Underwriting is the process by which investments are evaluated to determine their viability. This includes reviewing due diligence materials related to the investment in order to assess the various factors that may or may not contribute to its eventual success or failure.
In real estate, both the investment property and the “sponsor” or real estate company that owns the project are evaluated during the underwriting process.
Sponsors are evaluated based on their financial stability, track record, ability to compete in major markets, and project-specific expertise.
Project underwriting involves a detailed analysis including, but not limited to, the following factors:
- Business plan (investment strategy)
- Risk/return profile
- Existing financial sources
- Proposed financial uses
- Exit strategy
- In depth market analysis including study of comparable properties
- Third-party reports
- Phase I and II Environmental
- Appraisal (Current and Stabilized)
- Engineering (Property Condition Report, Geotechnical Report, Seismic Report)
- Budget analysis including detailed breakdown of construction costs
- Architectural plans and site plans
- Pro-forma financial analysis
- DSCR/LTV sensitivity
- Investment structure
- Legal/organizational structure
- Third party references
- Site visit and walk-thru