|
Commercial Lending Basics:
Most brokers/lenders who are not experienced with commercial properties or custom lending are easily discouraged & often do a poor job of quoting rates, terms, & closing costs. In most cases, these hassles & miscommunications can be avoided by the Private Lending Group and their clients spending a little extra upfront time & energy following the process described below;
Step 1:Prequalification (Credit History & Financial Status):
This is by far the most important step in determing accurate rates/terms for a client from the start.
All of our lenders will require a Borrower Credit History & will want to document Income & Liquidity of the Borrower.Personal Debt-to-Income ratios are becoming less important in commercial underwriting.A borrower’s credit history & financial strength will largely influence the ability to highly leverage a property & will greatly effect the rates/terms available.
Step 2: Property Cash low
Our commercial lenders focus on Debt Service Coverage Ratio (DSCR) to help determine the amount of debt a property can support.To calculate this you must determine the Net Operating Income (NOI) of a property (Free cash flow after all expenses) & divide this by the annual Debt Service (defined as 12 months of principal & interest payments) Underwriters typically want this ratio to be at least 1.2:1, which means for every $1.20 of NOI or excess cash flow, the property can support $1 of debt.
Our underwriters will look at your actual expenses & add “hypothetical” expenses to adjust for minimum vacancy factor, management fees, & replacement reserves.
It is important to note that this information must be supported by historical financial statements, not realtor’s future projections of cash flow.
Step 3: Property Value
Commercial properties are typically valued by how much income they produce & how safe or predictable that income stream is.<
Commercial appraisers rely heavily on Cap Rates which are often misunderstood.
The Cap Rate is determined by dividing the property’s NOI by the Sales Price of comparable properties.The Cap Rate is the rate of return an investor expects to receive by investing in a specific property over time & is similar to how a bond investor chooses a specific bond.Essentially, you look at a stream of cash flow & discount this stream to Present Value to determine your rate of return.
For example;If you purchase a property for $1 million & you seek a ROI(Return on Investment) of 7%.... you will need to find a property that has an NOI of $70,000/year. Because expenses on a property will vary from year to year, you have to make certain assumptions about likely vacancies, management fees, reserves for maintenance, appreciation potential, & replacement of major building components, etc.You will also find more comfort if you have stable, long term tenants such as Walgreens or a major anchor like Walmart or Krogers Grocery, therefore, your tenants will effect the Cap Rate.
Anyone who has ever purchased real estate has heard that location, location, location are the three most important factors.This is true, the reasons being that well located properties have the best chance of appreciating in value, attracting the best quality tenants. Lower vacancies make these properties easier & less expensive to manage & ultimately sell.
Summary
Only by analyzing these above factors can we assess the likelihood of closing your loan & effectively quote you rates & terms. JRD Global's Private/Commercial Lending Group is eager to speak with, and get the process started.
.
|
Learn More
