Due Diligence for Apartment Building Investing

What Due Diligence Do You Need to Conduct Before Purchasing a Multifamily Property?

Before you make the leap and purchase a multifamily property, you’ll need to do some homework first. In multifamily industry, this is referred to as “due diligence,” and often consists of hiring third-party service providers to inspect and/or provide reports on various parts of the property to analyze its suitability as an investment. 

If you’re planning on financing your property with a multifamily loan, much of this due diligence will also be required by your lender and will need to meet their requirements if you want to get approved.

However, if you want to finance the property yourself (an extreme rarity), you’ll still want to conduct the full due diligence process to ensure you’re getting a good deal.

Basic Due Diligence Checklist for Apartment Investors

The major reporting requirements for both borrower and lender due diligence include:

Financial Audit Report

Market Report

Property Condition Assessment

Lease Audit/Rent Roll Analysis

Unit Walk

Environmental Site Assessment


Site Survey/Title Report

In addition, some additional reports may be required (or desired), depending on a borrower’s individual situation:

Green Report

Seismic Report

Now, we’ll break down each of these reports in a bit more detail:

Financial Audit Report

In most cases, borrowers will first look to a property’s income and expense statements, including their trailing 12-months (T-12), and the last 3-years profit and loss (P&L) statement.

They will then generally make projections about how the property will operate in the future. However, these projections alone aren’t enough to make a solid decision about the property’s future profitability; instead, borrowers will generally want to hire a real estate consulting firm to examine the property’s historical financial statements.

This can help reveal any concerns or inconsistencies, as well as making sure that a borrower’s projections are generally accurate.

Market Report

A market report, sometimes also referred to as a market study or a market survey, analyzes the subject property’s market and submarket in order to help determine the property’s estimated occupancy level, market value, absorption time, and other data.

The study, which is also generally conducted by a third-party real estate consulting firm, will additionally examine market need, local multifamily rents, supply and demand, and other market conditions which could impact the property’s long term profitability. It’s important to note that, for some types of loans, such as HUD multifamily loans, a borrower may need to use an approved third-party consultant.

Property Condition Assessment

A property condition assessment (PCA), sometimes referred to as a capital needs assessment (CNA), or a physical needs assessment (PNA), is a third-party report that examines the current condition of the property and how much it will cost to maintain it (and to replace aging building elements when they require it). It can also be utilized to help calculate replacement reserves, funds that are set aside for future property repairs (and required by certain lenders).

Specific PCAs are generally required for Fannie Mae and Freddie Mac Multifamily loans, as well as for HUD multifamily loans.

Lease Audit/Rent Roll Analysis

A lease audit is a third-party report that examines the current leases for a commercial or multifamily property. It can be done by the property management company that is currently managing the property, but if you think they may be biased, you may want to use a different firm.

This process will often initially involve looking at a property’s rent roll, but will usually go much further than that. In fact, a lease audit will usually involve looking at each aspect of every lease, including tenant billing schedules, unpaid or late rental payments, and units that are being leased at a discount or given freely to a property manager.

Unit Walk

A unit walk, is, much as it sounds, a physical walkthrough of each and every unit. No matter how great a property looks on paper, or even how great an appraiser or inspector says it looks, nothing compares to actually seeing the property in person.

A unit walk allows you, as a buyer, to look at the condition of each unit to assess potential problems and issues that others may not have noticed. Plus, you might also begin to get ideas for various upgrades and value-add improvements that may be able to make the building a more profitable investment in the future.

Environmental Site Assessment

Just like a market report and a property condition assessment, most lenders require borrowers to get an environmental site assessment or ESA, before they will approve them for a loan. Most properties will only need a Phase I ESA, though some properties may require a Phase II. A Phase I ESA will look for any traces of petroleum products, dangerous chemicals, pesticides, or other contaminants that could endanger the residents of a property. It will also look into mold, asbestos, radon, lead paint, and other potentially hazardous building elements, as well as any previous environmental liens that have been placed on the property.

If the Phase I ESA determines that there is a significant contamination issue with the property, in general, lenders will require that a borrower order a Phase II ESA, which will take samples of the affected area for further testing.


Perhaps the most important part of the due diligence process, an appraisal attempts to estimate the market value of a multifamily property. This will typically need to be conducted by a professionally licensed appraiser who is licensed in the area in which the property is located.

The appraiser will generally use several methods to price the property, including looking at the property’s NOI and DSCR, as well as comparing it to similar multifamily properties in the local area. If an appraisal comes significantly below the asking price for the property, you (and your lender) may want to think twice about the deal.

Site Survey/Title Report

A title report is generally required by multifamily lenders in order to determine the legal status of the title of the property. It helps to ensure there are no competing legal claims to the property from past owners (or their spouses, lenders, or relatives), or parties that have previously done work on the property (i.e. mechanic’s liens).

A title report is also generally required to get lender’s title insurance, which most lenders require, as well as owner’s title insurance, which most investors should generally consider purchasing. In most cases, title reports (and title insurance) require an investor/borrower to first order a site survey of the property, which confirms the exact boundaries of the property, as well as determining/confirming the exact size of the lot.

Green Report

A green report helps to determine what, if any, opportunities there are to increase the energy efficiency of a property. These could include special windows, roof or wall insulation, new thermostats, LED lighting, energy-efficient appliances, and a variety of other upgrades.

The report will also generally include the cost and the ‘payback’ period of each upgrade (i.e. the time it would take for the upgrade to pay for itself in the form of increased energy savings).

Seismic Report

For properties located in certain areas which are at high risk for earthquakes, a lender may require a borrower to get a seismic report, also referred to as a seismic assessment. The assessment will generally take the form of a Probable Maximum Loss (PML) assessment, which will estimate the risk of structural damage estimate in a worst-case scenario.

This is a re-post. For more information about Winston Rowe and Associates you can review them online at https://www.winstonrowe.com

6 Ways to Invest in Apartment Buildings

The phrase “real estate investing” is very broad, though, and there are a lot of ways to get into it. One of my personal favorite methods is investing in apartment buildings (otherwise known as multifamily properties).

But deciding to invest in an apartment building is only the start. There are quite a few different angles to consider. The way you choose to pursue depends on how involved you want to be, how much capital you have, how much time you want to commit, etc.

I’ve discussed how I bought my first apartment building before, but if investing in a multifamily property has piqued your interest, then this article can provide a good overview on the ways you can do just that.

Here are six ways to invest in apartment buildings:

1. Buy It Yourself

The first and perhaps most obvious method is to simply buy the building yourself. Of course, this requires the most upfront capital, and it can be the most intimidating of the methods listed here. After all, it’s all up to you to make sure everything goes right. It involves doing the proper due diligence. You’ll need to do most, if not all of the following:

Save the funds

Know your budget

Team up with a broker

Review deals

Make an Offer

Get it accepted

Find a loan

Find property management


Decide if/when to sell

Yes, it’s a little more involved, but the benefits can be tremendous. It’s like owning your business. You get to decide the strategy behind the investment. Are you going to keep it for the long term and live off the cash flow? Are you going to keep it cash flowing until it’s a good time to sell? Maybe you’re going to exchange it into another property.

Whatever the case, owning the property means that you get to make all the decisions and can base it off of what’s going on with your life at the moment, not just the overall strategy.

2. Buy It With a Partner (or Partners)

When I purchased my first apartment building, I did it with a partner. I wanted to purchase in a certain up & coming area, and I didn’t have all the funds I needed to make it happen. So, I partnered with a friend, pooling our capital.

Neither of us had any experience with multifamily properties, but we learned together. We told ourselves this would be our real estate education, and it really has been an amazing learning experience. I’ve since gone to purchase my own multifamily property, and the knowledge from that first purchase has been invaluable.

The downside of buying with a partner is that you don’t get to make all of your own decisions. You might have different visions for the property. For example, someone might want to spend more on the renovations and try to create a nicer class of property. The other, however, might not want to put in more money for renovations.

Then, when it comes to selling or exiting the property, one might want to keep the property for the long term and the other might want to sell it.

Having a partnership can be a tricky dance, but that’s why you need to go in with eyes open. You also need to document and discuss everything you can beforehand. If you find the right partner, though, it can be a very rewarding (and lucrative) experience.

3. Invest In a Syndication

A “syndication” is a pooling of funds in order to purchase a property (in this case, an apartment building).

Remember that long list of things you have to do when you’re buying a property by yourself? In this case, the syndicator, or the one running this investment, will do all of those things for you.

Then, instead of just purchasing it on their own, they will open the opportunity for investors to purchase a small stake in the building.

The syndicators are what’s known as “general partners,” and investors are known as “limited partners.”

General partners make all the decisions and actively run the property according to the business plan they’ve laid out.

Limited partners are considered passive investors. All they have to do is collect distributions and a large share of the profit when the property is sold.

4. Invest in a Real Estate Fund

A real estate fund is capital that is raised with the intention of buying multiple apartment buildings. It is typically “blind,” meaning that investors bank on the reputation of the fund managers, their business plan, and their track record rather than the property itself.

The fund managers take investor funds and decide where to invest, as well as all the major decisions surrounding the apartment buildings. For example, they decide how to renovate and when to sell.

In short, with a real estate fund, you get more diversification because you’re able to invest in multiple properties. However, the minimums tend to be higher. Plus, you’re investing without necessarily knowing the exact properties you’re investing in.

FYI, if you’re interested at all in checking out the next fund I’m investing in, check out Alpha Investing Fund I.

5. Invest in a REIT

A REIT is a large corporation that runs and manages multifamily properties. When you invest in a REIT, you’re buying shares in the corporation–not in the properties themselves.

To take it a step further, there are public and private REITs.

Public REITs are bought and sold like stocks. The ease with which you can buy and sell, otherwise known as liquidity, is one of the most powerful benefits of REITs.

However, they’re often loaded with fees and you don’t get as many of the tax benefits as you would with direct ownership or investing in syndications/funds.

Private REITs, on the other hand, are created by certain companies. You’re also buying shares in that opportunity, but they’re not listed on the public markets. Still, they behave the same way, in that you can buy and sell directly from the companies.

In any case, you should always look at each individual REIT to know their terms for both purchase and exit.

