By Brent Pritchard

Where the numbers of the Mathematics of Finance leave off, there are words to describe what makes an investment opportunity tick. In the real estate industry, this is what people refer to as the deal’s “story.”

Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):

Having cut my teeth in underwriting and credit analysis, I’m well aware that “It’s easy to lend, but hard to get paid back.” That’s why it’s been said that “Lenders wear belts and suspenders.” If you don’t like the visual of what those accessories are trying to keep from exposing, “Surprises are for birthdays” gets the same point across.

This is also why I tend to see the glass half empty. This is a pretty typical (former) lender’s view.

I’m guessing you’ve probably heard of the “5 C’s of Credit.” They provide a great general framework for underwriting a financing opportunity.

I’ll do you one better (in the spirit of the glass being half empty). Aspiring and current (real estate) finance professionals would do well to think in terms of DRAMS Analysis:

• Downside: What is the single biggest risk at the property or loan level that you have identified through due diligence which if left unaddressed would likely result in an event of default?

• Risk: What other risks have you identified through your analysis, regardless of whether they were referenced in the financing proposal? (Some mortgage bankers would do themselves a favor to see things from the lender’s point of view, which just might get them to the closing dinner where now the question relates to a wineglass.)

• Address: How is the downside risk addressed through sizing, structuring, pricing, or enhancing? (What I call the “4 ings” of commercial real estate financing.)

• Mitigants: How, in your opinion, are the other risks mitigated or managed based on historical or anecdotal information, space market fundamentals, analysis of the competitive set, comps, and the like?

• Strengths: What are the biggest strengths you see as it relates to the subject property and the hypothetical mortgage loan request?

This framework was developed in the commercial real estate industry; however, it can be used for any situation that involves financial analysis. For example, you can substitute “offering memorandum” for “financing proposal” or “investment opportunity” for “mortgage loan request” if that better describes your situation. Regardless of the words used, the approach is the same.

The glass half full people have SWOT Analysis. DRAMS Analysis is a risk management framework, which as an added benefit tempers any tendency to be too salesy when it comes to the written or verbal presentation for the financing or investment opportunity. This is the kind of communication executives appreciate. “Present and advise, the client decides.”

Fun fact: You don’t know how excited I was when I developed this framework years back and learned that a dram is a unit of measurement for a liquid (like water in the glass that’s half empty).

What’s stopping you from incorporating DRAMS Analysis into your underwriting or due diligence today (other than the glass half full people who like their water and SWOT Analysis)?

Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.