According to experts getting money for your commercial lending
project can be quite a challenge if you do not know how to analyze
and present the property properly to a commercial real estate
lender. Theoretically speaking before presenting your property
to a potential lender it is important to determine the most
probable ratios that the lender is going to use in making a
decision to lend you the money.
It is worth mentioning in this regard that there is an increased
risk with commercial real estate loans because of the size of
the loans. As a matter of fact hundreds of thousands to millions
of dollars are loaned on commercial properties and projects.
There is no hiding the fact that a commercial
lending wants to make sure that he or she will get their
money back from the generated income of the property.
More often than not most lenders will use the following three
ratios to determine if they will loan the money on a project.
In an ideal scenario the first ratio is the debt coverage ratio
or DCR. It is worthwhile remembering that the DCR applies to
the property itself and how much income it is producing compared
to the debt service, or how much money is paid out towards the
mortgage on a monthly basis. As a matter of fact it is expressed
by the net operating income divided by the total debt service.
On the other side of the coin the net operating income is the
total income left over from the property after paying all the
operating expenses. Point to be noted in this regard is that
the debt service is determined by the mortgage terms, such as
interest rate, length of the loan, and how often a payment is
made. The general thumb rule in this regard is that the higher
the DCR, the more ability the property will have to cover the
debt service. Fact remained that many lenders require a DCR
above 1.2 in order to consider it a relatively safe investment.
On the other side of the coin anything below that indicates
that the property is either barely breaking even, or losing
money. Theoretically speaking a lender does not want to loan
money on a project that is not able to cover its debt service.
If experts are to be believed the second ratio is the loan-to-value
ratio. In simple terms this is expressed by the total loan balances
(sum of all mortgages) divided by the market value. It is worth
mentioning in this regard that when you apply for a commercial
loan, as you do for a residential loan, you must determine how
much value of the property you are actually borrowing versus
what will remain as equity. In case if you can acquire a loan-to-value
ratio of 75%, then that is generally a good number.
On the other hand if you can get more than 75% of the value
loaned to you, then consider that a bonus. There is no denying
that lender's rules and guidelines may differ greatly depending
on how much they are willing to risk on the project.
According to experts the third ratio is the debt ratio. It is
worthwhile pointing that for smaller commercial projects commercial
lenders may require that you submit personal information to
back the loan. More often than not this includes your personal
income and debt on a monthly basis. In an ideal scenario the
debt ratio is expressed by dividing monthly housing expenses
by gross monthly income.
Theoretically speaking the results show how much debt stands
in relation to income. Always remember that many commercial
lending will not accept a debt ratio greater than 25%.
However, point to be noted in this regard is that some commercial
lenders have been known to go up to 28% or even 36%. There is
no denying that a debt ratio greater than 25% stands a good
chance of having budget problems.
The general thumb rule in this regard is that the lower debt
ratio you have, the more likely you will be able to get funding
for your smaller commercial project.
If experts are to be believed before approaching any lender,
it is really important to analyze these ratios on your own.
As a matter of fact they pertain to your specific deal for which
you want to get financing. In an ideal scenario by performing
the ratio analysis on your own, you can better determine if
financing will be easy or difficult to obtain, depending on
the nature of the project and its level of risk.
In addition it may be a good idea to contact several potential
lenders and ask them their basic criteria and guidelines that
they follow in evaluating properties. There is no denying that
you may find that some lenders are far more conservative than
It is worth pointing that by understanding your property, you
can better fit a lender to your specific needs. Also it is worthwhile
remembering that private lenders can be extremely helpful with
those risky deals that public lenders will not even consider.
But before that be sure that you are well equipped with the
proper information and supporting documentation no matter what
lender you approach.
Believe it or not there are literally hundreds of commercial
lending waiting to provide new businesses with growth capital.
There is no denying that youve probably seen their advertisements
pop up on your browser offering the lowest rates and best service.
With so many lenders to choose from, the question now arises:
How can you get past the gimmicks to find the one that will
fill your needs
It is pivotal that you start with the type of business you want
to open. Are you interested in a manufacturing, retail, agricultural,
or service business Fact of the matter is there are many different
types of business, all with their own unique facility requirements.
However, it is worth noting that not every commercial lender
will finance every property type.
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