6. Raise Money and Create Your Own Syndication

In this method, you’re no longer the “limited partner” I mentioned in the previous syndication option. Instead, you’re the general partner. This can be a great option if you’re confident in your ability to find, vet, and create deals.

If you decided to go this route, you’d find a deal, create a business plan for investors, raise money, purchase the property, distribute returns, and make all the decisions for how to renovate and eventually sell the property.

Obviously, this is a lot more work, but the payoff can definitely be worth it. If you’re doing this, you’re no longer in the business of simply investing, you’re now truly a real estate professional.


As we’ve seen, when it comes to investing in apartment buildings, there are so many different ways to get involved. The important thing is to consider them in the light of what works for you. Some ways are certainly more hands-on than others, while some carry more inherent risk.

Whatever you decide, real estate investing is one of the best wealth-building methods I’ve found, and apartment buildings are one of the best subsets of that. Taking that first leap can be scary, but in the end, it’s well worth it.

The True Cost of Not Screening Your Tenants

Landlords that don’t screen their tenants run the risk of incurring hefty costs that could easily be avoided. In this article, we discuss many of the costs associated with not screening your tenants. If you aren’t yet convinced about the importance of tenant screening, you will be soon.

Late Payments

Rent payments are the foundation of any successful rental business. When tenants are late on payments, or miss them altogether, it interrupts your cash flow and threatens the health of your business. Late payments make it difficult to make mortgage payments, fulfill employees’ paychecks, and grow your business. Screening tenants and running credit and employment history checks helps ensure that tenants will pay rent on time every month.

Eviction Process

Evictions are a costly process that only result in a month or two’s recovered rent. More often than not, landlords lose more money when evicting a tenant than they recover in the end. Let’s break down the actual cost of eviction.

First, you miss a few months of rent payments. Then you must file a complaint against a tenant in circuit court, which can cost $90-$400. After that, a notice will be served by the sheriff’s office, which could cost $50-$400. Next, you have filing and services fees of anywhere from $50-$700.

Lastly, you’ll incur attorney fees. There are flat attorney fees as low as $250 for filing paperwork and making one court appearance. Other attorneys charge up to $600 for the whole process. And prolonged cases could cost $200-$400 an hour in attorney fees.

It’s safe to say that evictions should be avoided at all costs. The more thoroughly you screen tenants, the greater your chances are of finding quality tenants that won’t necessitate an eviction.

Property Damage

Low-quality tenants are more likely to damage your property. Tenants that are careless, irresponsible, and reckless tend to be neglectful of cleaning, too. This will mean extensive repairs and cleaning once the tenant moves out. It can also prolong the turnover period because it will take longer to make the unit move-in ready.

Tenant screening enables you to find tenants that will respect your property and take good care of it. As a result, you’ll have less repairs and cleanings to do once they move out, and your next tenant can move in sooner.

Unsafe Community

When you don’t screen tenants, you run the risk of leasing with someone who will make the community unsafe. Dangerous or irresponsible tenants will scare away the good tenants you already have. And depending on the severity of the tenant’s behavior, your property and the area might develop a poor reputation, scaring away future tenants.

Thorough tenant screening cuts out applicants that will be a danger to other tenants and the community. When you screen your tenants, you can be sure that they will be responsible and respectful of you, your property, and the community

Additional Time and Energy

As cliche as it sounds, time is money. As it should now be clear, poor tenants are a drain on your time and energy. They require additional communication, you have to track them down for payments, you have to resolve any conflicts they create, and more.

When your attention is spent on low-quality tenants, you can focus on other important matters relating to your business. As such, screening tenants saves you time and money both directly and indirectly.


It should now be evident that not screening your tenants is a cost you can’t afford. Screening tenants is worth the little additional time and money. And with many property management platforms, landlords can pass screening fees off to applicants. These platforms also deliver reports within minutes.

In short, whatever reservations you might have had about screening tenants should no longer be a concern. If you aren’t already screening tenants, now is the time to start.

Lumber Price Inflation Helps Drive Up Construction Costs

Winston Rowe and Associates

Building material costs, with lumber alone up by 180%, may not drop to pre-pandemic levels soon, even when mills return to full staffing and overseas factories fully recover, according to some suppliers and contractors.

“This price spike has caused the price of an average new single-family home to increase by more than $24,000 since April 17, 2020,” stated the National Association of Home Builders, which reported lumber spiking 180% since the spring 2020.

At Healdsburg Lumber Company, half-inch plywood off the shelf sold for $19.93 a sheet on Feb. 4, 2020, while on April 1, 2021, the price was more than triple at $60 a sheet.

“Six months ago I would have told you it will come down at any moment. Now people say there is no end in sight,” said Ryan Arata, general manager for the Sonoma County lumber yard. “You can’t just fix the supply overnight. If tomorrow COVID ended and everyone was back working 24/7, they would still only have X number of plywood plants in the U.S. and you can only work so fast. So, it’s going to take months or years to build up stock.”

Rick Wells, CEO of Marin Builders Association, said these prices may be here to stay for a while.

“They may swing and drop in small amounts, but don’t expect to see a return to pre-COVID prices. What we are going to see is a new floor,” Wells said.

The association has 565 members all over the North Bay, but primarily in Marin County; representing every kind of contractor as well as folks who do business with contractors.

Impacts of the pandemic

Those in the construction-building-design business who spoke to the North Bay Business Journal mostly point to the pandemic for the reason why the prices have skyrocketed and why the supply of goods is out of whack.

When the country and world started to shut down in March 2020 so did lumber mills, as did factories making appliances, and other related sectors. Like many industries, when work resumed, protocols were in place to keep employees safely distanced. A full complement of workers did not return. This meant the production lines were putting out less than they did before the pandemic.

Healdsburg Lumber said vendors used to deliver product in two days with 98% of the order. Now it takes four weeks, with a fill rate of 60%.

The coronavirus pandemic disrupted shipping times, too, with some of the material coming from overseas.

“We order garage doors when we start the foundation and they generally don’t go in until after the dry wall,” said Keith Christopherson with Christopherson Properties in Santa Rosa.

Today, it’s necessary to provide at least a 12-week lead time for ordering those same doors. A year ago it was not a problem to get them in three weeks.

Christopherson uses KitchenAid appliances, which are made in the United States. Even without an ocean liner needed for shipping, delays and price increases are the norm.

“I think the issue is with the labor force,” Christopherson said. “People are getting unemployment checks so they are not coming back to work. It’s really pushed the cost of building way up. It’s making it difficult to build houses at reasonable prices. The market has never seen anything quite like it.”

Whirlpool Corp., which makes Whirlpool, KitchenAid, Amana, Maytag, JennAir and other brands of appliances, has 15,000 employees at its nine plants in the United States.

“Our plants have experienced a few brief interruptions in production related to the pandemic, including component shortages, but as a whole have remained up and running throughout this challenging time,” spokesman Chad Parks said. “Implementing steps to make our plants COVID-safe can impact manufacturing lines and production rates. These adjustments, including social distancing, have impacted most manufacturers across many industries, including many of our suppliers and other appliance manufacturers.”

Victoria Reschke, category business manager with Napa-based Central Valley Lumber, believes the pandemic is the reason for the market being off kilter. With people’s work spaces now in their home, along with kids still going to school virtually, renovations are the norm as is moving because many people can work from anywhere.

“People want to move to the suburbs where they have land and more space in their home,” she said. “People want an office, a kids’ room where they don’t just sleep. In California I think that demand is here to stay.”

All those remodels and building of larger homes would stress a normal supply chain, but these are abnormal times.

“We have had trouble with refrigerators. It’s much, much worse because what happened when COVID struck is people bought a second refrigerator for the garage so that wiped out the refrigerator supply,” Linda Nave with Sandra Bird Designs Inc. in Kentfield said. “In addition, the supply chain was broken because of shipping, then factories closed down until they could operate COVID-friendly. Some refrigerators are delayed six months.”

Sandy Bird, who owns the company and has been in business for 40 years, was one of the first women to get a contractor’s licenses in Marin County. She has seen the ebbs and flows of the remodel business through the decades, with what’s happening now being off the charts.

Windows and doors are taking longer to arrive. Engineered flooring mostly comes from China and is being impacted by tariffs. Sheet rock and concrete all cost more than a year ago. Prices are easily 20% higher than in early 2020, Bird said.

A consequence of haphazard arrival times for goods is the lack of space to store all the inventory. Contractors are used to product arriving as it’s needed. Bird is asking clients to store goods until it can be used because she doesn’t have the space to keep it.

Another factor slowing down the process for Sandra Bird Designs is the amount of time it takes to get a building permit.

“For a bathroom remodel we did in Corte Madera it took eight to 10 weeks to get the permit when normally I would get it right at the counter,” Nave said. Municipal government offices are still operating in COVID mode, thus adding constraints to the building industry and others.

The solar industry is also hurting from escalating prices from suppliers, with copper wiring being the main commodity.

Beginning in January 2020, California mandated all new home construction come with solar.

“The copper value in January compared to now has tripled,” said Ben Goldberg of Simply Solar California. The Petaluma-based company has 90 employees who work throughout the Bay Area. “It’s the large commercial projects where it’s adding tens of thousands of dollars to a half-a-million-dollar project.”

A quote Goldberg just did in McKinleyville in Humboldt County for a 40,000-square-foot project is $30,000 more than it would have been late last year.

For now, residential solar projects are less impacted because the square footage is not as great. Prices there might be up about $100 compared to six months ago.

Goldberg blames the pandemic for the cost increase as well as the North Bay fires over the last few years for adding to the demand in solar on new-home construction.

‘We just figured we’d build one or two’: How a national home flipper became a North Bay rebuilder

Burgess Lumber forklift operator Ron Fulton unloads high-demand lumber and other building materials at the company’s yard at 3610 Copperhill Lane north of Santa Rosa on Oct. 2, 2018. (Gary Quackenbush / for North Bay Business Journal)

North Bay construction suppliers see big boost from rebuild after wildfires

“First of all the lumber thing is just ridiculous. If we are able to get lumber, it is so far out in the stratosphere. It is not remotely close to anything I’ve seen,” Christopherson with Christopherson Properties said. He’s been in the home building business for 42 years, with most of the work in the greater North Bay.

On April 24, 2020, he paid $364 per thousand board feet. On Nov. 20, 2020, it was $651, on Jan. 22, 2021, $898, and on March 26, $1,096.

