs for 360 months and shows the declining principal balance as regular monthly payments are applied.
This document discusses classifying and analyzing problem loans. It covers major causes of business failures like incompetent management or lack of capital. It also lists troubled industries and financial warning signs. The document outlines the objectives and options in the loan workout process, including improving the lender's collateral position. It stresses completing a thorough review and financial analysis of distressed borrowers to develop an appropriate workout plan.
RMA-SOCL: Personal Development Accountability/Selling Credit Products (Tom Sa...UCF Continuing Education
This document discusses personal development and selling. It emphasizes that opportunity is not always polite or patient, and one must identify, grab, and jump on opportunities. It stresses that all business skills are learnable, and provides resources for learning like books, CDs, and mentors. Goals should be specific, measurable, difficult, and public to be most effective. Personal development requires accountability, and having a compelling vision with clear purpose, future focus, and values. Selling is emotional and one must connect with customers at a feeling level by demonstrating enthusiasm, confidence, empathy, and honesty.
The document provides an overview and analysis of the employment impacts of the Great Recession. Some key points:
- The Great Recession resulted in the loss of 8.8 million jobs and widespread unemployment across sectors. Job losses were structural rather than cyclical and many will not return.
- Current employment conditions show slow job growth of around 162,000 per month on average, barely enough to cover population growth. Unemployment rates remain elevated.
- Long-term trends suggest future jobs will require higher skills and specialized training, but there is a growing skills mismatch. If educational achievement does not increase, median wages will continue declining and structural unemployment rising.
- A full recovery of jobs lost during the
This document discusses various types of commercial real estate loans, including construction loans, land development loans, and loans for income-generating commercial properties. It provides details on:
- The loan application process and documentation requirements, including operating statements, balance sheets, tax returns, and property evaluations.
- How construction loans are disbursed based on completion of stages of construction and ensuring costs are paid.
- Additional risks associated with lending for land purchases, development projects, and speculative residential construction versus contracted builds.
- The role of takeout commitments in protecting construction lenders for residential property loans.
Best Known as a real estate agent, Boris Gantsevich assists clients to achieve real estate desires. He delivers important knowledge to clients about real estate market and properties. Whether you are buying or selling he guides his clients through the process.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
This document provides an overview of a short course on credit risk management in banking. The course focuses on risks in banking, why credit risk is important, credit risk analysis, and credit risk management. Credit risk is defined as the possibility that a borrower will fail to repay their debt. A strong first line of defense is sound underwriting, approval processes, and competent lending staff. Effective credit risk analysis requires understanding factors like the loan purpose, borrower repayment capacity, and environmental considerations. Primary controls for credit risk management include independence, credit policy guidelines, loan reviews, audits, and external reporting.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
This document discusses various methodologies for credit risk modeling and risk aggregation. It describes both unconditional models that use limited borrower information and conditional models that incorporate economic factors. Top-down and bottom-up approaches to credit risk aggregation are also outlined. Linear risk aggregation simply sums individual risks while copula models allow for more complex dependence structures. The document also notes that risk is not fully fungible due to legal and tax considerations.
This document provides an overview of credit risk management. It defines credit risk as the potential for loss due to a borrower failing to repay a debt. Credit risk arises when there is a possibility a borrower will not repay a loan as obligated. The document discusses distinguishing credit risk from market risk and outlines key credit risk concepts like probability of default, exposure at default, and loss given default which are used to estimate expected and unexpected credit losses. It also provides examples of credit products like loans and bonds.
1) The document discusses various principles of lending that banks follow such as safety, liquidity, profitability, security, purpose of loan, social responsibility, and risk diversification.
2) It also describes different types of loans and advances provided by banks including cash credits, overdrafts, bill discounting, letters of credit, and term loans.
3) The evaluation of borrowers, types of securities, and RBI's role in selective credit control are also summarized.
Credit rating agencies play a key role in the modern financial system by providing ratings that assess the creditworthiness and risk of default for debt instruments. While ratings agencies increase market efficiency through widely available low-cost information, their business model is unusual in that issuers, not investors or users, pay for ratings. This can potentially compromise the independence and objectivity of agency ratings. The role of ratings agencies has expanded over time as regulations increasingly require their use in investment and lending decisions. Factors like independence, credibility, disclosure, and a developed debt market are important for ratings to effectively fulfill their function of informing investors.
The document provides information about credit rating agencies in India. It discusses how India was one of the first developing countries to establish a credit rating agency in 1988. It then outlines the key functions and importance of credit rating agencies, describing how they assess an entity's creditworthiness and ability to repay debt through financial analysis and assigning ratings. The document also details the credit rating process, highlighting the steps of data gathering, management meetings, rating assignment, publication and ongoing surveillance. Finally, it lists the major credit rating agencies operating in India, including CRISIL, ICRA, CARE, Duff & Phelps and Onicra.
