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Credit Risk Analysis and Credit Risk Rating of Commercial Real Estate

  • Terence M. Yhip
  • Bijan M. D. Alagheband
Chapter
  • 62 Downloads

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.

Keywords

Stabilised IPRE Net operating income Debt service ratio Loan-to-value ratio Valuation methods Capitalisation rate 

Supplementary material

485627_1_En_6_MOESM1_ESM.pptx (1.4 mb)
Credit risk analysis & credit risk rating of commercial real e... (PPTX 1476 kb)
485627_1_En_6_MOESM2_ESM.xlsx (28 kb)
Commercial real estate analysis (PPTX 28 kb)

Copyright information

© The Author(s) 2020

Authors and Affiliations

  • Terence M. Yhip
    • 1
  • Bijan M. D. Alagheband
    • 2
  1. 1.University of the West IndiesMississaugaCanada
  2. 2.McMaster University and Hydro One Networks Inc.TorontoCanada

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