Category 1

Category 2

Category 3

Category 4

Factor: financial strength

The supply and demand for the project’s type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand.

The supply and demand for the project’s type and location are currently in equilibrium. The number of competitive properties coming to market is roughly equal to forecasted demand.

Market conditions are roughly in equilibrium. Competitive properties are coming on the market and others are in the planning stages. The design and capabilities of existing comparable properties are not state of the art as compared to new projects.

Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. Comparable properties in the market are losing tenants at lease expiration. New lease terms of comparable properties are less favourable compared to those existing.

The property’s financial ratios, measured by the property’s debt service coverage ratio (DSCR (1)) or interest coverage ratio (ICR (2)), are considered strong and are expected to remain strong taking into account the past evolution in financial ratios. DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase.

The property’s financial ratios, measured by the property’s DSCR or ICR, are considered good and are expected to remain good taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase.

The property’s financial ratios measured by the property’s DSCR or ICR are satisfactory and are expected to remain satisfactory taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase.

The property’s financial ratios, measured by the property’s DSCR or ICR are weak and are expected to remain weak taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase.

The property’s loan to value ratio (LTV) is considered low given its property type. Where a secondary market exists, the transaction is underwritten to market standards.

The property’s LTV is considered satisfactory given its property type. Where a secondary market exists, the transaction is underwritten to market standards.

The property’s LTV is considered relatively high given its property type.

The property’s LTV ratio is well above underwriting standards for new loans.

The property’s resources, contingencies and liability structure allow it to meet its financial obligations during a period of severe financial stress (e.g. interest rates, economic growth).

The property can meet its financial obligations under a sustained period of financial stress (e.g. interest rates, economic growth). The property is likely to default only under severe economic conditions.

During an economic downturn, the property would suffer a decline in revenue that significantly increase the risk of default.

The property’s financial condition is strained and is likely to default unless conditions improve in the near term.

The property’s leases are long-term with creditworthy tenants and their maturity dates are scattered, or a public private partnership guarantees a considerable part of the tenancy contracts.

The property has a track record of tenant retention upon lease expiration. Its vacancy rate is low. Expenses (maintenance, insurance, security, and property taxes) are predictable.

The majority of the property has several tenant lease contracts that are long-term, and with tenants that have on average a high creditworthiness, and with scattered maturity dates. A public private partnership may guarantee part of the tenancy contracts. Where the property has only one lease contract or one tenant has a very significant share in the income generated by the property, this tenant is of excellent creditworthiness and the contract includes covenants that ensure lease payments until the end of the project life or beyond.

The property experiences a normal level of tenant turnover upon lease expiration. Its vacancy rate is low. Expenses are predictable.

Most of the property’s leases are medium rather than long-term with tenants that range in creditworthiness. A public private partnership may guarantee only a minor part of the tenancy contracts. Where the property has only one lease contract or one tenant has a very significant share in the income generated by the property, this one tenant, the contract includes covenants that ensure lease payments until the end of the project life or beyond but the tenant has moderate creditworthiness.

The property experiences a moderate level of tenant turnover upon lease expiration. Its vacancy rate is moderate. Expenses are relatively predictable but vary in relation to revenue.

The proportion of short term leases is significant with tenants that range in creditworthiness, or the property has only one lease contract, or one tenant has a very significant share in the income generated by the property, where that tenant has a low creditworthiness and/or the contract does not include the necessary covenants that ensure lease payments until the end of the project life or beyond.

The property experiences a very high level of tenant turnover upon lease expiration. Its vacancy rate is high. Significant expenses are incurred preparing space for new tenants.

The cashflows obtained from the leasing activity, for instance obtained from a public private partnership, meet or exceed the expected cashflows used in the valuation of the property. The project should achieve stabilisation in the near future.

The cashflows obtained from the leasing activity, for instance obtained from a public private partnership, meet or exceed the expected cashflows used in the valuation of the property. The project should achieve stabilisation in the near future.

Most of the cashflows obtained from the leasing activity meet the expected cashflows used in the valuation of the property, however, stabilisation will not occur for some time.

The cashflows obtained from the leasing activity do not meet the expected cashflows used in the valuation of the property. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue.

The property is entirely preleased through the tenor of the loan (5) or pre-sold to a tenant or buyer of high creditworthiness, or the bank has a binding commitment for take-out financing from a tenant or buyer of high creditworthiness, for instance through a public private partnership.