While he acknowledges closure of the mills starting last spring brought the supply chain to a halt, Christopherson is not convinced that is the only factor affecting lumber prices.

“It is a commodity, so I smell Wall Street buying futures,” he said. “But that is a hunch.”

Mark Labourdette, owner of Design/Build Specialists Inc. in Novato, worries that an economic bubble may be forming.

“It’s everything — stock market is out of whack, the supply chain is out of whack, tariffs are out of whack, shadow banking industry is out of whack,” he said. “It’s like everything is on a tilt at the same time. And the government is pouring trillions of dollars into the economy. My gut is (the downturn) could be as severe as 2008—’09, and I’m an optimist.”

His firm that combines architectural and building services is focused mostly on remodels.

“We are doing kitchen remodels for $300,000. The days of a $75,000 kitchen remodel is now $150,000; the days of a $20,000 bathroom are now $50,000,” Labourdette said. “Not a single person is batting an eye about anything. People have been living in their home and staying in their home for the last year. They know what needs to be done.”

Christopherson gets his lumber from Central Valley Lumber, which has seven locations mostly in the North Bay. That company also expects prices to remain high.

“We are reforecasting to August for when we see prices coming down, but I don’t think it will be a huge swing — maybe a few hundred dollars per thousand,” Reschke with Central Valley Lumber said. “I think what will bring a big change is bigger than the industry. Something will happen nationwide, something in the economy.”

Arata at Healdsburg Lumber said, “It’s one thing when prices go up five, 10 bucks a thousand board-feet. But now it’s adding $50,000 to $70,000 to a house.”

Lumber prices affect more than framing for house construction. It’s roofs, decks and fencing.

“One of the things that is really hard to get is the trusses for the roofing,” said Jose Jimenez, owner Jimenez Construction in Rohnert Park. “You have to order them like six months before you start. Two or three years ago you ordered them when you started the job and it arrived right on time.”

Goldberg with Simply Solar California is also in the roofing business.

“On the roofing side the biggest thing is lumber itself has gone up, but plywood has tripled in less than six months. That is literally one of the biggest expenses for us,” he said. “We are almost installing roofs at margin. We are barely breaking even.”

A standard 1,800-square-foot home would have about a 22-square-foot roof. Today just for the plywood Goldberg would need to charge $4,200, while last fall and the end of summer it was $2,000.

The added expenses are making home projects less affordable for many.

“A homeowner who just wants to redo a fence it was $1,200 last year and now all of sudden due to lumber and even the labor aspect of it could be five or six times that price,” Arata said. “It affects the middle and lower classes much more than the higher classes.”

This is a re-post using a stock photo.

What questions should I ask a hard money lender?

12 Questions to Ask a Hard Money Lender

Winston Rowe and Associates

Hard money lenders, also known as private money lenders, offer special types of financing designed for property development. These lenders provide fast, up-front funding for acquisitions, construction, and renovation that lets builders, landlords, flippers, and others get their projects started and finished on schedule.

If you’re thinking of using a hard money lender, it’s important to understand the services they offer, how much they will charge, and what you can expect. We’ll break down the most important questions to ask a private money lender to maximize your return on investment and decide if this type of funding is right for you.

What Are the Benefits of Using a Hard Money Lender Instead of a Traditional Loan?

Mortgages and other traditional loans from banks and institutional lenders can be an option if you plan well ahead. However, the world of real estate development moves very quickly, and it can take several weeks to get a traditional loan or mortgage approved. Private money lenders offer several significant advantages:

Speed: Loans can be approved quickly, and you could have access to the money in as little as seven business days.

Simplicity: The process of applying for a hard money loan is often much simpler and easier than for a traditional mortgage.

Flexibility: A loan officer from a private lender will work with you to find the best loan product for your project, often customizing it to fit your individual needs.

Scrutiny: A hard money lender won’t scrutinize your personal finances as closely as a traditional lender. Instead, they are most interested in the value of the completed project.

What Types of Real Estate Funding Does the Lender Provide?

A good private money lender will have specialized loans based on the type of construction or development you’re managing. This is important because lenders have modeled their risks, interest rates, and terms based on types of projects. Finding the right funding product for your project gives you more flexibility.

Residential new construction

Residential renovation

Residential development

Land acquisition

Multifamily renovation


Cash-out and refinance

Where Does the Hard Money Lender Provide Loans?

Different lenders support different regions. Some might be able to offer loans across multiple counties, while others will only focus on local financing. A local lender will understand your marketplace much better, which means they’ll take a more personalized view of your project than a national one will. Talk to potential lenders to see where they can provide funding.

Can You Get Prequalified for a Private Loan?

In some circumstances, it’s worth getting qualified for a loan before you need it. That way, if you come across a great real estate deal, the private lender can get the money to you quickly.

How Much Collateral Do You Need to Provide?

Hard money lenders lend money that’s secured against your real estate project. The value of your construction or development is the “collateral” you provide in return for funding. Private lenders take into account the total cost of the project and what the finished development will be worth when it’s sold. A lender will be able to provide an estimated value, typically based on an appraisal or BPO, for the collateral you need to provide, depending on how much you want to borrow.

How Much Money Can You Borrow?

Every lender will set the amount you can borrow around several different factors. These might include:

The “Loan to Value” (LTV) of the property: The amount you’re borrowing, compared to the overall value of the finished project. For example, if a project will be worth $300,000, and the lender offers up to 70% LTV, they might consider lending up to $210,000. Streamline can typically offer up to 70% LTV for renovations and new construction projects.

The “Loan to Cost” (LTC) of the property: This is similar to LTV, except instead of comparing the amount you’re borrowing to the finished value, the lender looks at the total cost of your project and makes a determination on how much to lend. For example, at Streamline Funding, we can typically offer up to 95% LTC for residential new construction.

The “After Repair Value” (ARV) of the project: The value of real estate after it’s been improved, renovated, or fixed up.

Minimum and maximum loan sizes: Some lenders put lower and upper limits on how much they’re prepared to fund.

History of borrowing: If you’re applying for follow up loans and have successfully borrowed in the past, a lender may be more likely to approve your request.

How Much of a Down Payment is Needed?

A lender will not provide all of the money needed to pay for a project. Ask the lender what their LTC is, as that’s the maximum they will fund towards the project, and you’ll need to come up with the rest. For example, if they provide 80% LTC, and the project will cost $150,000, they could fund up to $120,000, meaning you’d need a down payment of $30,000.

What Interest Rates Does the Private Lender Charge?

Hard money lenders do charge higher interest rates than a traditional mortgage or bank loan due to the additional risk. However, your monthly payments will typically be interest-only and you’ll be responsible for paying off the principal balance at the end of the loan term. The interest rate is the single biggest influence on how much you’ll repay. Most private lenders charge interest rates between 9% and 14% a year, depending on the purpose of the loan. You’ll also want to ask how the interest is calculated. For example, is it applied on a daily basis, or over some other time period?

What Are the Repayment Terms?

The frequency of repayments and the length of time it takes you to repay will have a significant impact on your capital and interest payments and your cash flow. Ask the lender about the loan repayments you’ll need to make on a regular basis and how long your loan term will be.

Can the Loan be Extended?

It’s important to understand if an extension would be available for your loan due to unforeseen circumstances. Establishing this with a lender before you need an extension can be less costly than needing to ask for one once you’ve taken out the loan.

Does the Lender Check Personal Credit Scores?

Most private money lenders are more interested in the details of your project and the collateral you provide than your personal credit history. Although they may review some of your finances in a loan decision, credit scores don’t play as big a role as they might for banks or other traditional lenders. It’s important to note that issues like bankruptcies within the last two years, tax liens, open judgments, fraud, and other white-collar crimes may mean you won’t be eligible for a loan.

What Does the Lender Need to Provide a Quote?

You will need to provide project details, cost estimates, market values, and other documents to get a quote for a loan. These requirements vary between lenders, so find out what you need to get started and ask how soon you can have a quote.

Get a Hard Money Loan through Winston Rowe and Associates

We hope you’ve found this guide to finding the right hard money lender helpful. Use this list when you’re evaluating lenders for your next real estate project.

Ways for Landlords to Evaluate a Self-Employed Renter

Winston Rowe and Associates

Screening Self-employed renters naturally strike fear in a landlord’s heart. Sure, we admire their moxie. But what about paying the rent? What about the ebbs and flows of business? How can you be sure a dip in sales won’t leave them weeks or months behind on paying up?

The same goes for freelancers, gig workers, and all those other professionals without standard, 9-to-5 jobs. They’re worrisome.

Fortunately, you don’t have to take a leap of faith when these tenants come calling to your rental property. There are many ways to both evaluate a self-employed renter’s income and ensure they’re a good fit for your rental all in one fell swoop. Here are five of them.

1. Ask questions

Get to know the prospective tenant. Ask them about the nature of their business, how long they’ve been operating, what types of clients they work with, and more.

You should also find out about the tenant’s credentials, past employment, and education history. How qualified are they to be doing what they’re doing? How likely is it they have the connections and skills to keep their business afloat?

2. Research the business

You should also research the business. Do they have a website? Are they registered with your state? Are they licensed and insured? These are all indications a self-employed person is legitimate. (You might even be able to check out their pricing if you find their website!)

3. Request bank statements

If you want the most accurate depiction of the tenant’s income, ask for recent bank statements (business ones, if they have a business account). Pay careful attention to the deposits — how much they are, the consistency/cadence of them, etc. — and make sure the expenditures don’t outweigh the incoming cash.

Tax returns can work for verifying income, too, but these often don’t reflect the person’s full earnings — nor are they the most updated picture of their cash flow (they are annual, after all).

4. Pay special attention to their credit report

You’ll also want to pay special attention to the tenant’s credit. Look at the balances on any credit cards, loans, or other accounts they have out, as well as the monthly payment those come with.

You should also look carefully at payment history: Have they had any problems paying bills on time or in full? Are there any collection efforts or derogatory notes in their name? Have they had any bankruptcies or foreclosures? These can all give you insights into the tenant’s financial health — as well as any struggles they may be having.

5. Talk to past landlords

Finally, be sure to ask for the contact information for any past landlords the tenant has had. Call them up, ask about their payment history and, most importantly: Find out whether the landlord would be willing to rent to them again. Typically, if a landlord says “no” here, you’re best off moving to the next candidate. (Just make sure you’re abiding by fair housing laws and not discriminating!)

