Reading a T-12 the way an underwriter does

A trailing twelve-month operating statement arrives as a spreadsheet of collections and costs. It leaves underwriting as a smaller number, and the difference is entirely made of adjustments that are standard, predictable and almost never explained to the borrower in advance.

What gets removed from income

• Concessions, bad debt, model units and employee units — economic vacancy, not physical vacancy.
• Non-recurring income: a lease termination fee, an insurance recovery, a one-off legal settlement.
• Pro-forma rent. Underwritten rent is what is on the rent roll today, capped at market.
• Percentage rent with no multi-year history.

What gets added to expense

A management fee is applied whether or not you pay one — typically three to four percent of effective gross income — because a lender has to be able to hire a manager if it takes the property back. Replacement reserves are deducted per unit or per square foot. Taxes are reassessed at the purchase price where the jurisdiction reassesses on sale, which on a below-market-basis property can be the largest single adjustment in the file.

How to send a better package

Send the statements in the accounting system’s own export rather than a retyped summary. Reconcile the rent roll to the December collections line before anyone else does. Flag the non-recurring items yourself and say what they were. An underwriter who finds a surprise re-reads everything; an underwriter who is told about it in advance reads on.