Long horizon simulations for counterparty risk Alexandre Bon
The Challenges of Long Horizon Simulations in the context of Counterparty Risk modeling : CVA, PFE and Regulatory reporting.
This joint presentation reviews the key decisions that need making regarding the choice of risk factor evolution models and calibration methods. In particular, we will analyse the performance of classical historical calibration methods (such as Maximum Likelihood and the Efficient Method of Moments) in estimating the volatility and drift terms of the Hull & White class of Interest Rate models ; both in terms of convergence and stability.
As most methods perform satisfactorily for volatility but disappoint on the mean reversion estimation, we propose a new modified Variance Estimation method that significantly outperform the classical approaches.
Lastly, after reviewing historical economic evidence of mean-reversion dynmics in high interest rate regime, we propose modifying classical models by making mean reversion non-linear and accelerating for high rates - that can be referred as "+R" models.
This model address unrealistically large and persistent interest rates values often observed at high quantile in PFE and CVA simulations.
Credit rating agencies play a key role in financial markets by providing independent ratings of financial instruments. Their ratings help investors assess risk and make investment decisions. Over time, credit rating agencies have become important due to various factors such as regulations requiring certain investment minimum ratings, and the growth of securitization and global capital markets. However, their business model, where issuers pay for ratings rather than investors, creates a potential conflict of interest that could compromise rating objectivity. Credit ratings communicate an agency's opinion on the probability that a debt issuer will default, but they are not guarantees or recommendations, and do not consider all risk factors in an investment.
The document provides financial information for XXX Constructions Pvt. Ltd for the fiscal years 2013 through 2016. It includes key metrics such as net sales, operating profit, PAT, cash profit, margins, tangible net worth, total liabilities, and ratios such as TOL/TNW. XXX Constructions is an Indian mining and construction company that diversified into Africa in 2012 by establishing a subsidiary in Zambia. The financial position of the company appears stable with consistent sales growth and profits over the period analyzed.
Quantifi Whitepaper: The Evolution Of Counterparty Credit Riskamoini
This white paper explores the evolution of approaches to counterparty credit risk management in major banks over the past two decades. It traces how models have progressed from simple reserve-based approaches to active simulation and hedging of counterparty exposures. Recent priorities include incorporating wrong-way risk, collateral risks, and clearing more products through central counterparties to reduce capital charges under Basel III. Overall banks have converged on actively managing counterparty risk through central simulation and hedging functions.
The candidate has extensive experience securitizing and packaging mortgage loans into mortgage-backed securities (MBS) to provide financing to the mortgage market. They have expertise in analyzing groups of loans that meet criteria for securitization and understanding the various risks involved like prepayment, market, and credit risk. The candidate has also priced various fixed income securities including MBS and participated in to-be-announced (TBA) transactions on the polypath system to estimate interest rates and hedge exposure. They are interested in a new project utilizing their analytical skills and concepts like weighted average life and coupon to design models and solutions.
Credit default swaps (CDS) emerged in the 1990s as a way for banks to transfer credit risk without selling loans. The CDS market grew rapidly after 2000 as it became more standardized and parties unrelated to referenced assets began speculating. By 2007, the notional value of CDS exceeded the value of underlying assets by $20 trillion as speculation increased. Problems with subprime mortgages and related collateralized debt obligations exposed issues as CDS sellers struggled to pay claims. Insurance companies faced risks both as CDS buyers and sellers, with potential losses if counterparties or referenced assets defaulted. The rapid growth and increased speculation in CDS contributed to systemic risks revealed by the financial crisis.
This document outlines the payment schedule for a 30-year residential mortgage loan of $1,540,000 with an interest rate of 3.25%. Over the first 12 months, the borrower's principal balance is reduced by $30,832.72 through monthly payments of $6,702.18, with the majority going toward interest. The schedule runs for 360 months and shows the declining principal balance as regular monthly payments are applied.
This document discusses classifying and analyzing problem loans. It covers major causes of business failures like incompetent management or lack of capital. It also lists troubled industries and financial warning signs. The document outlines the objectives and options in the loan workout process, including improving the lender's collateral position. It stresses completing a thorough review and financial analysis of distressed borrowers to develop an appropriate workout plan.
RMA-SOCL: Personal Development Accountability/Selling Credit Products (Tom Sa...UCF Continuing Education
This document discusses personal development and selling. It emphasizes that opportunity is not always polite or patient, and one must identify, grab, and jump on opportunities. It stresses that all business skills are learnable, and provides resources for learning like books, CDs, and mentors. Goals should be specific, measurable, difficult, and public to be most effective. Personal development requires accountability, and having a compelling vision with clear purpose, future focus, and values. Selling is emotional and one must connect with customers at a feeling level by demonstrating enthusiasm, confidence, empathy, and honesty.
