Q: In my area we work with mostly small businesses that are owned by one or two people where we do not use UCA cash flow. We typically rely on global cash flow to determine how the business can handle the proposed debt. Is there a class offered that discusses more small business cash flow where we don't usually use UCA cash flow?
A: There is one webinar in particular that addresses this issue. It is entitled Global Cash Flow and will be conducted on July 25th. It uses traditional “cash flow” as a proxy for UCA cash flow. The case in question is a real estate investment company owned by two individuals. A key point that we examine is whether the lender should use a guarantor’s personal cash flow surplus or his or her highly liquid personal assets to adjust a company’s operating cash flow in compiling global cash flow.
Q: For commercial real estate lending, is UCA cash flow still relevant?
A: Absolutely. It’s relevant because the property is not the obligor for repayment of a term loan for an income producing property. The obligor, which may be a corporation or pass-through entity such as a partnership, is responsible for meeting the debt service. The obligor may, and usually does, own and manage more than one income producing property. It has the usual array of business operating expenses, such as wages and salaries, rent, communications, office expenses, distributions, or guaranteed payments to partners, and so on.
If we limited our analysis to the sufficiency of a property’s net operating income (NOI) relative to the term loan debt service and made a credit decision on that basis alone, we may find ourselves greatly surprised that the obligor could not properly service some or all of its interest-bearing debt, which includes debt service on this particular term debt. Therefore, it is critical to fully assess the obligor’s ability to meet all its debt service responsibilities from operating cash flow or other sources using, among other analytical tools, the UCA cash flow statement.
Course overview: Description and Analysis in the Credit Write-Up