Commercial Mortgage Loans

Documentation for Commercial Loans

Documentation requirements vary depending on property type and if the property is considered an investment property or an owner occupied business. In both cases a personal guarantor is almost always required.

Investment Property Any property where rents are collected and is the main source of paying the mortgage and other property related expenses. Required for issuing a letter of interest (LOI) which details rate and terms: Rent Roll / Schedule of Leases 3 years P&L (or appropriate schedule from tax return) 3 years personal tax returns for personal guarantor(s) Personal financial statement for personal guarantor(s) (or residential loan application) Purchase contract (if a purchase) At some point during the process we will also need: Lease agreements Credit report (tri-merged, we will run) Appraisal Insurance information Payoff information

Owner-Occupied Property Any property where the source of loan repayment is the owners business (even if held as a separate entity). If the property is partly leased and part owner occupied, you will need to provide everything required in both sections. Required for issuing a letter of interest (LOI) which details rate and terms: 3 years business P&L and Balance Sheet 3 years business tax returns 3 years personal tax returns for personal guarantor(s) Personal financial statement for personal guarantor(s) (or residential loan application) Purchase contract (if a purchase) At some point during the process we will also need: Credit report (tri-merged, we will run) Appraisal Insurance information Payoff information

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Some property types also require additional documentation such as environmental reports, photos, old appraisals, additional operating history, letters of explanation, aging reports, etc.

SBA Commercial Loans
The Small Business Administration (SBA) offers programs to assist small business in obtaining financing. Their two programs are SBA 7(a) and the Certified Development Company (504) program. Both programs have advantages and disadvantages. To find out if either program is appropriate for you, please speak with a commercial loan agent.

Commercial Loan Underwriting
Unlike residential loans, commercial loan underwriting can greatly differ case by case. There are, however, certain basic ratios with every commercial loan:

Debt Service Coverage Ratio (DSCR, DSC, DSR, DCR) - this is used to determine whether a property (or business) is able to cover the mortgage and all other expenses tied to a property. Usually lenders require that the property be cash flow positive (more income than expenses) and that there is some buffer room. Breakeven would be a 1.0 DSCR, or in other words income equals expenses. Most loan programs require a 1.2 - 1.35 DSCR or 20% - 30% more income than expenses on the property. For owner occupied businesses where there is no rental income, the requirement is usually much higher (2.0+ DSCR) because they are gauging the strength of the business as opposed to the property itself. DSCR can vary depending on loan size, interest rate and amortization.

Loan-to-Value (LTV) - this is used to determine what percentage of the property is being financed. As opposed to residential programs where 100% (or sometimes 125%) financing is available, most commercial programs max out at 60% - 75% depending on property type. SBA programs can often go as high as 90% for qualifying properties (usually owner occupied businesses), but be prepared for some red tape. Also keep in mind that many properties will be more limited in loan size by DSCR than by LTV limits.

Net Operating Income (NOI) - this is used to determine the profitability of a property. In simple terms, NOI is calculated by subtracting expenses from the income. Usually the income is decreased by a vacancy factor that the lender feels is conservative. Depreciation and mortgage payments are not included as expenses in this calculation. But there are several theoretical expenses that may apply (such as tenant improvements, leasing commissions, etc.) NOI is also used to determine cash available for debt service by dividing NOI by the minimum DSCR. Divide by 12 for a maximum monthly payment.

Cash Available for Debt Service - this is used to determine the maximum payment allowable for this property based on the NOI and minimum DSCR. In some cases, this can be adjusted for non-recurring expenses.

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Commercial Loan Process
Once basic documentation is submitted, the loan is pre-underwritten to determine terms of the loan and a Letter of Interest (LOI) and fee agreement is issued. The borrower is asked to sign both documents and provide a deposit check for the appraisal (the amount needed will be detailed on the LOI). Upon receipt of the signed documents and check, a bidding process begins on the appraisal and the appraisal is ordered. Once the appraisal is received (which can vary from 2 - 4 weeks) the final underwriting takes place and loan docs are drawn (taking usually 1 - 2 weeks). The funds are wired usually 2 - 3 days after the signing and the loan is recorded the following day.