The document provides an overview and analysis of the employment impacts of the Great Recession. Some key points:
- The Great Recession resulted in the loss of 8.8 million jobs and widespread unemployment across sectors. Job losses were structural rather than cyclical and many will not return.
- Current employment conditions show slow job growth of around 162,000 per month on average, barely enough to cover population growth. Unemployment rates remain elevated.
- Long-term trends suggest future jobs will require higher skills and specialized training, but there is a growing skills mismatch. If educational achievement does not increase, median wages will continue declining and structural unemployment rising.
- A full recovery of jobs lost during the
This document discusses various types of commercial real estate loans, including construction loans, land development loans, and loans for income-generating commercial properties. It provides details on:
- The loan application process and documentation requirements, including operating statements, balance sheets, tax returns, and property evaluations.
- How construction loans are disbursed based on completion of stages of construction and ensuring costs are paid.
- Additional risks associated with lending for land purchases, development projects, and speculative residential construction versus contracted builds.
- The role of takeout commitments in protecting construction lenders for residential property loans.
Best Known as a real estate agent, Boris Gantsevich assists clients to achieve real estate desires. He delivers important knowledge to clients about real estate market and properties. Whether you are buying or selling he guides his clients through the process.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
This document provides an overview of a short course on credit risk management in banking. The course focuses on risks in banking, why credit risk is important, credit risk analysis, and credit risk management. Credit risk is defined as the possibility that a borrower will fail to repay their debt. A strong first line of defense is sound underwriting, approval processes, and competent lending staff. Effective credit risk analysis requires understanding factors like the loan purpose, borrower repayment capacity, and environmental considerations. Primary controls for credit risk management include independence, credit policy guidelines, loan reviews, audits, and external reporting.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
This document discusses various methodologies for credit risk modeling and risk aggregation. It describes both unconditional models that use limited borrower information and conditional models that incorporate economic factors. Top-down and bottom-up approaches to credit risk aggregation are also outlined. Linear risk aggregation simply sums individual risks while copula models allow for more complex dependence structures. The document also notes that risk is not fully fungible due to legal and tax considerations.
This document provides an overview of credit risk management. It defines credit risk as the potential for loss due to a borrower failing to repay a debt. Credit risk arises when there is a possibility a borrower will not repay a loan as obligated. The document discusses distinguishing credit risk from market risk and outlines key credit risk concepts like probability of default, exposure at default, and loss given default which are used to estimate expected and unexpected credit losses. It also provides examples of credit products like loans and bonds.
1) The document discusses various principles of lending that banks follow such as safety, liquidity, profitability, security, purpose of loan, social responsibility, and risk diversification.
2) It also describes different types of loans and advances provided by banks including cash credits, overdrafts, bill discounting, letters of credit, and term loans.
3) The evaluation of borrowers, types of securities, and RBI's role in selective credit control are also summarized.
This document provides a 10 step process for analyzing problem loans and minimizing losses. The steps include reviewing documentation, performing lien searches, collateral valuation, financial analysis, identifying all related debt, evaluating management and business operations, environmental issues, viability assessment, and developing an action plan. The goal is to gather all relevant information to understand the problem fully and develop a solution that protects the bank's interests while helping the borrower return to financial health.
Credit risk is the possibility that a borrower will fail to repay a loan according to the agreed terms. It arises when a bank lends money to customers or other banks. The probability of loss from credit risk is high if the likelihood of default is high. There are several types of credit risk, including default risk, concentration risk, and country risk. Banks assess credit risk through qualitative factors like loan documentation and quantitative factors like non-performing loans. Credit risk is managed through techniques such as risk-based pricing, collateral, and credit monitoring.
General Principles of Lending:
When a request for a loan is received, it is important to ensure that the borrower has the legal capacity to borrow. The other matters upon which the information should be obtained are: the purpose of advance, the amount involved, the duration of the advance, the sources of repayment, the profitability of transaction, and, where applicable, the security offered. The most fundamental principle of all is that the bank should have confidence in the integrity, competence and continuing credit worthiness of the borrower.
• Know Your Customer:
While entertaining a proposal for advance, the branch has to first ensure compliance with the KYC norms.
• Pre- Sanction Stage:
Obtain/compile the following:
• Bio-data/declaration of assets owned by the borrower and guarantor along with latest income tax/wealth tax assessment copies and compilation of opinion reports.
• Particulars of immediate family members/legal heirs along with their father’s name and age.
• Audited balance sheets for the previous 3 years, estimated balance sheet for the current year and projected balance sheet for the next year.
• Particulars of existing borrowing arrangements and credit reports/no objection letters from existing banks if any.
• It should be followed by independent verification by the branch incumbent.
• Details of associate/group concerns, their borrowing arrangements and their latest balance sheets.
• No objection letter from term loan lender(s) if already financed by them and their permission/willingness to cede pari passu/ second charge on their security.
