Commercial Mortgage Capital

When defining the commercial mortgage capital, it is important to understand the definition of what capital for a business really is. Capital measures the current assets of the business and subtracts the current liabilities of the business from that number, when the business has a loan secured by a mortgage this is also calculated. The working capital measures how much in liquid assets a company has in order to run and build its business. This number can either be a positive number, meaning that business has enough funds to cover operating expenses, or a negative number meaning that the business currently does not have enough funds in its operating budget to cover the expenses and running of the business.

When you have a commercial loan that is secured by a property and you have the mortgage on that property that in essence is your capital. Most commercial loans are secured by a property that is being financed for the business. This property often includes all fixtures and improvements on the property as well as the property itself. Lenders use many different formulas to calculate the amount of the loan that they will finance and to determine the terms of the loan such as the down payment, monthly payments and interest rates. Commercial mortgage capital is the amount that they will give for working capital and operating expenses plus the interest and other factors that are involved.

Lenders often evaluate the value of your property and your mortgage by conducting a fair market analysis of the area and accessing what the value is of other properties in and around that area. Like with any kind of commercial loan, commercial lenders use tools to access the ability of the business to pay back the loan and usually start out with determining the loan to value of the property that is being purchased. This is calculated to help the lenders determine and make sure that the property being purchased is worth the asking price and this step usually involves a full appraisal of the property as well as an analysis of the properties around it to determine a fair market value.

Commercial mortgage capital can be refinanced in most kinds of commercial loans. The individual terms and rates may vary greatly, and it can make a big difference whether or not the business is in good standing and has been in operation for an adequate amount of time. Rates for commercial loans are changing all the time due to the market value and changing conditions in the market. Each day can yield new rates to consumers and business loan customers. Commercial lenders are always up to date on the current rates and most of them will work with you and your business to help make sure that you are getting the best rates possible. They have different methods of doing this and of securing their loans. There are a number of factors that can influence the lenders when approving a commercial loan, and they may request additional information at any time during the process.

Commercial Loan Default

Commercial loans can sometimes fall into default. What exactly is default? It is when the business and business owners are unable to make the required payments on the debt in a timely manner or they fail to comply with other terms and conditions of the loan agreement. Depending on the terms of the commercial loan, this can mean different things to business owners and lenders and have different consequences that are paid by the business who took out the loan.

Commercial lenders take a lot of time and care when approving a commercial loan. This is because it is usually a large sum of money that is being financed, and depending on the type of commercial loan can be risky if the proper steps are not taken. It is because of this that most commercial lenders have a strict set of guidelines that they follow when issuing any kind of commercial loan. Commercial loan default can have serious implications for the business and the business owners. Sometimes situations may arise that make it impossible for the business to repay the debt or make the minimum installment payments.

When the commercial loan defaults, and the lender is unable to obtain the money lent, there are then steps that the commercial lenders must take in order to protect their interests. Most commonly, lenders will secure their monies by performing a foreclosure on the property of the business. A foreclosure is a legal process in which the owner no longer has rights to the property and the lender is forced to legally obtain the property and perform a sale on it to pay off the mortgage debt.

A foreclosure can be handled a number of different ways, and depending on the lender, they may choose a public auction to sell the property. Sometimes it can depend on the amount of the loan that is yet to be repaid, and the value of the property. There are times when the property does not have a lot of value, and an auction can be the best way to go. Other times, the commercial lenders will secure the debt by privately selling the property in order to make more of a profit if the balance of the loan is still large in relevance to the value of the property.

If the commercial loan did not have a property on it for collateral, or the commercial loan was for reasons other than the purchase of commercial property such as operating expenses or working capital, the lender must then pursue other methods of retaining the loan and making sure that the loan is paid off. Generally, when a commercial loan defaults, the lender can seize whatever property or goods are used as collateral on the loan and sell them in order to pay off the balance of the loan.

In general, it is very important that the business who is applying for the loan fully understands all of the terms and conditions of the agreement and loan to prevent any default action from taking place.

Commercial Lending Terms

Commercial lending terms vary greatly on the lender and company, and the type of commercial loan that you are applying for. Commercial lenders use a variety of tools to access and determine the eligibility and amount of a commercial loan. These tools are used in what is known as the underwriting process and it is where the amount, rates and agreements of the commercial loan are determined.