One last tip

If you’re not sure whether the tenant is a good fit, you can always consider requiring a cosigner, also known as a guarantor. This is someone who agrees to vouch for the tenant financially, as well as cover the rent if they’re unable to down the line.

13 Warren Buffett Quotes For Real Estate Investors

For guidance on investing in troubled times, good times and unclear times – there’s no better person to turn to than Warren Buffet. I’ve taken 13 of his most famous quotes and listed them below. And beneath each quote, I’ve translated it into practical advice for real estate investors like you. Let’s get going…

You must ask yourself. Am I investing in a market? Or am I investing in a DEAL? If the deal is right and your exit strategy is clear, then the market conditions become much less relevant.

13 Quotes From Warren Buffett (Translated)

1. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

REI Translation: Today’s market fluctuations are your friend because they’ve scared off your competition … other investors. They’re also your friend because the fluctuations have caused there to be a flood of motivated sellers. And as any savvy investor knows, buying from motivated sellers is the only way to make it in this business.

2. “Only when the tide goes out do you discover who’s been swimming naked.”

REI Translation: Keep plenty of tools (investing techniques) in your tool belt so that you can adapt to a changing market. What worked best in 2006 doesn’t work best in today’s market. Today, we’re seeing first hand that those with only one investing strategy are taking a beating.

3. “Our favorite holding period is forever.”

REI Translation: To build true long-term wealth, you must buy and hold properties.

4. “Risk comes from not knowing what you’re doing.”

REI Translation: Those who don’t know how to properly analyze, enter, and exit real estate transactions think today’s market is risky. Those who fully understand the intricacies of creative real estate investing continue to participate and profit.

5. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

REI Translation: Now’s the time to buy. In real estate and in life, it’s almost always best to act opposite to the herd.

6. “Wide diversification is only required when investors do not understand what they are doing.”

REI Translation: Naive people are putting their money into stocks, bonds, and savings accounts right now. Smart people continue to invest in real estate, and they’re picking up more bargains than ever.

7. “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

REI Translation: If you’re concerned that you cannot sell for full value, then buy lower – at about 60% of value – and sell lower – at about 90% of value.

8. “We will reject interesting opportunities rather than over-leverage our balance sheet.”

REI Translation: Sometimes the best real estate deals are the ones you don’t make.

9. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

REI Translation: If you’re going to hold a property long term, it’s far better to buy a wonderful house at a fair price than a dump at a bargain.

10. “A public-opinion poll is no substitute for thought.”

REI Translation: Most Americans think that now is a risky time to get into real estate investing. Do they know more than you? Most likely not. Only a handful of Americans know the specific techniques for profiting in today’s market. And that’s because they read articles like this, they buy real estate investment courses, they attend their local real estate investor meetings, etc. Most Americans get their “investing tips” from the daily paper. There couldn’t be a worse source. Do you think journalists know how to wholesale houses, do short sales, take over a loan Subject 2, etc.? I think not.

11. “The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

REI Translation: Don’t worry what the masses are doing. Follow the advice of successful real estate investors, and use their techniques to profit in today’s market.

12. “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.”

REI Translation: Every deal must work on paper before it will ever work in real life.

13. “I really like my life. I’ve arranged my life so that I can do what I want.”

REI Translation: Remember, that’s what real estate investing is all about. Arranging your life so that you can do what you want to do when you want to do it.

10 Mistakes That Kill Real Estate Deals

Mistake #1: Bad Planning

When you make an offer on a house and it gets accepted and you put down your earnest money, you’re probably going to have about 2-4 weeks in between until you actually close on the property. Everything from budgets, schedules and Scopes of Work should be in place.

Mistake #2: Under Budgeting Property Repairs

It’s SO important to make sure that your contractor is on the same page as you are right from the start. You need to make sure that the product you are putting on the market is consistent with the neighborhood.

Mistake #3: Add-On’s

After you have put together your schedule, your Scope of Work and your budge, and you’ve started demo is NOT the time to decide you want to move walls around. If you decide you are going to move walls, that needs to be decided BEFORE you have finished your plumbing, mechanical, HVAC, etc.

Mistake #4: Missing the ARV

Figuring out what the correct After Repair Value (ARV) of your property is KEY. You need to figure out what sets your property apart from the other houses in the neighborhood – whether it’s got neighbors in the backyard or it’s wooded, the size of the lot, the finishes and fixtures, etc.

Mistake #5: Financing Costs

Sometimes I see when students put together their budget, they don’t factor in interest costs, paying points or paying for appraisals. They look at it like, “I’m going to buy $100,000, put $20,000 and sell it for $180,000, so that’s $60,000 in profit.”


You have to factor in your closing costs and financing costs, it eats into that $60,000.

Mistake #6: Holding Costs

This is another big mistake that newer investors make that can eat into your profits. This includes insurance, utilities, property taxes, etc.

Mistake #7: Contractors Missing Days on the Job

This is a very important thing to keep in mind – most of the time, your contractor is NOT working JUST for you, so you will constantly be fighting a battle to get them to dedicate the time to your project. Setting expectations with your contractor is very important so you don’t get behind on your schedule.

Mistake #8: Markup on Materials

It’s incredibly important to find a contractor who will estimate the cost of materials and have a clear understanding of your budget and how much you want to spend to avoid markups. Just starting out as a new investor, it might take a few

Mistake #9: Not Selling Your Property Quick Enough

You put a good property on the market, so it should sell itself and it SHOULD sell quickly. But sometimes, properties just don’t sell as fast as you expect them to. Days on market can kill a property. Make sure that when you go to sell, you are hiring an experienced, elite realtor who has been around for a while and has a great marketing plan of action.

Mistake #10: Your Buyer Flakes Out

What happens when you did an incredible job on your rehab, you list your property and it sells quickly, but then, your buyer flakes out?

People think when they get their property under contract, they are good to go and start dreaming about their profit money. DON’T make this mistake!

Real Estate Investing Mistakes Happen

Trust me, I know better than anyone that mistakes will happen regardless, especially if you are a newer investor just starting out. The biggest thing is to TRY and not to make the mistakes that cost you money. Every extra day that your rehab goes longer than planned, that’s costing you money.

Why people are getting evicted for calling 911

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In countless cities across the country, calling 911 can get you evicted. You, the caller, that is, not the person you’re calling the police on — all because of policies called “nuisance ordinances.”

In Maplewood, Missouri, one victim of domestic violence was forced out of her home after contacting the police because of the town’s particularly egregious rental restrictions.

Between September 2011 and February 2012, Rosetta Watson was assaulted several times by a former boyfriend, according to court documents, and on at least one occasion he allegedly choked her and refused to leave, forcing her to call 911.

Watson would end up calling the police on four occasions over six months, her legal complaint states. As a result, Maplewood deemed her a “nuisance” and revoked her occupancy permit, which is required to reside in the city. She ended up moving to St. Louis, where her abuser attacked her again; now terrified of calling the police, she took herself to the hospital.

The American Civil Liberties Union (ACLU) filed suit on Watson’s behalf against Maplewood, contending that its nuisance ordinance that penalizes people for requesting emergency services is unconstitutional. The city settled the case in September 2018 to the tune of $137,000 and promised to change its ordinance to adopt “broad protections for victims of crimes or those who seek emergency assistance” and keep the ACLU looped in on nuisance enforcement, among other things.

“I thought calling 911 would help stop the abuse, but instead Maplewood punished me,” Watson said in a statement. “I lost my home, my community, and my faith in police to provide protection.”

She’s not alone. While Maplewood’s specific law is somewhat unique — requiring its residents to obtain occupancy permits — the principle behind it is not. Hundreds of other jurisdictions across the country have “crime-free” policies of some kind on the books. They differ in exact wording, but the intent is to deputize landlords as police officers but with no judge, jury, or due process for tenants. Cities looking to punish or get rid of people they see as “nuisances” without having to charge them with a specific crime implement these policies, with the effect of criminalizing often legal behavior.

In practice, they’re often adopted to keep out minorities, lower-income people, and other marginalized groups. When Bedford, Ohio, was considering adopting one after an influx of Black residents, one local said at a city council meeting that he supported the ordinance because he didn’t want Bedford turning into another “Maple Heights and Warrensville Heights” — two majority-Black cities nearby.

Some nuisance ordinances and “crime-free” laws will designate a property a public nuisance, usually after police are called multiple times to respond to incidents in the same place. Under these laws, landlords are forced to act as an arm of law enforcement and face fines and other punitive measures if they are unable or unwilling to abate the nuisance. Landlords are sometimes pressured to evict tenants who are in any way involved with nuisance activity, regardless of whether they are the victim, the perpetrator, or simply associated with the victim or perpetrator of an alleged crime.

Another form these policies take is through “crime-free leases,” with addendums in rental leases that would allow or mandate eviction after sometimes just a single instance of alleged nuisance activity. Some cities mandate the use of these leases, while others incentivize them. These lease provisions are often enforced by the police, which pressure landlords to evict “undesirable” tenants.

However, the police have a great deal of discretion in when and how they penalize potential “nuisances.” Researchers have shown that this discretion has meant poorer residents, women, and people of color bear the brunt of enforcement.

“Crime-free” housing policies have proliferated.

Quantifying how many nuisance laws exist across the country and how often they lead to evictions is exceedingly difficult. Many localities don’t have their laws uploaded to the internet, and there’s no comprehensive way to search for “crime-free” clauses in leases.

In Ohio, researchers have found nearly 50 of these laws, and in Illinois, a self-described non-comprehensive list numbered roughly 100. Some researchers and advocates say nearly 2,000 localities have them, but it’s unclear how this number is being tabulated; it appears to originate from a group advocating in favor of such policies, an Arizona nonprofit called the International Crime Free Association.

In a Michigan Law Review article, Deborah Archer, a law professor at New York University, traces how these laws were adopted as part of the “expanding web of zero-tolerance policies” that criminalize “relatively non-serious behavior or activities” — most often among Black Americans — without having to find anyone guilty of any crime.

Crime is a real problem. People deserve to feel safe and secure in their communities. But there is a justice system for a reason — if someone is committing a crime, then police ought to arrest them and convict them in a court of law. Americans have constitutional rights that are meant to protect them from facing punishments without due process.