• The position of term working capital liabilities with various banks/FIs and details thereof viz., Limit, DP, Out standings, Irregularities (if any).
• Conduct a search/obtain a search report from Registrar of Companies to ascertain position of charges created already.
•
• Due Diligence:
• Branch Manager should do adequate Due Diligence before bringing an asset to the Bank’s books. This will avoid NPA.
• Thorough inquiry about the prospective borrower (with other banks, Financial Institutions, etc.) market intelligence, his past track record of performance and repayment of obligations, credit worthiness (Net Worth) must be done.
• Personal visit to his office/place of business will give an idea of his business.
• Processing of Applications:
While processing the applications, the following should be looked into and commented upon in the proposal:
• Due diligence on promoters’ background, their track record of repayment by checking with their existing bankers (NPA status) (any rephasements, any compromise entered into), credit worthiness, market reputation etc.
• Latest RBI defaulters’ list and willful defaulters' list —Company and their Directors.
• Bank’s loan policy.
• Contractual capacity of the borrower regarding borrowing powers/any restrictions on borrowings and names of persons authorized to borrow by verifications of:
• Partnership deed
What You Really Need to Know about Commercial Real Estate UnderwritingColleen Beck-Domanico
Prudent real estate underwriting uses quantitative analysis. However, real estate math isn't just a black‐and‐white exercise, nor is it simple formula lending. Many qualitative judgments feed into your estimates of property cash flow, coverage, and value that come from quantitative analysis. Your analysis should be completed in the context of the qualitative credit risk assessment. Doing so will avoid over‐advancing on potentially weak property cash flow streams that will jeopardize repayment prospects and bank portfolio quality. This presentation looks at quantitative analysis and integrating qualitative factors; underwriting guidelines; regulatory guidance; and value and cash flow analyses.
This document provides an overview of the credit process at banks, outlining the key components and objectives. It discusses the importance of thoroughly analyzing the creditworthiness of borrowers by evaluating their industry, financial condition, management quality, and security. The credit initiation and analysis process is described as beginning with screening prospective customers, collecting data, analyzing risks, and structuring proposed credit facilities to minimize losses while maximizing profit. Key factors to consider include industry dynamics, the borrower's financial statements, management competence and reputation, and collateral liquidation value. A strong credit process focuses on understanding these credit foundations to determine repayment ability and risk.
Accounts receivable and inventory managementluburtusi
This document discusses key aspects of accounts receivable management, credit analysis, and inventory control. It addresses setting credit policies, analyzing credit applicants, managing the billing and collection process, and following up on overdue accounts. It also outlines the five C's model for credit analysis - character, capacity, capital, collateral, and conditions. Finally, it discusses techniques for inventory control like ABC analysis, economic order quantity models, reorder points, and just-in-time systems. Effective accounts receivable and inventory management requires cooperation across sales, finance, accounting, and other functions.
Interest rate risk management what regulators want in 2015 7.15.2015Craig Taggart MBA
Areas covered in this section
Why Interest Rate Risk (IRR) should not be ignored
• Forward Rate Agreements (FRA’s) Forwards, Futures
• Swaps, Options
Why Bank Regulators continue to have a poor handle on interest rate risk
• Interest Rate Caps, floors, Collars
• LIBOR and UBS & Barclays rigging rates
• How should Financial Institutions determine which IRR vendor models are appropriate?
IRR Measurement methodologies are institutions
This document provides a summary of qualifications for Joyce L. Edwards including her background in mortgage lending with over 20 years of experience in underwriting, closing, and management. She has held senior level positions at several large mortgage lenders, demonstrating strong analytical and customer service skills. Her education includes an accounting degree from Bishop College in Dallas, Texas.
This slide deck is for commercial real estate lenders, bank appraisal review analysts, credit analysts, underwriters and appraisers to better serve property owners and ease the real estate financing process for all parties.
Credit scoring uses historical lending records to identify explanatory variables that effectively explain a borrower's credit quality and discover relationships between credit quality and these variables. This quantitative relationship can then assess potential borrowers' credit quality. Credit scoring guides credit assessments with empirical rules from historical records, allowing efficient evaluation of many borrowers. A good credit scoring process includes historical lending records of sufficient good and bad borrowers, explanatory variables that reflect credit quality, and a scoring formula describing relationships between variables and credit quality.
A credit rating is an evaluation of a debtor's creditworthiness and ability to repay debt conducted by a credit rating agency. It is based on the debtor's credit history, current financial position, and likely future earnings. Credit ratings help investors assess risk and return when making investment decisions. The major credit rating agencies in India are CRISIL, ICRA, and CARE. They provide ratings for various instruments including corporate bonds and government debt.
Similar to RMA-SOCL: Appraisals for Lending Purposes (Bill Pittenger) (20)
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2. Seminar Coverage
• Using the Appraisal to Evaluate Loan Repayment Risk.