Depending on the kind and amount of commercial loan being applied for, lenders have different ways to calculate and determine the commercial lending terms. There are certain things that are always taken into consideration with commercial loans. These include the real estate property, age and experience of the business, fair market analysis and the creditworthiness of the owners involved in the business.

Commercial lenders use tools to access the ability of the business to pay back the loan and usually start out with determining the loan to value of the property that is being purchased. This is calculated to help the lenders determine and make sure that the property being purchased is worth the asking price and this step usually involves a full appraisal of the property as well as an analysis of the properties around it to determine a fair market value.

Another tool that commercial lenders use to help determine the commercial lending terms of the loan is how long the business has been operating and requires a full analysis of the financial documentation and records of the business. The lenders have to be assured that the business has enough operating income and income on reserve to be able to operate as normal and be able to pay the terms of the new loan. The secured item in most commercial loans is the property that is being financed and this can include all outbuildings and other buildings on the property, fixtures and other tangibles that can be used as collateral to secure the loan.

If the commercial lenders size up the situation and determine that the business has not been operating for an acceptable amount of time, they may need to obtain the financial documentation and credit ratings of all of the owners of the business as well. This can occur for most lenders if the business is fairly new and has not been operating for more than a couple years. Each commercial lending company has their own unique way of determining the commercial lending terms, but they all follow certain guidelines to help them make sure that the business and borrowers will be able to operate the business and pay off the loan as well. In some instances, the commercial lenders may require additional collateral or a higher down payment than normal.

Usually, the down payment on commercial loans is about 20 percent with 80 percent being financed, although it can differ depending on the loan to value ratio and the individual circumstances of the business and owners. Each commercial lending company abides by the basic of terms when determining the proper value of the commercial loan.

Commercial Lending LLC

Most people understand the requirements for underwriting on residential mortgage loans, but not many understand the requirements of getting a commercial mortgage loan. There are certain guidelines for small to medium sized businesses to follow when they are trying to apply for a commercial lending loan. Many commercial lending LLC companies use the same kind of criteria and the same basic guidelines for underwriting loans.

There are four main areas that are considered by lenders when underwriting commercial real estate loans and these are known commonly as the 4 C’s that a commercial lending company uses to determine the lending process:
• Collateral – this is generally defined as assets that are used to secure a loan. In commercial lending LLC companies, the collateral is usually the commercial real estate and any improvements that include land, buildings and fixtures. The lenders will generally be willing to offer a loan amount in the 50 to 90 percent range for value of the real estate. The value of the commercial real estate is a key component in determining how much loan will be given.
• Cash flow – this is used by commercial lenders to evaluate the ability of how a business can repay the debt and maintain a comfortable margin to operate. There are two types of cash flow that lenders can analyze. There is traditional cash flow and actual cash flow. Most lenders rely on both methods for analyzing the cash flow of a business; some lenders rely more heavily on one kind than the other.
• Credit and financial analysis – lenders use this to obtain business credit reports and personal credit reports. They use both of these to determine if the persons and business are credit worthy and how they have handled their previous debts and loans in the past. This gives lenders an idea of how the business and people repay their debts and loans.
• Character and management – the ability of the owner to manage their businesses and the character of the owners and business can have a big effect on how the lenders underwrite the commercial loans. The areas that are typically measured include obtaining reasonable assurances that the management ability is adequate and capable of operating the business and that the business is being operated in an ethical manner.

These are the main areas that commercial lending LLC’s look at when determining the loan process for underwriting. There are other factors that are taken into account as well, as depending on the individual people and businesses involved. Other methods such as loan to value and value of the real estate are also taken into account when issuing loans.

It is important to understand how lenders view and analyze the ability of the owners and businesses to conduct their business and how they will be able to repay the loan. When you are ready to request a loan from the lenders for your business, you need to be sure that you are properly prepared for getting the loan and paying back the loan.

Commercial Lending Groups

Commercial lending groups are those groups that are responsible for the underwriting of commercial loans and handling of commercial loan requests. Each different group has a set of requirements that needs to be met in order for the loan to be granted. There are criteria that are used when evaluating every request for a new commercial loan and are all done on a case by case basis.

One key component that commercial lending groups use is the financial analysis of the applicant. They use different tools and techniques to determine the debt to income ratio of the business and also take into account other factors such as the length of the commercial business that is applying for the loan. The task of commercial lending groups is to determine whether the applicant is qualified to receive the requested funding for a business venture and the underwriting that is involved in the procedure.