Further, the implementation of these laws reveals that often this isn’t about limiting criminal activity, it’s frequently about the type of person people view as undesirable neighbors.

“They want an extrajudicial process to get rid of [nuisances],” Park explained.

A comprehensive report authored by researchers at Cleveland State University and the ACLU of Ohio found that these laws are usually adopted when “residents express frustration with their neighbors’ behaviors and often perceive the city and police response to their complaints to be inadequate.” These frustrations they note are rarely to do with serious crimes but rather “annoying or rude behavior and their wish for a certain community character.”

Robert McNamara is a senior attorney at the Institute for Justice, which has sued Granite City, Illinois, over its nuisance ordinance. He told Next City that he believes these laws are “part of a broader contempt that government officials have for renters. … A lot of cities are hostile towards rental properties and their ‘less desirable’ occupants.”

Several researchers have pointed to the trend of cities adopting these ordinances as a response to demographic change, not burgeoning crime. Archer points to the example of Faribault, Minnesota, where the Black population rose 214 percent between 2000 and 2010, which led to residents complaining about an increase of crime, including drug activity and theft. However, Archer notes that “police reported that records did not support any claims of an increase” and that the chief attributed issues to “cultural differences.”

Mark Talbot, the chief of police in Norristown, Pennsylvania, he hadn’t seen “any evidence that this is a reasonable method of crime reduction.” He added that these laws “run counter to our mission. What about this is protecting? What about this is serving?”

Talbot has advocated for the elimination of these policies both in the cities where he has served and in other jurisdictions, citing reduced community trust in police: “Any police department will say we want people to call us when there is a problem. … You can’t both be mad when nobody calls and mad when they do call.”

Park, who has been leading the charge against nuisance ordinances from the ACLU, said that she has “never seen and there’s never been any studies or data … that show that somehow these ordinances make their communities safer.”

Nuisance ordinances are often in violation of civil rights laws and the Constitution

Challenges to nuisance ordinances fall into a few buckets: Fair Housing Act (FHA) violations, First Amendment violations, due process violations, and violations of the Violence Against Women Act. By and large, these challenges succeed.

“I can’t recall any instances where I’ve heard the challenges [to nuisance laws] defeated,” said Kris Keniray, associate director of the Fair Housing Center for Rights and Research.

Vox couldn’t confirm that challenges have been 100 percent successful, but the case of Somai v. City of Bedford exemplifies many of the ways nuisance ordinances have been found to violate the Constitution and various laws.

The complaint, filed by Beverley Somai and the Fair Housing Center for Rights and Research, details how the ordinance was implemented in Bedford — and that residents worried about the “mixture of the community,” as one man put it during the 2005 city council meeting where officials would unanimously adopt a nuisance ordinance.

In response, the mayor noted that “we believe in neighborhoods, not hoods” and that students walking down the streets “are predominantly African American kids who bring in that mentality from the inner city where that was a gang-related thing by staking their turf. We are trying to stop that.”

Comments like these bolstered the plaintiffs’ claim that Bedford’s law violated the Fair Housing Act’s protections against racial discrimination. Their argument is one the Department of Housing and Urban Development itself has clarified for localities, noting in 2016 guidance that a local government would be in violation of the FHA if their policies have “an unjustified discriminatory effect, even when the local government had no intent to discriminate.” The department specifically calls out the “selective use of nuisance or criminal conduct as a pretext for unequal treatment of individuals based on protected characteristics.”

This isn’t unique to Bedford’s policy: Sociologists Matthew Desmond and Nicol Valdez studied nuisance citations in Milwaukee over a two-year period and found clear signs of disparate treatment. Of the “503 properties deemed nuisances, 319 were located in black neighborhoods, compared to 18 in white neighborhoods,” they write. They also found that this was not because residents in these places were placing more 911 calls than other places.

The Bedford plaintiff also argued that the nuisance ordinance interfered with “Ms. Somai’s First Amendment right to petition her government for redress of grievances.” Essentially, the right to call 911 is protected by the Constitution.

This case also centered due process rights. Nuisance laws generally do not afford due process for tenants, as the legal dispute is between the city and the landlord — like an unmanicured lawn or a fallen tree. Often, tenants have no idea why they’re being evicted or are unaware that the police are enforcing a nuisance law against their landlord. And no conviction or even arrest is necessary for an individual to lose their home under these laws.

Somai’s complaint noted that Bedford’s nuisance ordinance “does not require any notice to tenants … nor does it give tenants an opportunity to contest” the allegations against them.

The suit highlights the protections provided by the Violence Against Women Act, which the complainants write “express a clear federal policy that is inconsistent with … the City’s policy of penalizing survivors of domestic violence.”

As is often the case with these types of lawsuits, the city settled, agreeing to repeal the law within 30 days and pay $350,000 in damages.

With nuisance ordinances, victims of violent crime rarely seem to be the object of concern. Rather it’s the irritation they may cause their more affluent neighbors that worries enforcers. Desmond and Valdez document the case of Sheila M., who had called the police several times after being “beaten” repeatedly. Her landlord outlined his plan on how to “abate a nuisance” in an email to the Milwaukee Police Department:

“We suggested she obtain a gun and kill him in self-defense, but evidently she hasn’t. Therefore we are evicting her.”

Free Business And Real Estate Investing eBooks

Free Books Business Real Estate Investing

Winston Rowe & Associates

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Welcome to Winston Rowe and Associates knowledge blog, scroll down to the right for posts about commercial real estate.

This is a list of free books about real estate investing, commercial real estate financing and business strategy.

We’re always on the lookout for great free books so bookmark this blog and check back for monthly updates.

These links are not affiliate marketing links, just publications that we feel may add value to people and businesses.

Commercial Real Estate Finance

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

Real Estate Investing Articles

This is a link to1226 real estate investing articles written by industry veteran’s.

25 Productivity Tips for Successful Business Owners


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5 Benefits Of Investing In Apartments

Investors, You know the saying, “What is one man’s garbage is another man’s treasure.” Or something like that…

I guess that is why companies like eBay do so well is because this is true more often than not. But what about those ‘treasures’ that you have, right now, that are collecting dust?

I will give you some of the ‘treasures’ I have that are collecting dust in a BIG, BIG way –

About 4 magazine subscriptions.  I get them in the mail and put them in a pile.  They never seem to move from the pile!

Newspaper subscriptions.  I have a couple of these too that see the recycle bin many days before I read them.

Fitness equipment.  I have a couple pieces of fitness equipment in our exercise room that I have not used in years!  Not even as hangars!

Appliances.  I was fishing around for something to eat over the weekend and found our bread maker. I don’t think we have actually used the bread maker since 1999.

And there is more but I won’t bore you. But, I bet you can relate huh?

But there ARE some treasures that I do like. Treasure investment properties like the apartments projects that I will be getting into here in 2014 and the ones that I currently have.

Benefits of Apartment Investing

The nice thing about apartment investment properties is not only the return of course but all of the other intangibles that never collect dust such as:


Equity Build Up

Income Tax Savings. A lot of it!

IRA/401 (k) Investment Options

 And of course, cash flow

When you think about it apartments like this really work overtime because it is really four or five investments working together as one.Day and Night, Hot or Cold, Spring or Fall.

And when the struggling economy sends out another ‘danger signal’ people will still need a place to live won’t they. Again…an investment working overtime.

So, my goal is to add more investment treasures like these in 2014 to my portfolio and write about them so you can add them to your treasure chest as well.

Let’s focus on investments that won’t collect any dust.  Get rid of those!

And be motivated to get out of those investment that you now have that you know have been collecting dust – sometimes for years. Investors be aware it takes cash flow and net worth improvements to get you where you want to be financially.

Not dust!

So, stay with me and get all that dust out of your life – once and for all!

Apartments are continuing to be the best investment alternative for many investors – even in a dusty economy!

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How Do Commercial Construction Loans Work

Winston Rowe and Associates Commercial Construction Loans With No Upfront Fees

What are construction loans?

A construction loan is a type of bank-issued short-term financing, created for the specific purpose of financing a new home or other real estate project. A traditional mortgage, also called a permanent loan, will help you buy an existing house. However, if you need to build a new house from the ground up, especially if you also need to purchase the raw land, that’s where a construction loan can help.

How do construction loans work?

The loan can be applied for by anyone who is investing their time and money in construction or related expenses. An individual homeowner, a contractor, or a small business owner can use construction loans to finance their construction project. If you already own the land, the equity that you have in that property can be used as your down payment for your construction loan.

Many borrowers ask how a construction loan turns into a mortgage. After the house is complete and the term of the loan ends (usually only one year), the borrower can refinance the construction loan into a permanent mortgage. Alternatively, the borrower can apply for a new loan (often called and “end loan”) to pay off the construction loan.

Does the borrower make monthly payments on a construction loan? Yes, however interest payments on this loan might only be required while the construction project is still underway. Unlike a lump sum loan, construction loans are similar to a line of credit, so interest is based only on the actual amount you borrow to complete each portion of a project rather than all at once. Some construction loans may require the balance to be paid off entirely by the time the project is complete.

More than just for the actual building, a construction loan can also be used to pay for equipment used in construction, building materials, or for hiring employees.

Here are some uses and things to know about construction loans:

New construction: If you are an individual or small business owner who is looking for funding to build a new home for yourself or a client, then you can apply for a short-term construction loan. This type of loan can be used to pay for the construction of new buildings. Construction loans have high-interest rates owing to the risk involved.

Builders or homeowners who want to build custom homes generally look to a construction loan. After completing the project, you can refinance the loan into a mortgage, or you can repay it by taking a new loan from another financial institution.

Expect a big down payment: Construction loans generally require a large down payment of around 20-25% of the total cost of the project, usually the cost of construction and mortgage.

Thorough application process: When you apply for a construction loan, you’ll be asked to provide the details of your construction project, including like the total amount of funding required, details about the builder, a detailed project timeline, the floor plans or construction drawings, the cost of materials, and the cost of labor.. (We’ll talk about applying for a construction loan in more detail later.)

Look out for paperwork: Until recently, it was hard to find lenders offering construction loans online. If you know you want to apply for a construction loan, you might find it easiest to visit your local bank or regional credit unions and ask for information in person. These institutes will be aware of the local property and construction market, and should be able to help you create a plan for your application.

