Few deals that originators evaluate ultimately fit their lending criteria and turn into real opportunities. Accurate deal sizing—a nuanced, early-stage analysis—enables originators to make smarter decisions, close more transactions, and foster lasting relationships with borrowers.
A common misconception is that deal sizing is simply entering rent roll and financial statement data into a model and issuing a term sheet based on a few steps. But there's much more to it, said Jen Cleare, senior director of strategic advisory solutions at SitusAMC. Cleare and director Kevin Garmon shared their thoughts about deal sizing and the potential role artificial intelligence may eventually play in a SitusAMC blog.
Sizing requires looking at the entire deal and all aspects of the transaction to assess risk, Cleare said. Ultimately, thoughtful loan sizing involves a balance between the borrower’s desired proceeds and the lender’s need to mitigate risk.
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“Lenders need to understand if the borrower and the underlying collateral are creditworthy and whether the cash flow supports the loan size,” said Cleare.
Deal sizing is more complex for CRE properties than for residential properties and takes into account multiple elements, including building size and layout, tenant mix, lease terms and property types, said Garmon.
“This requires a comprehensive review of all the diligence, identifying key factors, asking targeted questions, and finally tying all the data together,” said Garmon. “The foundational analysis completed when sizing a loan provides a full picture of the property and potential debt it can support. For example, you might have a large-scale office complex with multiple buildings and a diverse tenant mix with varying lease terms.”
Other key components considered in the deal sizing process include stabilized vs. in-place cash flow, future capital expenditures, tenant rollover risk, interest rate assumptions, and exit strategy, Garmon said. In addition, properties may have hidden complications, such as a ground lease with no option to renew.
“You might have great cash flow, but if you can't rent the land underneath the building, you don't have a deal,” according to Cleare.
Proper deal sizing is crucial, as brokers often shop the same deal with multiple banks. If an originator misjudges the loan sizing, they jeopardize losing it to a competitor who better understands the risk.
AI is already assisting in deal sizing efficiency through data entry, especially for multi-tenant properties or large portfolios, by quickly, accurately, and systematically getting information into models, said Garmon.
“But then a human is needed to integrate all the aspects of the transaction: the market, sponsorship, property nuances, issues that can't be easily discerned from a rent roll or a financial statement,” said Garmon. “AI is a fast-evolving technology, and I expect that it will be able to support more than just data entry in the future.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
