Realized 1031 Glossary of Terms

Underwriting

Written by The Realized Team | Jul 18, 2022 3:22:00 PM

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.