• Getting to Know Your Collateral.
• Looking Behind the Numbers.
• Value Is Definition Dependent.
• Market Analysis & Economic Feasibility.
• Proposed & Partially Complete Development
• Development cost and why it’s important in the lending decision.
• Value to a single purchaser -- the discounting process.
• Cash flow patterns & Capitalization methods.
• Discounted Cash Flow Analysis.
• Common analytical deficiencies.
3. Property & Market Loan
Repayment Risks
Repayment of a commercial real estate loan can be
jeopardized by any property or market condition which
mitigates the property’s ability to produce revenue that is
sufficient to operate the property AND service the debt.
If the property cannot do both, the loan becomes borrower
dependent band rarely do borrowers have funds to operate
the property and service the debt independent of revenue
from the security property.
4. CRE Loan Repayment Sources
• Net rental income from security property
• Net sale income from security property.
• Disposition of security property
• Other borrower resources.
5. Categories of Loan Repayment Risk
• There are three fundamental categories of repayment risk in any real estate loan.
These are borrower risk, property risk and market risk. Lenders must evaluate all
three risk categories to reliability assess a borrower’s ability to repay.
• As a practical matter, many lenders fail to thoroughly evaluate all three categories.
• Most lenders are adept at evaluating a borrower’s financial condition through
analysis of loan applications, credit reports and financial statements, etc. This
information alone however, is insufficient to make a reliable assessment of the
borrower’s ability to repay a real estate loan since it fails to consider the
borrower’s experience and ability to manage a real estate asset and it fails to
consider the risks associated with the security property and its competitive
marketplace.
6. Categories of Loan Repayment Risk
B o r r o w e r R is k
P r o p e r t y R is k
M a r k e t R is k
U n d e r w r it in g L o a n D e c is io n
7. Borrower Risk
Timely loan repayment can be jeopardized by characteristics
related directly to the borrower. These characteristics might
include, but are not limited to, lack of professional
experience, inept administration, lack of commitment to
project completion or ineffective project management.
None of these characteristics are likely to be revealed by the
most comprehensive appraisal report or even analysis of the
borrower’s financial history.
8. Property Risk
• The physical, functional, legal and economic characteristics of a security property need to be
carefully evaluated in order to identify conditions, either existing or potential, which could
jeopardize a borrower’s ability to repay a loan. Examples of property characteristics include,
but are not necessarily limited to:
• Physical characteristics such as shoddy construction, as well as inefficient, aging or
deteriorating building components or mechanical systems can cause a property to
experience excessively high operating costs thereby limiting the funds available to the
borrower to repay a loan. The borrower may be faced with a choice between operating the
property or making loan payments; a no-win dilemma which usually leads to loan default.
• Functional or design characteristics can frustrate a borrower’s ability to lease or sell newly
created space or to keep existing space occupied and producing revenue sufficient to operate
and maintain the security property and repay a loan. Examples may include, unusual floor
plan, building design or other physical or functional characteristics which have limited market
appeal.
9. Functional & Design Characteristics
• Inadequate parking in terms of the number or size of spaces or their proximity to the
building, inadequate or difficult access to the site or building, or inadequate elevators in a
mid or high-rise building are also examples of functional characteristics that can mitigate
revenue production.
• Locational characteristics such as a misplaced improvement or one in a location dominated
by incompatible or undesirable uses or even uses which are detrimental or harmful can
mitigate revenue production.
• Other problematic locational characteristics might include a property in an area subject to
soil problems, environmental hazards or even flood, earthquake, sinkhole or wave action and
wind velocity (waterfront properties). Finally, improvements which aesthetically clash with
the environment and surrounding land use could mitigate revenue production.
• Important Note. Things that potential buyers ignore in a strong market suddenly become
huge issues in a troubled market when the few buyers that exist get extraordinarily sensitive.
10. Zoning, Legal & Environmental
• Zoning, land use, environmental or legal constraints can frustrate a
borrower’s ability to use the property in the intended manner. If a loan
has been made and funds have been advanced, repayment may be in
jeopardy if a project cannot be completed as planned.
11. Market Risk
• A security property will not exist in a vacuum. Rather, it will co-exist and more importantly, it
will compete with other similar properties for tenants or buyers. The lender, as part of its
underwriting and loan decision process, must identify characteristics about the marketplace
which could jeopardize the security property’s ability to attract tenants or buyers and
therefore to produce revenue necessary to operate the property and repay the loan. For
example, excess supply of competitive space will put downward pressure on rents and values
thereby mitigating the ability of the security property to produce revenue.
• If market risk is to be effectively evaluated, it is necessary that both the amount of
competitive space and the time periods during which it will be competitive with the security
property be identified.
