Gary D. Hanna     Stockton, California Calif. Dept of Real Estate # 00878795 Office: 209.957.7500  Cell: 209.200.2565 Email Gary Hanna: gary@anymtgloan.com

Commercial Loans     Commercial Mortgage Options     Commercial Morgage Essentials

Commercial Mortgage Loan Essentials

Loan-to-Value (LTV)

    * Unlike residential lending, commercial investment properties are viewed more conservatively. Most lenders will require a minimum of 25% of the purchase price to be paid by the buyer. The remaining 75% can be in the form of a mortgage provided by either a bank or mortgage company. Some commercial mortgage lenders will require more than 25% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property.

               Total Loan Balances (1st Mrtg + 2nd Mrtg + 3rd Mrtg…)

      LTV = -------------------------------------------------------------

               Fair Market Value (as determined by appraised value)

      If you know what a lender's LTV requirements are, you can also calculate the loan amount by multiplying the purchase price by the LTV percentage. Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less then the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.

Debt-to-Income

    * The Debt-to-Income Ratio compares the amount of bills that the borrower must pay each month to the amount of gross monthly income he earns.

                       Monthly Debt Obligations

    Debt Ratio = -----------------------------

                       Monthly Gross Income

    Not much emphasis is placed on this ratio in the commercial lending industry. Most of the emphasis will be placed on the income property's ability to "carry" itself by the income it generates.

Debt Service Coverage Ratio (DSCR)

    * Measures a mortgaged property’s ability to cover monthly payments defined as the ratio of net operating income over the periodic payments (principal and interest) made on a loan. A DSCR of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.

                  Net Operating Income

      DSCR = -------------------------

                  Monthly Debit Service

      Net Operating Income is the income from a rental property remaining after paying all operating expenses (Insurance, Utilities, Repairs, etc). Mortgage Debt Service is the annual amount of all periodic payments for interest and retirement of the mortgage loan(s). You will be required to provide a vacancy factor to cover collection loss. Also, lenders will include a management expense of 3-5% of the effective gross income, even if the property is owner-managed. Their logic is that the owner earns that fee, which they would have to pay to others, if they took back the property in a default situation.

Commercial Mortgage Guidelines

Commercial Financing is underwritten on a case by case basis.

Every loan commercial mortgage application is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages.

Financial Analysis

A key component in making an underwriting evaluation is the debt coverage ratio. The DCR is defined as the monthly debt compared to the net monthly income of the investment property in question. Using a DCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment. Typically they will determine the DCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income. The higher the DCR ratio, the more conservative the lender. Most lenders will never go below a 1:1 ratio ( a dollar of debt payment per dollar of income generated). Anything less then a 1:1 ratio will result in a negative cash flow situation raising the risk of the loan for the lender. DCR's are set by property type and what a lender perceives the risk to be. Today, apartment properties are considered to be the least risky category of investment lending. As such, lenders are more inclined to use smaller DCR's when evaluating a loan request. Make sure that you are familiar with a lender's DCR policy prior to spending money on an application. Ask them to give you a preliminary review of the investment property that you want to purchase. Information is free, mistakes are not.

Loan to Value

Unlike residential lending, commercial investment properties are viewed more conservatively. Most lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either bank or mortgage company. Some commercial mortgage lenders will require more than 20% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property. Loan to value is the percentage calculation of the loan amount divided by purchase price. If you know what a lender's LTV requirements are, you can also calculate the loan amount by multiplying the purchase price by the LTV percentage. Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less then the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.

Credit Worthiness

For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations, business performance and credit ratings will be evaluated with a proven track record.

Property Analysis

Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

Links to my affiliates:

www.gregadamsrealestate.com

www.stocktonmortgage.com