How Lenders Underwrite CRE Deals: Inside the Black Box

Most CRE borrowers have submitted a loan application but few have read the credit memo that comes out the other end. The credit memo is the lender's internal document that presents the deal to the credit committee — a comprehensive analysis of every risk factor and a recommendation to approve or decline. Understanding how lenders build that document — what they look for, in what order, and how they weigh competing factors — makes you a more effective borrower and a more persuasive presenter of your deals.

Phase 1: Pre-Screening (Days 1–5)

Before formal underwriting begins, every lender runs a quick pre-screen: does this deal fall within our credit box? The pre-screen typically takes 1–5 business days and involves: loan size vs. lender minimum/maximum, asset class and market fit, preliminary LTV/DSCR check using borrower-provided numbers, and a sponsor background check. Deals that fail pre-screening are declined immediately — no application fee, no third-party reports. Strong borrowers who understand the lender's credit box avoid wasting time on lenders who can't approve their deal.

Phase 2: Formal Underwriting (Weeks 3–8)

Once a term sheet is signed and application fee paid, formal underwriting begins. This is where the lender's team digs into every assumption. The four pillars they evaluate:

1. Property (Collateral): Physical condition (PCA), environmental status (Phase I), financial performance (T12 P&L, rent rolls, STR reports for hotels), and market position (comp set, occupancy trends). An independent appraisal establishes value; the lender's underwriter independently calculates their own value using cap rates from comparable sales.

2. Borrower/Sponsor: Personal financial statements, net worth and liquidity (most lenders require post-close liquidity of 10–15% of loan amount), credit history, and — critically — track record. Experienced sponsors with completed comparable projects get better terms. First-time CRE investors pay a premium.

3. Market: Supply and demand dynamics in the submarket, competitive pipeline, rent growth trajectory, and market economic drivers. A hotel in a market with 2,000 new rooms under construction is a very different risk than one in a market with a supply moratorium.

4. Structure: Does the loan structure appropriately reflect the risk? LTV, DSCR, term, amortization, prepayment, reserves — the lender's structuring team will modify the original term sheet to fit the credit they've discovered during underwriting. Borrowers should expect to negotiate structure at this stage.

Phase 3: Credit Approval (Week 8–10)

The final credit memo goes to the credit committee — a group of senior lenders or a loan committee that has authority to approve loans above a certain threshold. The credit officer who ran the deal presents; the committee asks questions; the deal is approved, conditionally approved, or declined. Conditions are negotiating leverage — respond to them substantively and quickly.

First Realty Capital prepares borrowers for lender underwriting with a pre-application checklist and a mock credit review. Schedule a loan preparation call.