The REO Schedule: Too Much Information Is Never Enough
The underwriting of commercial real estate loans is part art and part science. When approaching the bank for the capital your transaction needs, it’s important to be able to see the process from all sides. Underwriters will tell you: what gets the benefit of the doubt in underwriting decisions is detail – the more you provide to the lender, the happier and more agreeable that lender will likely be.
The borrower’s property portfolio — the list of property owned by a borrowing entity, also known as a REO schedule, is the “other half” of the one-two punch along with the balance sheet/personal financial statement. These deliverables are the minimum a loan discussion requires. But what belongs on the REO schedule?[DISCLAIMER: Never, ever take anything you read here at The Source as legal or fiduciary advice. Always retain qualified counsel!]
An experienced underwriter will be able to tell at a glance of the REO schedule what he or she is dealing with: is the borrowing entity a big corporate firm? An individual? A majority partnership LLC held n a minority partnership LLC all in turn held by a full corporation? What the balance sheet doesn’t tell by itself the REO schedule will address and fill in the gaps.
Typically an REO schedule contains property facts and figures and the lender will have a form available. But the fact is that many forms can be inadequate for the task at hand: demonstrating what the balance sheet and personal financial statement alone can’t. Since a borrower isn’t there just to fill out forms, but instead to have a discussion about a financing, it’s essential to pay attention to what is and isn’t on the given form, and to make every effort to put what should reasonably be on that form into the hands of the lender.
The basics – property name, address, type, today’s loan balance, market value, monthly expenses and monthly income – are the bare minimum and space for these are found on REO schedule forms almost every time. But this isn’t a detail level that gives the underwriter what is needed. Consider adding more in the form of monthly operating expenses, the borrowing entity’s date of acquisition and percentage of ownership, names of existing lenders and other critical information.
Format For The Win
Make sure there are sufficient columns and that column headings are well-defined, leaving no chance to confuse monthly averages vs. annual totals. Aiming to include 10-12 properties on a legal-sized sheet is a good benchmark when working in Excel, so set your type size to 11 points, limit your columns to A through Q and set a page scale of around 70%.
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