• If the security property is an existing project currently competing for buyers or tenants, then
the amount of competitive space may be known or at least knowable. If the security
property is proposed , under construction or subject to a change in use, it is not currently
competing for tenants or buyers but rather will do so in some future market place.
12. Market Risk
• While there may appear to be sufficient current demand for the security property,
the relevant point is the security property is not currently capable of competing
for tenants or buyers. It is therefore necessary to identify the space which is most
likely to be competitive with the security property at the future time when the
security property is complete and ready to compete.
• The supply and demand relationship in the marketplace will directly influence the
ability of the security property, whether it is existing or proposed to produce
revenue and to do so in the time periods necessary to achieve timely repayment
of a loan.
13. Incomplete Use of Appraisal Information
• Incomplete Use of Appraisal Information. Many lenders focus exclusively on the value
estimate contained in an appraisal report. They do so for two fundamental reasons. First,
they use the value estimate as a guide to what the security property might be sold for in the
event foreclosure becomes necessary. This is an unreasonably restrictive – and arguably
naïve -- point of view since it implies the only risk associated with the security property is risk
of foreclosure. It also implies that the property will be worth an amount equal to or greater
than the amount it is worth at the time of the appraisal at some unspecified future time
when and if foreclosure becomes necessary. Additionally, as we saw repeatedly in the recent
recession, foreclosed assets typically sell for less – sometimes much less.
• Second, some lenders rely on the value estimate contained in an appraisal as a guide to the
maximum amount of credit that can be extended over the life of the credit arrangement.
This too is an unreasonably restrictive point of view. While the value of the security property
is clearly relevant and necessary information to be considered in the loan decision process, it
is not the only piece o9f information about the security property that should be considered.
14. Role of the Appraisal
• An appraisal report is the primary source of information about two of three broad
categories of real estate loan repayment risk. As a result, it is imperative that real
estate lenders have a reliable appraisal report containing sufficient current
information to make informed judgments about the security property and its
competitive marketplace.
• The appraisal process and the resulting appraisal report must also be consistent
with the complexity of the property being appraised. This implies that both the
depth of analysis and the information presented in the appraisal report can vary
depending upon the complexity of the property, its competitive marketplace, and
the lender’s perception of risk in the transaction and even the structure of the
proposed credit arrangement.
15. The Role of the Appraisal
• Depth of analysis. Must be consistent with the complexity of
the problem and the anticipated risk. Not policy, nor cost or
delivery time.
• Commercial real estate versus commercial loan secured by
real estate (business loan).
• Is an appraisal necessary?
16. Is An Appraisal Really Necessary
A s k : H o w w ill t h e b a n k b e
r e p a id ?
A n s w e r : R e v e n u e d e r iv e d
f r o m r e n ta l o r s a le o f r e a l
e s t a t e .
If r e p a y m e n t o f t h e c r e d it is in a n y
w a y d e p e n d e n t o n r e v e n u e d e r iv e d
f r o m r e n t a l o r s a le o f r e a l e s t a t e , a n
a p p r a is a l o r e v a lu a tio n is n e c e s s a r y .
A n s w e r : R e p a y m e n t w ill c o m e
f r o m s o u r c e s N O T d e p e n d e n t
o n r e n t a l o r s a le o f th e r e a l
e s ta te c o lla t e r a l.
A n a p p r a is a l is N O T
n e c e s s a r y
A p p r a is a l O p t io n s
C o m p le te
o r
L im ite d
E v a lu a tio n O p tio n
A p p r a is a l R e p o r t
O p t io n s
S e lf C o n t a in e d
S u m m a r y
R e s t r ic t e d
17. Caution: The Appraisal Lending Time Shift.
T IM E L IN E
C A U T IO N : M o s t a p p r a is a ls a r e p r e d ic a t e d u p o n h is to r ic a l e v e n t s to m a k e in f e r e n c e s a b o u t f u t u r e lo a n r e p a y m e n t
P a s t P r e s e n t F u tu r e
S a le s , r e n ta ls , a n d e c o n o m ic in d ic a to r s ( r a te s &
r a tio s ) r e lie d u p o n in m o s t a p p r a is a ls w e r e
e x tr a c te d fr o m h is to r ic a l e v e n ts .
A ll lo a n s a r e r e p a id in th e fu tu r e r e g a r d le s s o f
a s s u m p tio n s th a t m ig h t b e m a d e to th e
c o n tr a r y .
A p p r a is a l
P r e p a r e d
18. What Can You Do?
• Establish policies and procedures to ensure all categories of risk are
effectively and meaningfully evaluated in the loan decision process.
• Identify the real source of repayment of most commercial real estate
loans. In most cases that is the cash flow produced by the security
property.
• Recognize that real estate markets are dynamic. Values change in direct
response to supply and demand relationships. You should therefore
analyze expected supply and demand relationships and not just those
that occurred historically or are occurring at the time the loan decision is
being made.
