Underwriting – as it is applied to commercial income-producing property capital financing transactions – is the process of reviewing, investigating and analyzing the income-generating ability of a given commercial income-producing property in terms of its debt support characteristics, its collateral value, the supporting credit issues that pertain to liquidity support for the future operations, and the issues that may result in a default. This underwriting process is undertaken by the INVIZEN RTU program model in light of current capital market conditions and expectations, as well as the realities of the impacts that are likely to occur as a result of forecasted near-term market conditions. Capacity underwriting is the most important part of the underwriting process as the chief means of creating wealth and value for commercial properties is derived from the income-generating capacity of the property once the raw land has been converted into a commercial use via improvements. Accordingly, in a market economy such as that of the United States, capacity underwriting is the most important component to the overall underwriting regimen, with the results of said capacity analysis acting as important drivers for the three (3) remaining underwriting analyses that are routinely conducted to determine the overall risks and rewards potential a given property or business may present to the capital markets.
The key issue that cannot be eliminated pertains to market disruptions. By their very nature, market disruptions are not foreseeable and are therefore outside of the scope of consideration, as this portion of market risk is not manageable by any means in 100% of cases. That aside, the market feasibility analysis process pertaining to a specific class of business operations within a given geographical marketing area, provides a strong basis for better decision-making where the latest data is available at any point in the decision-making process. The INVIZEN approach is predicated upon the idea that continual updates of data sets throughout the project life cycle will, over time, allow capital market participants to make better decisions regarding the deployment of capital funds by focusing on a forecast window of only 24 months, as this period is the longest period of a forecast that is likely to have a predictable outcome and provide the opportunity for an orderly sale of the business in cases where the market opportunity is expected to continue to deteriorate.
The RTU reporting series capacity underwriting component analysis uses a set of defined means and methods that are intentionally designed to support the INVIZEN Real-Time Status (“RTS”) Investment Protection Program requirements. These requirements serve as the conditions precedent to helping prevent materially-significant loan loss severity risk (or investment loss severity risk in the case of equity investors and investments, as the case may be) from accruing for the full term of the entire capital investment (loan and equity capital). The entire purpose of the INVIZEN Real-Time Analytics (RTA) program is to support the end-result of investment protection maximization for the benefit of all the financial stakeholders in a given business enterprise.
One of the key components of this process is the capacity underwriting review. The INVIZEN program model relies upon a combination of the following elements to complete the capacity review:
- Completion of the Real-Time Analytics Feasibility (“RTAF”) Report, as the business will be subject to the requirements of operating within the framework of a market economy (i.e.: the future success of any business in a market economy is dependent upon the purchasing preferences of the consumers or end-users of the subject business’ products or services). Changes in the purchasing preferences of the market directly impact the ability of the business enterprise to survive, much less generate a materially-significant profit to its sponsors. The RTAF is unique in that it is undertaken on a near real-time basis, so it can be updated continually throughout the underwriting process and beyond, thus providing the critical market forecast information necessary to substantiate the forecast of future sales of the business upon which all capacity calculations are completely dependent.
- The current capital market expectations for the given type of investment, industry, etc., as well as the INVIZEN capital requirements necessary to sustain the transaction to be qualified to enter the RTS Investment Protection Program (at the option of the financial participants). This results in a two-tailed capacity analysis approach where the RTS variant is a circuitous testing of income statement and balance sheet findings to determine if the transaction variant can be made qualified for participation in the RTS program or not.
- Analysis of the component pro forma financial values for revenues and expenses to determine the likelihood of the business attaining an income generating capacity that would be great enough to garner capital market support for debt and equity securities, based upon the conditions precedent and capital market preferences, under the auspices of all other matters being equal.
The result is graded as either a check mark (√) if the reasonably-conservative analysis results are consistent with the current capital market expectations, or an (x) mark if the results are inconsistent with current capital market expectations and therefore would not be reasonably expected to garner sufficient capital market support as the transaction is currently structured and contrived.