Underwriting is the process of evaluating the future performance of a property. Similar to an insurance underwriter, in the context of commercial real estate, investors, sponsors and lenders review potential property investment opportunities to assess risk and establish pricing or value of a property, investment or loan. Such review may consists of financial and market analysis as well as property and sponsor due diligence.
For example, a bank may underwrite a potential mortgage loan by estimating the property’s future cash flows, reviewing tenant leases, analyzing the credit and financial strength of the tenants and conducting physical and environmental due diligence on the asset. The banker would then determine the amount of proceeds the loan can support and the interest rate to be charged based on the property’s financial and risk profiles. Real estate underwriting differs from securities underwriting in that real estate underwriting is generally limited to the evaluation of a property or investment’s risk and performance whereas securities underwriting includes raising capital for a third party.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
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