Types of construction loans

Construction Mortgage Loans: This is a loan you can use to finance the purchase of land, or construction of a home on land you already own. These loans are usually structured so that the lender pays a percentage of the completion costs and you, the builder or developer, pay the rest.

During construction, the lender will release your funds in a series of payments, called “draws.” Typically, the lender will require an inspection between draws to check that the project is proceeding as planned. As the borrower, you are responsible for paying interest on the amount of funds you use.

This is different from a term loan, where you get a lump sum payment at once, and then pay back interest on the whole amount. Once your construction is complete and your interest paid, you’re responsible for repaying the entire loan amount by the due date. Generally, construction loans have short terms because they reflect the amount of time it would take to build the project; a year-long term is common.

Construction-to-Permanent Loans: Also called the CP loan, construction-to-permanent loans are another option for financing the building of a new home. CP loans offer some extra convenience to borrowers by combining two types of loans in a single process.

During construction, if you have a construction-to-permanent loan, you only pay interest on the outstanding balance, at an adjustable rate determined by the lender and pegged to the prime rate. The prime rate is a widely-used benchmark based on the federal funds rate, which is set by the Federal Reserve, meaning that if the Fed raises rates, then the interest rate on your construction-to-permanent loan will rise, too.

When the construction phase is over, the C2P loan converts into a standard 15- or 30 year mortgage where you pay principal and interest.

An advantage of construction-to-permanent loans for small business owners and homeowners is that instead of having to get a loan for the construction phase and then a second for financing the finished project, you can get two loans at once. In this scenario, you only close once and pay one set of closing costs.

Commercial Construction Loans: If you’re thinking bigger and planning to construct a multi-family home or apartment building, high-rise, multi-unit retail center, commercial office building, or other type of larger project, then you should probably be looking for a commercial construction loan.

Lenders for modern commercial construction loans for apartments and similar big projects are extremely risk-avoidant, and will expect a developer to shoulder most of the risk by covering up to 90% of the cost of the project. If you’re involved with this type of commercial project, you’ll need to be prepared with a lot of cash on hand to fund the construction yourself.

Why get a construction loan?

Purchase Equipment and Materials: You can use a construction loan to buy material and equipment that will be used in the construction of the new home.

Expanding a Company’s Facility: If you are a small business owner with a physical location and you need to build a new office or remodel an existing one, then you can use construction loans to finance your construction project.

Hiring and Training Employees: You can use the funds from a construction loan to hire new employees for construction purposes. You can also finance education and training costs for those employees with your construction loan.

Overcoming Damage or Disaster Expenses: If your office or commercial property is damaged by unforeseen circumstances like an earthquake or other disaster, you can use construction loans to make necessary repairs.

How can you get a construction loan?

Is it harder to qualify for a construction loan? Yes, construction loans are harder to get than a typical mortgage. Most lenders consider construction loans risky (because there is no asset to secure the loan), so you’ll face some stiff requirements if you decide to apply. Here’s what many lenders require for a construction loan:

Down payment: To get a construction loan, you’ll need to make a down payment of 20% or more of the cost of the total project. This means that you will need to be prepared to start the project with your own funds or assets before a lender will agree to loan more. If you already own the land, for example, it’s likely that you will be able to use that toward the down payment amount.

Talk to your lender about this. The particular amount of your down payment will depend on the cost of your project, the land, and what you plan to do with the funds. Lenders require high down payments as a way of making sure you’re invested in the project and won’t vanish if things go wrong during construction.

Strong personal credit: Anytime you apply for a construction loan, you’ll need to provide the lender with your personal credit history–even if you are applying as a small business. The lender will almost definitely want to see your personal FICO score and your business credit history, too.

Financial documents: Typically, a prospective lender will analyze your current and past debt and payment history, as well as any other loans or liens you may have on your property. Whether this loan is for your own home, or for a small business construction project, you’ll be asked to provide financial statements, tax returns, and proof of other assets.

Good reputation: Whether you are the builder, or you are working with a builder, know that the lender will scrutinize the builder’s reputation. Any public information is fair game for making this judgement call: vendor and subcontractor reviews, online reviews, and previous work history.

If you are working with a builder, they should not hesitate to provide evidence of their good reputation, along with the detailed project plans and cost estimates you’ll also need. If you need help finding a qualified builder, check out one of the many National Association of Home Builders chapters closest to you. A trusted local builder with a solid history of successfully completed projects will have an easier time getting a vote of approval from a financial institution in the form of a construction loan.

Specific plans: To qualify for a construction loan, you must have specific and detailed building plans, construction contracts, and cost estimates ready.

Appraisal: It’s challenging to appraise something that does not exist yet! Of course, there are experts who do just that every day. Construction lenders work with appraisers to analyze your project when you apply for a loan. They review the specifications of your construction project and compare it with other existing constructions of similar specifications. They then draw conclusions regarding the possible worth of the construction in the future.

It is very important to get a good appraisal to improve your chances of getting a construction loan approved. You can get an independent appraisal if you want, but your lender will most likely insist on conducting their own.

How do you qualify for an FHA construction loan?

If you have less-than-perfect credit, you may qualify for a construction loan backed by the Federal Housing Administration. FHA construction loans have lower qualification minimums than most banks. As of October, 2020, these FHA requirements were: FICO® score at least 580 = 3.5% down payment FICO® score between 500 and 579 = 10% down payment MIP (Mortgage Insurance Premium ) is required Debt-to-Income Ratio < 43% The home must be the borrower’s primary residence Steady income and proof of employment

First steps toward construction financing

Before making decisions about your potential construction loan, we recommend that you consider a wide range of options. Banks, online lenders, brokers, and subcontractors can each help you through the difficult and stressful process of completing your construction project. On the other hand, if you choose the wrong partners, they can add delays and complexity.

Here are a few more recommendations for getting started:

Shop Around for the Right Lender: You can look around for a lender that will offer all the options that you need. Some lenders will not provide construction loans while some lenders will provide loans with limited options that you do not need. Check out your local banks and credit unions to learn what type of construction financing they offer, and which options are available to you.

A broker is a professional and expert in construction loans, and an experienced one can save you a lot of hassle. They will understand your requirements, explain to you the best options that you have given your budget, and then shop around for the right lender. They may be able to get you better rates than you can negotiate yourself. Brokers understand the financial side of the construction loan as well as the construction side and both their limitations.

Confirm the Lender’s Experience: This might sound obvious, but make sure to choose a lender with experience in construction financing. If their past experience isn’t clear, you can ask them about past construction projects they’ve financed. You can also ask for references of other developers they have helped.

Tap your network and your local community: If you’re looking for help with a construction loan, look locally. Your personal network is always a good place to look for trustworthy recommendations. If you have a good relationship with a local banker or financial institution, that is also a great place to start.

Which bank is the best for a construction loan?

Your choice of the best bank depends on a number of factors, including your borrower profile, who offers a construction loan in the state where you live, your credit rating, and how much money you have to put down on a construction loan.

Winston Rowe and Associates Commercial Construction Lending With No Upfront Fees.

How to Write a Real Estate Business Plan

Winston Rowe and Associates No Upfront Fee Commercial Real Estate Lending

Success in the real estate investing industry won’t happen overnight, and it definitely won’t happen without proper planning or implementation. For entrepreneurs, a real estate investing business plan can serve as a road map to all of your business operations. Simply put, a real estate business plan will serve an essential role in the formation of your investing career.

Investors will need to strategize several key elements to create a successful business plan. These include future goals, company values, financing strategies and more. Once complete, a business plan can create the foundation for smooth operations and outline a future with unlimited potential for your investing career. Keep reading to learn how to create a real estate investment business plan today.

What Is A Real Estate Investing Business Plan?

A real estate business plan is a living document that provides the framework for business operations and goals. A business plan will include future goals for the company and organized steps to get there. While business plans can vary from investor to investor, they will typically include planning for one to five years at a time.

Drafting a business plan for real estate investing purposes is, without a doubt, one of the single most important steps a new investor can take. An REI business plan will help you avoid potential obstacles while simultaneously placing you in a position to succeed. It is a blueprint to follow when things are going according to plan, and even when they veer off course. If for nothing else, a real estate company business plan will see to it that investors know which steps to follow to achieve their goals. In many ways nothing is more valuable to today’s investors. It is the plan, after all, to follow the most direct path to success.

8 Must-Haves in A Real Estate Business Plan

As a whole, a real estate business plan should address a company’s short and long-term goals. Though in order to accurately portray a company’s vision, the right business plan will require more information than a future vision. A strong real estate business plan will provide a detailed look at the ins and outs of a company. This can include the organizational structure, financial information, marketing outline and more.  When done right it will serve as a comprehensive overview anyone who interacts with your business, whether internally or externally.

That said, creating an REI business plan will require a persistent attention to detail. For new investors drafting a real estate company business plan may seem like a daunting task, and quite honestly it is. The secret is knowing which ingredients must be added (and when). Below are seven must-haves for a well-executed business plan:

Outline the company values and mission statement.

Break down future goals into short and long term.

Strategize the strengths and weaknesses of the company.

Formulate the best investment strategy for each property and your respective goals.

Include potential marketing and branding efforts.

State how the company will be financed (and by whom).

Explain who is working for the business.

Answer any “what ifs” with backup plans and exit strategies.

These components are what matter the most, and a quality real estate business plan will delve into each category to ensure maximum optimization.


A company vision statement is essentially your mission statement and values. While these may not be the first step in planning your company, a vision will be crucial to the success of your business. Company values will not only guide you through investment decisions, but will also inspire others to work with your business time and time again. They should align potential employees, lenders and possible tenants with the motivations behind your company.

Before writing your company vision, think through examples you like both in and out of the real estate industry. Is there a company whose values you identify with? Or, are there mission statements you dislike? Use other companies as a starting point when creating your own set of values. Feel free to reach out to your mentor or other network connections for feedback as you plan. Most importantly, think about the qualities you personally value and how those can fit into your business plan.


Goals are one of the most important elements in a successful business plan. This is because not only do goals provide an end goal for your company, but they also outline the steps required to get there. It can be helpful to think about goals in two categories: short term and long term. Long term goals will typically outline your future plans for the company. These can include ideal investment types, profit numbers and company size. Short term goals are the smaller, actionable steps required to get there.

