Midwest Financial Group prides itself on an expert underwriting process honed over the course of several years and hundreds of transactions. Midwest’s underwriting strategies can vary depending on the nature of the assets, the size of the portfolio, the information provided by the seller, and other variables. Most underwriting projects occur on an accelerated timeline. In fact, it’s rare to have more than 30 days from the date a decision is made to pursue a project until the date that the final bid is due. Once a decision is made to move forward, Midwest follows a diligent, determined, expedient approach to underwriting that helps to ensure that all parties involved realize their specific goals for the transaction.
Due Diligence Database
Midwest utilizes a proprietary Due Diligence Database (DDD) as the framework of each project. The DDD is populated initially with datatape information provided by the seller (names, balances, due dates, collateral addresses, payment history, seller valuations, etc.). The DDD then becomes the repository for additional information gathered and developed during the underwriting process.
An underwriting budget is established for each project and submitted to the investor for approval. The budget incorporates the anticipated costs of broker price opinions, title work, site inspections and other out of pocket expenses. Typically, the budget will target a certain level of coverage based on investor preferences.
Each loan relationship is assigned to an underwriter, who has primary responsibility for reviewing the file, aggregating and summarizing the available information and developing proposed exit strategies and projections for each asset.
The underwriter reviews the due diligence file provided by Seller. Key facts and documents (loan documents, title work, appraisals, litigation documents, financial statements) are summarized in the DDD.
The underwriter analyzes each item of collateral and develops an estimate of value based on a critical review of the available datapoints. Sources reviewed include seller appraisals, broker price opinions, rent rolls and operating statements, underwriter developed pro-formas, comparables obtained from online data sources, and conversations with brokers and appraisers. This analysis is summarized in the DDD.
The underwriter reviews available financial statements, tax returns, rent rolls and other financial information on each property and obligor. Financials are spread as appropriate and key information regarding financial performance, trends, liquidity and debt service ability are summarized in the DDD.
Searches and Third-Party Work
In addition to reviewing the seller provided files, information is concurrently gathered from other sources and captured in the DDD. These additional sources include, without limitation: Broker Price Opinions – Broker price opinions (BPO) are typically obtained on all key collateral items. These are obtained from national BPO services and direct relationships with brokers and appraisers in selected markets.
Title Searches – Confirmatory title work is obtained on all key collateral items to verify lien priority. This title work supplements seller provided title policies/searches and noted issues are reflected in final pricing.
UCC Searches – UCC searches are completed on a case by case basis as appropriate for loans having significant non-real estate collateral.
Tax Research – Property tax research is completed on all collateral and information regarding delinquent and future property taxes is incorporated into pricing.
Bankruptcy and Litigation Searches – Bankruptcy searches are completed on all obligors. Litigation searches are completed on a case by case basis. Case status for any hits is summarized in the DDD.
Asset Searches – Asset searches on obligors are completed on a case by case basis as appropriate.
Environmental Screens – Environmental screens are completed on a case by case basis depending on property type/history and other available information. Dun & Bradstreet Reports – Dun & Bradstreet
reports on operating companies are completed on a case by case basis.
Site Inspections – Site inspections of collateral and operating companies are completed on a case by case basis. These inspections may be completed by Midwest personnel or outsourced to third party
Online Valuations Resources – Underwriters consult online valuation resources (such as Loopnet and Zillow) to independently research competing sales, sale listings and lease listings. Industry specific
websites are also consulted in connection with valuation of significant items of equipment.
Internet Searches – Internet searches are completed on properties and obligors.
Summaries, Strategies and Projections
As the information is assembled into the DDD, the underwriter prepares the following for each loan relationship.
1. Summary of the asset, including an overview of the borrower, collateral, financial performance and other significant facts. This incorporates the highlights of the information gathered on each asset and sets forth how the underwriter valued the collateral.
2. Proposed exit strategy setting forth the underwriter’s view of how the asset will be resolved (restructure, refinance, liquidation, sale of collateral, etc.) and the likely timing.
3. Projections showing the estimated cash flow for each asset,including the anticipated timing and amount of all collections and expenses.
Review and Roll Up
The underwriter discusses the asset and the proposed model with Midwest management. Feedback is provided and changes are made as appropriate. Upon completion of internal review, a report summarizing each asset is sent to the investor for review, along with a bid model containing projections and other valuation metrics. A roll up call is then scheduled with the investor to review assets and answer investor questions. Pricing discussions are ongoing until the date of the bid as additional information is received and incorporated into the model.
Asset Sale Agreement
A proposed asset sale agreement is generally provided by the seller for review prior to the bid date. This proposed agreement is reviewed to confirm that key items are adequately addressed (e.g., seller representations and warranties, remedies in event of seller breach, economics of purchase price adjustments, closing mechanics, etc.). In most cases, sellers have flexibility on contract terms and will ultimately agree to a contract that contains industry standard term and conditions.