Underwriting Capex and Repairs with actuals

[James Kojo]

I'm looking at a smaller deal where the financial statements are not well-specified. It's a mom + pop owner-operator situation.

For instance, it looks like they may have put large capex expenses under "repairs." I see a steady stream of monthly repair expenses ranging from $100-500/month, then there's one month with $9K and another with $3K, etc.

I've asked them for more details, of course.

My question is, if I'm underwriting a deal with actuals, but I only have a limited history, how should I account for capex? Should I take the total actual expenditure over the time periods that i have, and take an average?

Or should I try to figure out what the capex was used for, and try to average it out over the useful lifetime?

For example, if they had a 9K charge for replacing the roof in 2017, and that was the only capex I could find in the 3 year history that I have, would I estimate capex reserves at 3K/year or $900/year for a 10 year roof?

What would a lender do?

Thanks!

James

[Mark Brooks]

I'm a credit analyst and underwriter for a commercial bank. If it was me, I would look at actual expenditures, but add-back anything that is non-recurring/extra-ordinary (roofs, parking lots, repainting exterior, etc). Also be sure you're establishing establish a base-line CAPEX and then average it out over time. I would make sure the borrower had sufficient funds to cover 1-2 years worth of "normal" capex plus and was proforma covering the PITI 1.35x+ from the property cash-flow. I would then "shock" it with a re-pricing rate hike, a significant loss of tenants and/or both. If it looked like it would still realistically cash-flow at a 1.0x when those "shocks" happened, then I wouldn't have an issue recommending approval.

But I'm looking at things from a conservative community bank's perspective, as an underwriter and not a loan officer. Better to be conservative on the front-end when running your underwriting, as opposed to ignoring some expenses you may incur. I've never seen anyone pissed off that their roof, driveways, etc. lasted longer than they expected.