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are some terms and concepts that will help you understand commercial
lending a little better. You can read the excerpts below for a rough
idea or click on the links to read the full article.
If
you still have questions, please be sure to check out our Frequently
Asked Questions or our Commercial
Lending Glossary.
Net operating income
or NOI is used in two very important real estate ratios. It is
an essential ingredient in the Capitalization Rate (Cap Rate)
calculation that is used to estimate the value of income producing
properties...Another important ratio that is used to evaluate
income producing properties is the Debt Coverage Ratio or DCR.
The NOI is a key ingredient in this important ratio also. Lenders
and investors use the debt coverage ratio to measure a property's
ability to pay it's operating expenses and mortgage payments.
A debt coverage ratio of 1 is breakeven. Most lenders require
minimum of 1.1 to 1.3 to be considered for a commercial loan.
From a bank's perspective, the larger the debt coverage ratio,
the better.
In commercial real
estate finance, this is the main measure to determine if a property
will be able to sustain its debt based on cash flow. Most banks
will lend to a 1.2 DSCR, but at times with more aggressive practices
you begin to see this number decreasing. A DSCR below 1.0 on a
property indicates that there isn't enough cash flow to even cover
the loan.
- Executive Summary
or Loan Request Summary.
- Personal
Financial Statement from each borrower/couple/partner.
- Last three years
of personal federal income tax returns (no State returns required).
- Last three years
of business financials or federal tax returns (N/A if Schedule
C Business).
- Credit report
and explanation of any derogatory items.
- Digital photos
of the subject property (if available).
The CDC/504 loan
program is a long-term financing tool for economic development
within a community. The 504 Program provides growing businesses
with long-term, fixed-rate financing for major fixed assets, such
as land and buildings. A Certified Development Company is a nonprofit
corporation set up to contribute to the economic development of
its community. CDCs work with the SBA and private-sector lenders
to provide financing to small businesses.
A key concept of
the 7(a) guaranty loan program is that the loan actually comes
from a commercial lender, not the Government. If the lender is
not willing to provide the loan, even if they may be able to get
an SBA guaranty, the Agency can not force the lender to change
their mind. Neither can SBA make the loan by itself because the
Agency does not have any money to lend. Therefore it is paramount
that all applicants positively approach the lender for a loan,
and that they know the lenders criteria and requirements as well
as those of the SBA. In order to obtain positive consideration
for an SBA supported loan, the applicant must be both eligible
and creditworthy.
Myth:
It takes four to six months to get a SBA Loan
processed.
Fact:
Completed loan applications from banks average 10 working
days.
Myth:
There are few SBA loan programs.
Fact:
SBA finance programs provide a wide spectrum of opportunities
including Guaranteed Loan, Handicapped Assistance, Contract Loan,
Veterans Loan, Exported Revolving LOC, and Small Business ($50,000
and less).
Most
commercial mortgage lenders
making fixed rate commercial mortgage loans charge a prepayment
penalty. The reason why is because the investors who buy commercial
mortgage backed securities (CMBS) want a certain yield that is
locked in. Why? Imagine you are a pension plan making actuarial
projections to be sure you have enough money to pay your retirees.
You need to know that you will earn a certain amount of interest.
This is why you buy commercial mortgage backed securities.
As far as 99.999%
of all commercial lenders are concerned, the purchase price is
the best indication of the fair market value of the commercial
property. Your commercial loan will be based on the lower of the
two - purchase price or appraisal.
The biggest advantage
of franchising appears to be the reduction of risk you will be
taking for your investment. This is because franchises typically
get up and running faster, and are profitable more quickly. This
can be a result of better management as well as a well-known name.
According to the Small
Business Administration (SBA), most small businesses fail
because of weak management. It is in this area that the franchising
option shines the most. When you lease a franchise, you are leasing
that managerial know-how.
A credit score
is a number that is calculated based on your credit history to
give lenders a simpler "lend/don't lend" answer for
people who are applying for credit or loans. This number helps
the lender identify the level of risk they may be taking if they
lend to someone. While the same end result can come through reviewing
the actual credit report (which lenders usually do), the credit
score is quicker and less subjective. The system awards points
based on information in the credit report, and the resulting score
is compared to that of other consumers with similar profiles.
With this information, lenders can predict how likely someone
is to repay a loan and make payments on time.
A credit report
is an accumulation of information about how you pay your bills
and repay loans, how much credit you have available, what your
monthly debts are, and other types of information that can help
a potential lender decide whether you are a good credit risk or
a bad credit risk.
The report itself
does not say whether you are a good or bad credit risk -- it provides
lenders with the data to make the decision themselves. Credit
bureaus, also known as credit reporting agencies (CRAs), collect
this information from merchants, lenders, landlords, etc., and
then sell the report to businesses so they can evaluate your application
for credit. Lenders make their decisions based on different criteria,
so having all of the information helps them ensure that they are
making the right decision.
Underwriting is
the process a lender uses to determine if the risk of lending
to a particular borrower under certain parameters is acceptable.
Most of the risks and terms that underwriters consider fall under
the three C’s of underwriting: credit, capacity and collateral.
To help the underwriter assess the quality the loan, banks and
lenders create guidelines and even computer modules that analyze
the various aspects of the mortgage and provide recommendations
regarding the risks involved. However, it is always up to the
underwriter to make the final decision on whether to approve or
decline a loan.
Writing an executive
summary not only will give you a concise picture of the moving
parts, but it also will allow you to shop your loan faster to
more lenders as you search for the right funding source.
Every executive
summary should contain detailed information about the following:
- Project details,
such as the number and type of units, proposed unit pricing,
total project cost and cost per plan
- People and entities
involved in the project
- Status of the
project's phases, which include the site acquisition, plans
and permits
- Takeout loan
and exit strategy
According to current
economic data, the hospitality industry is alive and kicking.
U.S. hotel appraisals have shown that since 2003, sales and transactions
for midmarket U.S. hotels ($3 million to $9.9 million) have continued
to grow and have now eclipsed the $1 billion mark annually. The
southeast United States is the most active market.
Transactions for
the $10 million-plus major hotel market are also experiencing
similarly strong growth rates as travelers take to the skies and
begin their vacations at luxury resorts and hotels throughout
North America.
Again we are seeing
strong revenue growth. Many hotel- and motel-owners are considering
selling or refinancing. For savvy brokers, this may be a great
opportunity to explore the hospitality industry, as long as you
keep a few tips in mind.
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