For example, one long term business goal could be to land four wholesale deals by the end of the year. Short term goals will make this more achievable by breaking it into smaller steps. A few short-term goals that might help you land those four wholesale deals could be to create a direct mail campaign for your market area, establish a buyers list with 50 contacts, and secure your first property under contract. Breaking down long term goals is a great way to hold yourself accountable, create deadlines and accomplish what you set out to.

SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis involves thinking through each of these areas as you evaluate your company and potential competitors. This framework allows business owners to better understand what is working for the company and identify potential areas for improvement. SWOT analyses are used across industries as a way to create more actionable solutions to potential issues.

To think through a SWOT analysis for your real estate business plan, first identify your company’s potential strengths and weaknesses. Do you have high quality tenants? Are you struggling to raise capital? Be honest with yourself as you write out each category. Then, take a step back and look at your market area and any competitors to identify threats and opportunities. A potential threat could be whether or not your rental prices are in line with comparable properties. On the other hand, a potential opportunity could be to boost the amenities offered at your property to be more competitive in the area.

Investment Strategy

Any good real estate investment business plan requires the ability to implement a sound investment strategy. If for nothing else, there are several exit strategies a business may execute to secure profits: rehabbing, wholesaling and renting — just to name a few. This is where investors will want to analyze their market and determine which strategy will best suit their goals. Those with long-term retirement goals may want to consider leaning heavily into rental properties. However, those without the funds to build a rental portfolio may want to consider getting started by wholesaling. Whatever the case may be, now is the time to figure out what you want to do with each property you come across. It is important to note, however, that this strategy will change from property to property. Therefore, investors need to be able to determine their exit strategy based on the asset and their current goals. The reason this section needs to be added to a real estate investment business plan is because it will come in handy once a prospective deal is found.

Marketing Plan

While marketing may seem like the cherry on top of a sound business plan, marketing efforts will actually play an integral role in the foundation of your business. A marketing plan should include your business logo, website, social media outlets and any advertising efforts. Together these elements can build a solid brand for your business, which will help you build a strong business reputation and ultimately build trust with investors, clients and more.

To plan your marketing, first think about the ways your brand can illustrate the company values and mission statement you have created. Consider the ways you can incorporate your vision into your logo or website. Remember, in addition to attracting new clients, marketing efforts can also help maintain relationships with existing connections. For a step by step guide to drafting a real estate marketing plan, be sure to read this guide.

Financing Plan

Writing the financial portion of a business plan can be tricky, especially if you are just starting your business. As a general rule, a financial plan will include the income statement, cash flow, and balance sheet for a business. A financial plan should also include short- and long-term goals regarding the profits and losses of a company. Together, this information will help when making business decisions, raising capital and reporting on business performance.

Perhaps the most important factor when creating a financial plan is accuracy. While many investors want to report on high profits or low losses, manipulating data will not boost your business performance in any way. Come up with a system of organization that works for you and always ensure your financial statements are authentic. As a whole, a financial plan should help you identify what is and isn’t working for your business.

Teams & Small Business Systems

No successful business plan is complete without an outline of the operations and management. Think: how your business is being run and by whom. This information will include the organizational structure, office management (if any), and an outline of any ongoing projects or properties. Investors can even include future goals for team growth and operational changes when planning this information.

Even if you are just starting out, or have yet to launch your business, it is still necessary to plan your business structure. Start by planning what tasks you will be responsible for, and look for areas you will need help with. If you have a business partner, think through each of your strengths and weaknesses and look for areas you can best complement each other. For additional guidance, set up a meeting with your real estate mentor. They can provide valuable insights to their own business structure, which can serve as a jumping off point for your planning.

Exit Strategies & Back Up Plans

Believe it or not, every successful company out there has a backup plan. Businesses fail every day, but by creating a backup plan investor can position themselves to survive even the worst-case scenario. That’s why it’s crucial to strategize alternative exit strategies and back up plans for your investment business. These will not only help you create a plan of action if something does go wrong, but will also help you address any potential problems before they happen.

This section of a business plan should answer all of the “what if” questions a potential lender, employee, or client might have. What is a property remains on the market for longer than expected? What if a seller backs out before closing? What if a property has a higher than average vacancy rate? These questions (and many more) are worth thinking through as you create your business plan.

The impact of a truly great real estate business plan can last for the duration of your entire career, whereas a poor plan can get in the way of your future goals. The truth is: a real estate business plan is of the utmost importance, and as a new investor it deserves your undivided attention. Again, writing a business plan for real estate investing is no simple task, but it can be done correctly. Follow our real estate investment business plan template to ensure you get it right the first time around:

Write an executive summary that provides a bird’s eye view of the company.

Include a description of company goals and how you plan to achieve them.

Demonstrate your expertise with a thorough market analysis.

Specify who is working at your company and their qualifications.

Summarize what products and services your business has to offer.

Outline the intended marketing strategy for each aspect of your business.

Executive Summary

The first step is to define your mission and vision. In a nutshell, your executive summary is a snapshot of your business as a whole, and it will generally include a mission statement, company description, growth data, products and services, financial strategy, and future aspirations. This is the “why” of your business plan, and it should be clearly defined.

Company Description

The next step is to examine your business and provide a high-level review on the various elements, including goals and how you intend to achieve them. Investors should describe the nature of their business, as well as their targeted marketplace. Explain how services or products will meet said needs, address specific customers, organizations or businesses the company will serve, and explain the competitive advantage the business offers.

Market Analysis

This section will identify and illustrate your knowledge of the industry. It will generally consist of information about your target market, including distinguishing characteristics, size, market shares, and pricing and gross margin targets. A thorough market outline will also include your SWOT analysis.

Organization & Management

This is where you explain who does what in your business. This section should include your company’s organizational structure, with details the ownership, profiles on the management team and their qualifications. While this may seem unnecessary as a real estate investor, the people reading your business plan may want to know who’s in charge. Make sure you leave no stone unturned.

Services or Products

What are you selling? How will it benefit your customers? This is the part of your real estate business plan where you provide information on your product or service, including benefits it has over competitors. In essence, it will offer a description of your product/service, details on its life cycle, information on intellectual property, as well as research and development activities, which could include future R&D activities and efforts. Since real estate investment is more of a service, it’s critical for beginner investors to identify why their service is better than others in the industry. It could include experience.

Marketing Strategy

Generally speaking, a marketing strategy will encompass how a business owner intends to market or sell their product and service. This includes a market penetration strategy, plan for future growth, channels of distribution, and a comprehensive communication strategy. When creating a marketing strategy for a real estate business plan, investors should think about how they plan to identify and contact new leads. They should then think about the various options for communication: social media, direct mail, a company website, etc. The marketing portion of your business plan should essentially cover the practical steps operating and growing your business.

Winston Rowe and Associates is a national consulting firm you can review them on line at www.winstonrowe.com

How To Calculate Loan To Cost For A Commercial Mortgage

Calculating loan to cost ratios for commercial real estate loans.

Loan to cost (LTC) compares the financing amount of a commercial real estate project to its cost. LTC is calculated as the loan amount divided by the construction cost.

Some examples of costs include purchase price, materials, labor, and insurance costs.

Other costs, depending on the scope of the project could include soft costs, like architectural plans and impact fees or even finance costs like interest and fees.

The formula to calculate LTC is as follows:

LTC = Loan Amount / Cost

A higher LTC result in higher risk for the lender than would a lower LTC. Since lending is risk based, higher leverage loans call for more conservative pricing and terms.

Commercial property loans with a lower LTC command more competitive structure with lower rates and more favorable loan terms.

The loan to cost ratio is essential in determining the qualification for a loan, other factors lenders pay close attention to include location, borrower financial strength, pro forma income and expenses, and asset class.

Winston Rowe and Associates prepared this article. They are a national consulting firm specializing in the due diligence and preparation of commercial loan proposals to submit to their network of capital sources.

They also have a free book “Commercial Real Estate Finance” available on their website.

You can contact them at 248-246-2243 or visit them online at https://www.winstonrowe.com

Supporting Document List For A Commercial Mortgage Purchase

This is the list of supporting documents for the purchase financing of a proposed commercial real estate loan.  

Upon completion of Winston Rowe & Associates initial due diligence review. The financing proposal will be submitted to One or more of our capital sources for consideration and possible financing.

You will be required to complete additional capital sources [lender] forms, applications, documents or additional supporting documents not listed here.

Please review our website concerning submission procedures, policies and services at http://www.winstonrowe.com

Purchase Commercial Loan General Submission Procedures: 

Winston Rowe & Associates and its capital source(s) utilizes a global approach during the due diligence investigation [review].

All files must be submitted electronically via email as an attachment. Named properly.

Incomplete loan files will not be processed.

If there are material misrepresentations made by the client or the client’s representative, the transaction will be terminated.

Borrowers must make themselves available to underwriting to answer questions pursuant to the material facts of the transaction(s).

Document files need to be properly named, with headers within each document identifying contents, date created, property and borrower.

The nomenclature to use for files is [property name, document type, date submitted] for example Property Name – Document Type – Date 

Business Financial Supporting Documents: 

Bank Statements for Proof and Source of Down Payment Funds

Business Profit & Loss 3 Years

Income & Expense Statement 3 Years

36 Months Detailed Business Bank Statements

Debt Schedule

Property Supporting Documents: 

Purchase agreement

Schedule of tenant leases 

Copies of tenant leases 

Property Title

Schedule of Units with Square Foot Per Unit Excel Format 

Schedule of all major improvements to be made with cost breakdown to subject property 

Exterior Photos of Subject Property Photos of Parking Lot, Street view 

Interior Photos of Subject Property

Subject Property Tax Documents with Amounts

Insurance Binder with Annual Costs

12 Months Utilities

Property Income & Expense Statement YTD 12 Months Trailing

Use of Proceeds in an Excel Format for Improvements to Property

Guarantor Supporting Documents: 

4506 (T) executed 

Tri merge credit report from http://www.creditchecktotal.com for all investors

Government issued photo ID copy – Front and Back 

Full detail personal and business bank statements YTD for 36 Months YTD

Personal financial statement for all guarantors and investors YTD for 12 Months YTD

3 Years Federal and State Income Tax Returns for all Guarantors and Investors

Articles of Incorporation 

Schedule of Real Estate Owned

Schedule of Corporations / Businesses Owned

Debt Schedule

Winston Rowe & Associates Forms:

You are required to complete the following forms.