19. Getting To Know Your Collateral
• Important: It’s more than bricks and mortar.
• Real property
• Personal property
• Intangibles
• The effect of management
20. Getting To Know Your Collateral … continued
• Important: Appraisal must match the
collateral and credit arrangement.
• Multiple phase development.
• Improbable assumptions.
• Sum of the parts versus the whole.
21. Understanding Market Value
• Market value versus value in use.
• Market value definitions vary.
• Professional standards & market value.
• Federal regulation requires a very specific
definition of market value.
22. Regulatory Required Market Value
Definition
"The most probable price which a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller, each acting
prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Implicit in this definition is consummation of a sale as of a specified date and passing of
title from seller to buyer under conditions whereby:
• Buyer and seller are typically motivated;
• Both parties are well informed or well advised and each acting in what he considers
his own best interest;
• A reasonable time is allowed for exposure in the open market;
• Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and,
• The price represents the normal consideration for the property sold unaffected by
special or creative financing or sales concessions granted by anyone associated with
the sale."
24. Economic Feasibility
There is not much need to
know what a proposed project
might hypothetically be worth
if it is not going to work.
25. “The trick is to discern a market
before there is proof one exists”
-- Bill Lear
26. Economic Feasibility
Although economic feasibility has been defined in a number of contexts, fundamentally it is a
simple comparison of expected costs ver-sus the benefits to be derived from those costs.
When the expected benefits are found to be equal to or greater than the cost to produce
them, a project may be judged to be economically feasible. Conversely, if the expected
benefits are less than the cost to produce them, a project may be judged to be non-
economic.
Economic feasibility analysis seeks to answer this question: If this project is constructed, will
it be worth an amount equal to or greater than the cost to create it?
Question: Can you think of any economic reason to
create something that, when finished, will be worth
less than it cost to create?
27. Market Analysis & Marketability
• Supply and demand analysis.
• Relevant market segment in both product type and geography.
• Analysis must be forward looking.
• A major shortcoming of market analysis is that conclusions are too often
predicated upon historical or current data while ignoring the future in which the
subject will actually compete.
• Real estate changes hands in an environment of expectations. Any analysis is
therefore incomplete unless the analyst understands what is being expected by
participants in the market place.
28. Market Analytical Considerations
• The Basics
• If it is built, will people care?
• How much will they pay for it?
• When will they pay for it?
• How long will they pay for it?
29. Demand Considerations
• How much space is currently being absorbed in the
marketplace?
• How fast is it being absorbed?
• At what price is it being absorbed?
• Baseline: How much space has historically been absorbed? At
what rate and at what price?
30. Supply Considerations
• How much space currently exists?
• How much is unleased or unsold?
• How long has it been unleased or unsold?
• How much space is under construction?
• How much space is currently proposed?
• When is it expected to come on line?
31. Supply Considerations
• How much space has governmental approval? How likely is it
to come on line and when will it compete?
• How much space is on the drawing board?
• How much is master planned?
• What space is rumored to be coming on line?
32. Reconciling Supply and Demand
• Are any apparent differences explainable?
• In what time periods will competitive space be coming on line
and how does that compare with the subject’s completion?
• Have turning points been identified?
• Has net absorption been considered?
33. Why Market Analyses Are
Sometimes Unreliable
• Over reliance on history.
• Failure to identify and isolate relevant market segment.
• Failure to recognize alternative outcomes.
• Over reliance on mechanical extrapolation.
• Failure to connect multiple events.
• Blindness to external non-real estate influences.
34. “I skate where the puck is
going to be, not where it
has been.”
-- Wayne Gretzky
35. Highest and Best Use
• The ultimate objective of property and market analysis is a conclusion of the highest and best
use of the property.
• Highest and best use has been defined in a variety of ways (all similar), however the thrust of
the highest and best use concept is that reasonable and probable use that will support the
highest value, as defined, as of the effective date of the appraisal.
• Both the vacant site and the improved property have a highest and best use at any given
time. The best use of the site may or may not be identical to the best use of the improved
property.
• Highest and best use must also be consistent with the value definition.
• Highest and best use must be reasonable and probable. That is, it is likely to occur soon if
not immediately. Highest and best use is therefore not speculative.
36. Highest and Best Use
• All too frequently, highest and best use is treated as if it were an assumption, rather than a
conclusion derived from a specific analytic process. When it is treated in this fashion the
highest and best use section of an appraisal becomes boilerplate which is not seen as having
any relationship to the valuation process.
• The Highest and best use estimate is critical part of every appraisal because it sets the stage
for the entire valuation process. Once the best use estimate has been made it will not only
govern the type of data to be selected but also the valuation technique which will be used to
process the market data.
