Q. How much money
do I have to put down on my Purchase?
A. Most commercial loans will only provide financing up to
85% of your purchase price. However, this figure varies based upon
the type of property. The maximum percentage is typically reserved
for multi-family properties, while properties considered “more
risky” such as restaurants and gas stations may only be eligible for
70-75% maximum financing. However, in both cases, a seller is
typically permitted to offer privately-held financing of up to 5-15%
above what the financial institution will offer. However, this may
increase the pricing of your institutional loan and lower the
percentage of financing that the institution is willing to extend to
you.
Q. What about an SBA loan?
A. SBA loans typically offer a higher percentage of financing
than traditional banks do, and their rates are typically much
better. But, there is a catch. The SBA loan process is arduous and
lengthy, and loan fees can be higher than traditional lending
venues. Even more important, the SBA loan will typically require you
to “cross-collateralize” your personal residence or other properties
that you may own now or even in the future, that may have little or
no mortgage on them. In this case, it will be very difficult, if
even possible, to access equity you may have in these other
properties, should you need to, without having to take extensive and
frustrating steps to do so. SBA loans also fit a very specific type
of borrower. It’s almost like trying to fit everyone into a size 6
dress or size 28 jeans. It’s perfect for some, but there are many
that this program just doesn’t fit.
Q. How do I calculate the Net Operating
Income of my property?
A. Without getting too technical, we’ll give you the basic
formula. Add up all of the income generated from your property such
as rent, fees, etc on an ANNUAL basis. Then subtract all of the
expenses associated with operating this property such as repairs,
utilities, and taxes and what you have left over is your Net
Operating Income, also known as “NOI”. Keep in mind, however, that
your NOI does not take into account your mortgage payment on the
property. That number is used in another calculation process known
as Debt Service Coverage Ratio.
The more technical formula is: Potential Gross Income + Other Income
- Vacancy - Real Estate Taxes - Operating Expenses = Net Operating
Income
Q. What does Debt Service Coverage Ratio
mean?
A. To put it simply, Debt Service Coverage Ratio, otherwise
known as DSCR, is the number that indicates how profitable the
commercial property is. For example, a DSCR ratio of 1.50 means that
for every dollar you spend on the property to keep it running, you
are bringing in 1.50 in income. As a standard, the lowest DSCR that
most lenders will accept is 1.25.
Q. How do I calculate Debt Service Coverage
Ratio?
A. In order to calculate a Debt Service Coverage Ratio you
will need to know what the annual mortgage payment on the property
will be. You will take the annual mortgage payment on the property
and divide it into your Net Operating Income. The number you end up
with should have a decimal in it. For example, if your Net Operating
Income is $763,456 and your annual mortgage payment is $435,000,
then your DSCR is 1.755 which is typically a good DSCR to most
lenders.
Q. What is a “Cap Rate”?
A. “Cap Rate” is short for capitalization rate. Essentially
this is the market rate for your type of property in your subject
property neighborhood. It is one of the ways appraisers determine
the value of your commercial property. This number will vary
dramatically by neighborhoods and property types. It is reflective
of the supply and demand for your type of property in your
particular neighborhood. For example, the cap rate in a college town
on an apartment complex will be much lower than a cap rate on an
apartment complex in rural Nebraska as the supply and demand will be
much higher in the college town. The lower the cap rate, the better
the news is for you. Here’s the basics of why. The appraiser will
take your Net Operating Income of the property and divide it by the
cap rate (as a tenth. IE: a cap rate of 8.5 will need to be divided
into your NOI as “.085”). So obviously, the smaller the number is,
the more times it will divide into your Net Operating Income. The
final number of this calculation is usually a good indicator of the
value of your property. For example, if the NOI of your property is
$245,000 per year, and the cap rate for your property is 8.5, then
the estimated value of your property is $2,882,352. This means that
you will need to provide an accurate Operating Statement to your
appraiser in order for them to properly calculate the value of your
property. Keep in mind, this is only one approach an appraiser takes
in determining the value of your property.
Q. What does “Stress Test” mean?
A. If you are applying for a loan that starts at a low
adjustable rate, you may need to qualify at a worst-case-scenario
rate. For example, if you were to start at a Prime + 2% rate, you
would probably have no problem qualifying for the loan if Prime is
at 5.25% since the rate would then be 7.25%. However, since you’re
applying for an adjustable rate mortgage, the financial institution
will want to make sure that you can still easily make your payment
should Prime increase because obviously your rate will also increase
at that time. So, the underwriter may underwrite the loan qualifying
you with a “stress test” or “qualifying rate” of 10.25% in order to
assure them that even if Prime were to increase dramatically, you
would still be able to make your mortgage payments.
Q. What kind of credit do I need in order
to qualify for a commercial loan?
A. If you were to deal directly with a bank or other type of
financial institution, that institution may have a set requirement
for a particular credit score or credit profile that you may be
required to have. However, with most commercial loans that are
brokered, the credit is not one of the first considerations in
qualifying you for a commercial loan. The first consideration is the
property type. The second is the income of the property. The third
is your financial net worth and personal cash flow. And finally,
your credit. Your credit score isn’t as important as your
credit history. Having tax liens, derogatory public records,
and recent late payments report on your credit is a huge detriment
in your approval process. However, mortgage-lates on any property
you own are equally as serious and may be the reason why you will be
turned down for a commercial loan.
Q. Will I be required to buy Environmental
Insurance?
A. Environmental Insurance is, unfortunately, a requirement
for most commercial loans. However, the insurance cost should be
minimal if your property is not known for environmental hazards. For
example, an office complex would have a much lower premium for
environmental insurance than a gas station.
Q. What does “Non-Recourse” mean?
A. In simple terms, a Non-Recourse loan is one in which, if
the loan is defaulted on, the lender can only go after the property
used as collateral, as opposed to a Recourse loan in which the
lender can go after the company or business entity for repayment of
that loan, or a Full or Personal Recourse loan in which the lender
can go after the owners of the business entity and guarantors. Loans
on properties other than multi-family properties typically require
Full Recourse, meaning the guarantors and owners of the business
will have to ensure timely payment of the loan.
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