Unlike residential loans and lending, the commercial lending groups have to take into account a lot more factors due to the size and length of the loan. Residential loans are usually less expensive and the amount being requested to finance is typically a lot lower than in commercial loans. Most lenders are a lot more conservative when granting commercial loans versus residential loans.

Most commercial lending groups require a minimum of 20 percent of the purchase price of the commercial property to be a down payment at the time and disbursement of the remaining loan funds. The 80 percent of the purchase price that remains can then be written into a loan under whatever terms and rates are decided upon and discussed. What the commercial lending groups do depends on how they rate the value of the property and the applicant that is applying for the commercial loan.

The loan to value is calculated on different requirements and the purchase price of the property has to be as much as the appraisal. The lender will go with the lower of the two numbers when deciding on the amount of the loan so it is important that the appraisal of the commercial property comes in at least to what the purchase price is.

Commercial lending groups have different requirements for businesses that are under three years old. In these cases, they can require the credit information of the applicants and their individual credit worthiness. For corporations, the credit ratings and performance of the business both need to have a proven track record in order to be granted another loan.

Before any decisions are made and any loan amounts are decided, the commercial lending groups will do a full property analysis of the surrounding kinds of properties and types of businesses that are similar to the proposed commercial loan and property to determine if it will be in their best interest to issue the loan. All of these factors are taken into consideration when granting a new business loan and for commercial properties. Different qualifications are depending on the lenders and their requirements of the applicants and business.

Commercial Lending Basics

Do you know what factors are considered when commercial lenders approve or deny your request for a commercial loan? Some people may not know all that is involved in the commercial loan process and the underwriting processes that take place every time someone applies for a new commercial loan.

There are four basic values that weigh heavily on a lender when making a decision to extend a loan to a commercial customer. The first commercial lending basic is cash flow analysis. It is in this phase when the commercial lender takes a complete analysis of the cash flow situation of the applicant. The property that is being considered has to have enough cash flow to be able to cover all of the expenses of the property that already exist as well as be able to cover the new expenses of the loan payment. This ratio that is used is called the DSC ratio. The number that different commercial lending officer’s use can differ but it is generally assumed that the minimum DSC ration must be at least 1.20.

The next commercial lending basic principle that is applied is the loan to value ratio or the LTV. This is used in commercial lending and tends to be very conservative. Commercial lenders will typically require a minimum down payment of 20 percent of the purchase price at the time of the loan. The remaining 80 percent will then turn into the loan amount for the new property. These figures can vary depending on a number of different factors including the creditworthiness of the applicant and the type of property.

LTV is the percentage of the commercial loan amount when divided by the purchase price. Any sum that is exceeding the lender’s LTV will then be required by the applicant as a down payment. If an appraisal is conducted on the property and it shows that the value is actually less than the purchase piece, the lender can then use the number that is lower to determine the amount of loan that will be approved.

The third commercial lending basic principle is the creditworthiness. In order for commercial loans to be given, the applicants must have a high credit score and enough credit to get the loan. If the applicant has been in business less than three years, the borrowers themselves will then need to be evaluated. For income commercial loans, the guarantors do not need to provide tax documents or personal financial statements. Those are determined on each different applicant.

The fourth commercial lending basic principle is that of property analysis and fair market value. In this, the fair market rent will be analyzed and reviewed. In this step, there can be an appraisal done of the property and those around it to determine whether or not the proposed property is worthy and has enough value to be financed for the amount purchased. There can be a number of different factors that goes into this step. Each lender has their own sets of requirements for guaranteeing new loans.

Apartment Loans

Apartment Loans

Apartment lending varies by property location, borrower strength, LTV ratio, and numerous other factors. In order to determine the maximum loan amount that can be borrowed an underwriter will calculated the property’s Net Operating Income (NOI). This process begins with Gross Rental Income, which includes all rental income, laundry income, and any other recurring income. Once Gross Rental Income is caluculated all property operating expenses must be subtracted to reach the Net Operating Income. Typical operating expenses include: property tax, insurance, utilities, repairs & maintenance, landscaping, property management, administrative, & other miscellaneous expenses. The bank’s underwriters will also take out additional expenses which typically include: 5% vacancy, 5% management, and $100-$300 per unit in replacement reserves based on the condition of the building.

Apartment Loan - Simple NOI Calculation

NOI = (Gross Rental Income – 5% Vacancy) – 5% management – replacement reserves – all other historic operating expenses

With the NOI we can now calculated a DSCR and the final loan.

