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Credit Risk Analysis and Credit Risk Rating of Commercial Real Estate

In: The Practice of Lending

Author

Listed:
  • Terence M. Yhip

    (University of the West Indies)

  • Bijan M. D. Alagheband

    (McMaster University and Hydro One Networks Inc.)

Abstract

This chapter applies the criteria-based risk-rating methodology to a stabilised income producing real estate (IPRE) asset. In rating a commercial real estate entity, the assessment is not on the property owner but on the IPRE, and the building blocks of the borrower risk rating (BRR) scorecard reflect this key difference. The BRR scorecard consists of just Business Risk (defined by tenant quality, lease maturity, and condition) and Financial Risk (defined by debt service coverage and loan-to-value ratio). The chapter explains how to set up a spreadsheet to forecast net operating income and the balance sheet, and offers a framework to create the descriptors, which drive the BRR. The chapter explains valuation methods and the capitalisation rate, and shows the sensitivity of property valuations to various assumptions.

Suggested Citation

  • Terence M. Yhip & Bijan M. D. Alagheband, 2020. "Credit Risk Analysis and Credit Risk Rating of Commercial Real Estate," Springer Books, in: The Practice of Lending, chapter 6, pages 225-273, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-32197-0_6
    DOI: 10.1007/978-3-030-32197-0_6
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