37. Proposed and Partially Complete
Development
P R O J E C T D E V E L O P M E N T & C O N S T R U C T IO N T IM E L IN E
S ite
A c q u is itio n
Z o n in g
A p p ro v a ls
P la n s
P e rm its
M o rtg a g e
a n d
E q u ity
F in a n c in g
S ta b iliz e d
O c c u p a n c y
o r
S e llo u t
P re -C o n s tru c tio n D e v e lo p m e n t A c tiv ity P o s t C o n s tru c tio n D e v e lo p m e n t A c tiv ity
L e a s e U p
o r
S e ll O u t
C o n s tru c tio n
P e rio d
38. Cost of Production Components
• Land Cost / Value
• Building Cost
• Financing Cost
• Marketing Costs
• Closing Costs
39. Cost of Production …continued
• Cost of sales and/or
financing concessions.
• Absorption period
expenses.
• Return on mortgage and
equity capital.
• Entrepreneurial profit
40. A Second Look at the Time Line
P R O J E C T D E V E L O P M E N T & C O N S T R U C T IO N T IM E L IN E
S ite
A c q u is itio n
Z o n in g
A p p ro v a ls
P la n s
P e rm its
M o rtg a g e
a n d
E q u ity
F in a n c in g
S ta b iliz e d
O c c u p a n c y
o r
S e llo u t
P re -C o n s tru c tio n D e v e lo p m e n t A c tiv ity P o s t C o n s tru c tio n D e v e lo p m e n t A c tiv ity
L e a s e U p
o r
S e ll O u t
C o n s tru c tio n
P e rio d
41. Deductions and Discounts
• Historical practice and result.
• Value to a single purchaser.
• Not just a regulatory standard.
• Wholesale versus retail.
• Result of the discounting process.
42. Deductions and Discounts
• Unearned entrepreneurial profit.
• Unspent dollars for …
• Marketing
• Maintenance
• Property taxes on unsold units or
unleased space.
43. Deductions and Discounts … continued
• Tenant improvements not
physically in place.
• Administrative expenses
• Financing costs -- mortgage &
equity.
• Sales and/or financing
concessions.
• Remaining building cost (as
applicable)
44. Income Capitalization Techniques
Direct Capitalization
General Rule
Use if property has achieved a stabilized level of
long term occupancy and income and expenses
are expected to remain relatively stable going
forward.
45. Discounted Cash Flow
General Rule
Use if stabilized occupancy (or sellout) has not
been achieved and income and /or expenses are
expected to fluctuate going forward.
Choice of direct capitalization or DCF should never be dictated by
policy although it frequently is to the detriment of reliability.
46. Analyzing Discounted Cash Flow
• Forecast period based on market evidence, not assumption.
• Income and expenses must model reality. Rents can go up,
down or stay the same. Don’t automatically insert an inflator
unless market evidence says so.
• Income and expenses forecast in time periods they are
expected to occur.
47. Appraisal Regulation In Perspective
• Underlying premise: LOAN REPAYMENT
• Sets forth when appraisals (or evaluations) are required and when they are not.
• Bank must control appraisal process.
• Appraiser independence.
• Appraisers must be certified or licensed as appropriate.
• Only five specific appraisal standards.
• The December 2010 Interagency Appraisal and Evaluation Guidelines added much
more substance and guidance.
48. Current Regulatory “Hot Spots”
• Appraiser independence.
• As- is value (without speculative assumptions).
• Appropriate and consistent use of abundance of caution and business loan
appraisal exemptions.
• Documentation of decisions.
• Separating real and personal property value components.
• Vacant land/lot analytics.
• Standard of care -- “would a disinterested third party looking only at the file
understand and agree with my decision?
49. Common Analytical Deficiencies
Property Type
• Vacant land: Failure to consider timing of land use.
• Proposed Development: Failure to consider all costs associated with proposed
development or partially completed development.
• Income Property: Failure to consider timing of lease rollover, rent concessions,
tenant improvements and retrofit costs.
• Special Purpose: Failure to estimate market value.
50. Common Analytical Deficiencies
Discounted Cash Flow Analysis
• Assumed rather than market based cash flow period.
• Assumed period by period cash flow change.
• Failure to include all appropriate expenses.
• Failure to recognize cash inflows and outflows in the periods they are most likely
to occur.
• Assumed or improperly developed discount rate.
• General failure of DCF to model reality.
51. Common Analytical Deficiencies
• Faulty application of value definition.
• Assumed highest and best use conclusion.
• Backward looking market analysis.
• Faulty or missing economic feasibility analysis.
• Inconsistencies among report sections.
• Irrelevant or out of date area or neighborhood data.
52. Common Analytical Deficiencies …
continued
• Incorrect property rights appraised.
• Assumption rather than reality based analyses and conclusions.
• Confusing holding period, absorption period, normal marketing period and
exposure period.
• Assuming away what the appraiser was hired to do.