The property is entirely pre-leased or pre-sold to a creditworthy tenant or buyer, or the bank has a binding commitment for permanent financing from a creditworthy lender, for instance through a public private partnership.

Leasing activity is within projections but the building may not be pre-leased and there may not exist a take-out financing. The bank may be the permanent lender.

The property is deteriorating due to cost overruns, market deterioration, tenant cancellations or other factors. There may be a dispute with the party providing the permanent financing.

Factor: political and legal environment

Jurisdiction is very favourable to repossession and enforcement of contracts.

Jurisdiction is generally favourable to repossession and enforcement of contracts.

Jurisdiction is generally favourable to repossession and enforcement of contracts, but repossession might be long and/or difficult.

Poor or unstable legal and regulatory environment. Jurisdiction may make repossession and enforcement of contracts lengthy or impossible.

Very low exposure; strong mitigation instruments, if needed

Low exposure; satisfactory mitigation instruments, if needed

Moderate exposure; fair mitigation instruments

High exposure; no or weak mitigation instruments

Factor: asset/transaction characteristics

Property is located in highly desirable location that is convenient to services that tenants desire.

Property is located in desirable location that is convenient to services that tenants desire.

The property location lacks a competitive advantage.

The property is located in an undesirable location.

Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties.

Property is appropriate in terms of its design, configuration and maintenance. The property’s design and capabilities are competitive with new properties.

Property is adequate in terms of its configuration, design and maintenance.

The property’s configuration, design and maintenance have contributed to the property’s difficulties. Weaknesses exist in the property’s configuration, design or maintenance.

Construction budget is conservative and technical hazards are limited. Contractors are highly qualified and have high credit standing.

Construction budget is conservative and technical hazards are limited. Contractors are highly qualified and have good credit standing.

Construction budget is adequate and contractors are ordinarily qualified and have average credit standing.

Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified and have low credit standing.

Amortising debt without bullet repayment

Amortising debt with no or insignificant bullet repayment

Amortising debt repayments with limited bullet payment

Bullet repayment or amortising debt repayments with high bullet repayment

There is no or very limited exposure to market or cycle risk since the expected cashflows cover all future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments.

There is no or very low refinancing risk.

The exposure to market or cycle risk is limited since the expected cashflows cover the majority of future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments.

There is low refinancing risk.

There is moderate exposure to market or cycle risk since the expected cashflows cover only a part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments.

Average refinancing risk.

There is significant exposure to market or cycle risk since the expected cashflows cover only a small part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments.

High refinancing risk.

Factor: strength of sponsor/developer (including any public private partnership)

The sponsor/developer made a substantial cash contribution to the construction or purchase of the property. The sponsor/developer has substantial resources and limited direct and contingent liabilities. The sponsor/developer’s properties are diversified geographically and by property type.

The sponsor/developer made a material cash contribution to the construction or purchase of the property. The sponsor/developer’s financial condition allows it to support the property in the event of a cash flow shortfall. The sponsor/developer’s properties are located in several geographic regions.

The sponsor/developer’s contribution may be immaterial or non-cash. The sponsor/developer is average to below average in financial resources.

The sponsor/developer lacks capacity or willingness to support the property.

Experienced management and high sponsors’ quality; strong reputation and lengthy and successful record with similar properties

Appropriate management and sponsors’ quality. The sponsor or management has a successful record with similar properties.

Moderate management and sponsors’ quality. Management or sponsor track record does not raise serious concerns.

Ineffective management and substandard sponsors’ quality. Management and sponsor difficulties have contributed to difficulties in managing properties in the past.

Strong relationships with leading actors such as leasing agents

Proven relationships with leading actors such as leasing agents

Adequate relationships with leasing agents and other parties providing important real estate services

Poor relationships with leasing agents and/or other parties providing important real estate services

Factor: security package

Perfected first lien (6)

Perfected first lien

Perfected first lien

Ability of lender to foreclose is constrained.

The lender has obtained an assignment for the majority of the rents. They maintain current tenant information that would facilitate providing notice to remit rents directly to the lender, such as a current rent roll and copies of the project’s leases.

The lender has obtained an assignment for a significant part of the rents. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project’s leases.

The lender has obtained an assignment for a relatively small part of the rent. The lender has not maintained current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project’s leases.

The lender has not obtained an assignment of the leases.

Very good quality

Good quality

Appropriate quality

Substandard quality