Commercial Real Estate Loans

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Commercial Loan Underwriting



Typical commercial real estate loan underwriting parameters come down to cashflow, loan to value, credit worthiness and property analysis.  Although the process to evaluate a potential commercial loan is basically the same from one bank the next, their various tolerances for risk is what separates one bank from the other. 

Commercial Underwriting - Loan to Value

 

Loan to value is simply the value of the subject property versus the loan amount.  I.e if the property is worth $2,000,000 and the loan amount is $1,500,000 the LTV is 75%.  This is a huge issue within commercial underwriting and a big separator between lending institutions.  Some lenders will get very aggressive with this, while other will be very conservative.

The property type has a major influence on loan to values that are offered on commercial loans.  For example restaurant loans will normally be capped at 65% while more general purpose properties such as retail will be limited to 75%.

Commercial underwriters will give more sway to buildings that are owner occupied vs being an investment properties.  Loan to value on purchase can go as high as 90% on owner occupants vs 75% on investments. 

Underwriting Commercial Cashflow

Cashflow is paramount to underwriting commercial loan requests.  Within the business the cashflow analysis is refereed to as the Debt Coverage Ratio.  For both owner occupied and investment deals underwriters normally want to see ratio's above a 1.25.  In other words, for every $1 of mortgage debt the property or business has to have $1.25 of net income to meet the mortgage payments. 

Debt coverages minimums vary from one lender to the next, property type and occupancy (investment or owner occ).  "Riskier" property types such as hotels or car washes will be required to have higher cash flow levels, ie DCR at or above 1.4. 

Credit Worthiness

The borrowers personal and business credit worthiness will be scrutinized.  Personal credit scores have become a bigger issues as the acceptance of the three bureau have become widespread.  D & B's as well as other measures are normally used to asses the creditworthiness of businesses that are involved. 

Property Analysis Commercial Underwriting

Fair market rent and fair market value is heavily measured.  Condition, age, appearance,  town population, market trends etc are examined while the commercial loan underwriting process is completed.   

 

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