Debt Service Coverage Ratio (DSCR)

The maximum apartment loan is amount is constrained by the Debt Coverage Ratio which is calculated:

DSCR = NOI / Annual Debt Service

Annual Debt Service = Monthly Principle & Interest X 12

For Apartment Loans the DSCR ration requirement is 1 to 1.20 in some cases the DSCR can be lowered to 1 to 1.15 or lower based on the location of the property & other mitigating factors.

Example Apartment Loan

20 Unit Apartment with a $144,000 NOI.

Loan: $1,570,000 @ 6.5% Rate 30 Year AM

Annual Debt Service = $120,202

$144,000 (NOI) / $120,202 (Annual Debt Service) = 1.20 (DSCR)

Items Required to Initiate and Apartment Loan

• Current Rent Roll
• 2 Full Years Income & Expense Statements + Year to Date Income & Expense Statement
• Color Photos
• Borrower’s Personal Financial Statement
• Borrower’s Credit Score

If you need to speak to an experienced commercial loan officer we recommend speaking with Nick Fitzer of BMC Capital. He can be reached at 206 303 8526 or at nfitzer@bmccapital.com

 

How To Start A NNN Loan

How to Start a NNN Loan

The NNN loan processing start when the commercial loan officer gathers the following information.

Property Information required for a NNN Loan

• Year to Date + 2 years financial statements on the property
• Background summary of the tenant
• Color Photos of the property
• Copy of the NNN Lease(s)
• Copy of the Purchase & Sale Agreement (if a purchase)
• Copy of the marketing package (if a purchase)

Borrower Information required for a NNN Loan

• Borrower’s Credit Report
• Borrowers’ Personal Financial Statement
• 2 years most recent tax returns
• Any relevant 1031 information you have

The information provided will be reviewed by underwriters and a term sheet will be issued if the deal is a good fit for the bank. The term sheet will display: rate, fixed period, amortization, fees & another other relevant information regarding your NNN Loan.

If you need to speak to a commercial loan officer we recommend speaking with Nick Fitzer of BMC Capital. He can be reached at 206 303 8526 or at nfitzer@bmccapital.com

NNN Loans

NNN Loans

Understanding NNN Loans

Every deal is underwritten on a case by case basis. The following factors are considered when structuring a NNN loan.

DSCR (Debt Service Coverage Ratio)

A key component used to determine the final loan amount is the debt coverage ratio of the property itself. The Debt Service Coverage Ratio is defined as:

 Net Operating Income (NOI) / Annual Debt Service.

Net Operating Income is derived from the annual gross income minus all appropriate adjustments for operating expenses and capital reserves. These adjustments are made on a case by case basis when considering the property’s location, lease terms, age, value, & tenant.

Loan to Value

Loan to Value is determined as:

Total Loan Balance / Fair market value (as determined by the appraisal)

Loan to Value rarely exceeds 70% on NNN loans

 Credit Worthiness of Tenant

Lenders will evaluate by the credit worthiness of a tenant by reviewing the tenants financial strength, the number of years remaining until lease expiration, and any other relevant information.

Property Evaluation

The characteristics of the property itself are also taken into consideration when underwriting NNN loans. The property’s location, age, appearance, accessibility, & market are the primary factors that will be considered.

Borrower’s Credit Worthiness

In almost all cases the credit worthiness of the borrower will be evaluated. Credit score, Net Worth, Liquidity, and relevant experience all come into play on NNN Loans.

Lender Contact

If you need to speak to a commercial loan officer we recommend speaking with Nick Fitzer of BMC Capital. He can be reached at 206 303 8526 or at nfitzer@bmccapital.com

How To Get A Commercial Loan

How to get a commercial loan.

A question that we hear all the time is “How do i get a commercial loan?” or “how to i get my commercial loan started?”. That is an easy one, simply call a commercial loan officer and begin discussing your deal. A knowledge able loan officer should be able to ask intelligent questions about your property and begin to formulate a lending solution that will meet your needs.

The process begins by sizing up the deal. Let the loan officer know the desired loan amount, estimated value of the property, location, property type, occupancy, etc. If the deal fits one of the available programs the lender can offer a term sheet stating the details of the transaction.

If you need to speak to a commercial loan officer we recommend speaking with Nick Fitzer of BMC Capital. He can be reached at 206 303 8526 or at nfitzer@bmccapital.com

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