This was sent to you as an excel workbook.

Personal Financial Statement

Income & Expense Statement

Real Estate Owned

Businesses / Corporations Owned

Rent Roll

Schedule of Tenant Leases

Improvement to Subject Property

Business Debts to be Consolidated

Debt Schedule

How to Find an Apartment Loan

Contact Winston Rowe and Associates for No Upfront Fee Apartment Loans

Buying an apartment building isn’t the same as purchasing smaller investment properties. The payoff can be higher but the risk may be higher.

A multifamily apartment building can have excellent income potential. It might generate consistent cash flow and grow your real estate portfolio. Plus, when you have a vacancy (or even a few vacancies), they likely won’t impact your bottom line like a vacancy in a single-family rental property would.

On the other hand, apartment complexes aren’t very liquid. They can take time to resell if the need arises. As a result, lenders often consider apartment loans as higher risk.

Due to the increased risk, qualifying for apartment building loans can be a financial challenge. You’ll generally need a lot of money upfront in the form of a large down payment and significant reserves. Lending standards, however, may be easier to satisfy. Commercial lenders care more about the value of the property than your personal credit qualifications.

5 Types of Apartment Loans

Despite the risk, there are multiple ways to finance the purchase of an apartment building. You’ll probably have several options to choose from when you start searching for commercial loans for a multi-family apartment complex.

Having multiple loan options is good. It means you don’t have to settle for the first offer you find. Instead, you can take your time to look for the best offer available for your situation.

Below are five common types of multifamily apartment loans. We’ve broken down the highlights of each to help you compare your options.

Fannie Mae Apartment Loans

Fannie Mae’s Multifamily platform has numerous loan programs that might help you in your search for affordable apartment loans. You can borrow as little as $750,000 with loan terms potentially as long as 30 years.

Fannie Mae’s multifamily financing options include:

Conventional Loans

Specialty Loans (Affordable Loans, Green Financing, Seniors Housing, etc.)

You’ll typically need a down payment of 20% or larger to borrow. Because the federal government backs the loans, they represent less risk for lenders. Therefore interest rates tend to be competitive when compared with other financing options. Still, you should always shop around for the best rate and terms to be sure.

Freddie Mac Apartment Loans

Through its Optigo program, Freddie Mac provides several options to consider when you need multifamily housing loans. Whether you want to borrow $1 million or $100 million to purchase a real estate investment, Freddie Mac might have a solution that can help.

Freddie Mac’s multifamily Optigo loan offerings include:

Conventional Loans

Small Balance Loans

Targeted Affordable Housing

Seniors Housing

If you qualify for an Optigo loan for a purchase or refinance, you can generally expect competitive interest rates compared with other apartment building financing options. The federal government backs these loans as well — reducing the lender’s risk.

Your repayment terms on some of the program’s fixed-rate loan options could potentially extend as long as 30 years. In general, you’ll need a sizeable down payment (20% or more) to qualify for funding.

Bank Balance Sheet Apartment Loans

Bank balance sheet apartment loans are another type of commercial financing you can use to purchase an apartment building. However, banks don’t package up and sell these loans to a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac after closing. Rather, the loans are kept in house and sit on the bank’s balance sheet.

Balance sheet loans are available from many traditional banks, but online lenders and life insurance companies may offer them as well. The loans are often full recourse loans, which means you can be held personally liable for the debt if something goes wrong. In other words, the lender may be able to seize your personal assets to try to recuperate its losses.

Your personal credit score may also be reviewed as part of the application process. So, a better credit rating might help you land a better deal on financing. Need to review your credit? Nav’s platform gives you access to your personal and business credit information in one spot.

Expect to pay at least 20% down for a bank balance sheet apartment loan. However, you might need to provide a more significant down payment depending on the lender’s requirements.

FHA Apartment Loans — Existing Properties

If you’re looking to purchase or refinance an existing apartment building with five or more units, an FHA Multifamily loan could help. FHA 223(f) loans are insured by the U.S. Department of Housing and Urban Development (HUD). HUD lenders package and sell the loans on the secondary mortgage market after closing, allowing for better interest rates and terms for borrowers.

Interest rates can be competitive on FHA apartment loans, but you should weigh other costs and factors too. For example, the funding process has a reputation for being slow and tedious with strict qualification standards.

Repayment terms on FHA apartment loans may extend as long as 35 years. The loans are non-recourse, so your risk is lower in the event of a default. However, mortgage insurance is typically required on these loans, so be sure to factor that into your cost comparisons.

The minimum loan amount for an FHA apartment loan starts at $3 million. For new purchases, a lender may be willing to finance up to 83.3% of the purchase price. This could result in a smaller down payment amount for you, the borrower.

Apartment Construction Loans

Do you want to rehabilitate an apartment building or build a new one from scratch? If so, you’ll need to consider apartment construction loan options instead of traditional multifamily commercial financing.

Conventional Construction Loans, backed by Fannie Mae or Freddie Mac, may have a program to help you secure the financing you need. For example, the Rural Development Guaranteed Rural Rental Housing Program from Fannie Mae can fund the construction or rehabilitation of eligible multifamily properties. Freddie Mac also offers a Moderate Rehab Loan that can fund rental property renovations.

Rates, terms, and fees vary from program to program. So, your best bet is to contact a Fannie Mae or

Freddie Mac lending partner to review your borrowing options.

The FHA 221(d)(4) loan, guaranteed by HUD, can help you finance the construction of a new multifamily apartment building. Minimum loan amounts generally start at $4 million, but most loans are $10 million and up. Financing terms can extend as long as 40 years. You may also be able to take advantage of interest-only financing during the construction period.

Balance Sheet Loans can also be used to finance the construction or rehabilitation of an apartment complex.

Because lenders hold the loans in house, they don’t have to comply with Fannie Mae, Freddie Mac, or FHA guidelines. You can check with individual lenders to learn more about loan rates, terms, and qualification criteria.

Finding the right type of financing should be high on your list of priorities when you’re buying an apartment building.

When you find the right apartment loan, it could help you to save money and make your investment more profitable overall.

Of course, it can be difficult to tell on the surface which loan is most affordable. Even comparing the interest rate on multiple loans won’t tell you the whole story.

The best way to shop for an apartment loan is to compare all of the terms and costs of multiple financing solutions side by side. You can start by calculating the cost of financing, including interest rates and fees.

Alternative Apartment Financing Options

If none of the traditional multifamily apartment loans above work for your situation, you may still be in luck. An alternative apartment financing option could be a better fit.

Commercial Mortgage Backed Securities (CMBS)

A CMBS loan, also called a conduit loan, is a non-recourse commercial real estate loan you can use to purchase an apartment complex.

The asset-based loans are secured by the property you’re buying. After closing, CMBS loans are packaged and sold on the secondary mortgage market, similar to government-backed loans.

The minimum loan amount for a CMBS is usually $2 million. But the average maximum LTV is 75%, meaning you may need to put down 25% or more to secure funding. You may also need to show significant cash reserves to qualify.

Although the loans may feature a 30-year amortization period, you’ll generally receive a shorter repayment term of 5–10 years.

CMBS loans may have a sizable prepayment penalty attached, so be sure to carefully review fees and terms before you commit to this type of financing.

Hard Money Loans

Hard money loans, sometimes called bridge loans, are an alternative form of financing commonly used by real estate investors. Bridge loans are short-term funding solutions and must often be repaid or refinanced in 36 months or less.

If you’re searching for a hard money loan, you probably won’t find one at your local bank. Instead, hard money lenders are typically private companies or individuals.

Hard money loans may fund much faster than traditional property loans. You might receive funding in just a few days if you qualify. However, this convenience comes at a cost. Interest rates and fees on hard money loans may range from 8% to 15%. You may also be required to come up with a 20% to 30% down payment.

If you’re considering a hard money loan, make sure you understand the risks and costs clearly upfront.

Pay special attention to origination fees, repayment terms, prepayment penalties, and any balloon payment requirements. (Note: If your loan features a balloon payment, you’ll have to pay off the remaining balance or refinance your investment property by that date.) It’s also wise to research a hard money lender’s reputation online before you apply for funding.

Business Loans

Traditional business loans, such as those offered by the Small Business Administration, usually aren’t the right choice for an apartment loan purchase. Yet there’s a chance you might find a business lender that’s willing to help you finance your investment property.

You can visit the Nav Marketplace to compare available business loan offers. It’s also a good idea to review both your business and personal credit reports and scores before you apply for any new business loan.

Commercial Construction Loans: The Ultimate Guide

No Upfront Fee Commercial Construction Loans

Winston Rowe & Associates

You’ve reached the point in your business when it’s time to expand. Maybe you’re renting your office space and you’ve decided that it’s time to build your own office building.

Perhaps you’ve outgrown your property and you want to add on to your existing space. Your scenario could be completely different: you’re a new business just getting off the ground and you want to build your property from the ground up.

No matter what the circumstances, many businesses face a situation where real estate construction or improvements are the next steps for business expansion. Of course, this expansion comes at a very high cost – a cost that many businesses can’t afford to pay up front. This is when it’s time to consider taking out a commercial construction loan.

As with any other type of financing, it’s important to understand the mechanics behind a commercial construction loan.

Read on to learn more about commercial loans, when you should consider applying, and what to expect throughout the application process.

What Is A Commercial Construction Loan?

A commercial construction loan is a type of loan that is used to finance the costs associated with the construction or renovation of a commercial building. The funds from a construction loan can be used to pay for labor and materials for the construction of a new property, the purchase and development of land for a new commercial property, or the renovations of existing properties.

Why Take Out A Commercial Construction Loan?

Business owners who plan to purchase existing commercial properties can get a loan known as a commercial mortgage. However, if you plan to renovate your existing space or construct a new building from the ground up, you’ll need to apply for a commercial construction loan.

New construction and renovations can be expensive — think hundreds of thousands or even millions of dollars. Most growing businesses don’t have this type of cash on hand, so instead, they turn to a commercial construction loan. With commercial construction loans, lenders provide funds throughout the construction process to pay for labor, materials, and land development so you don’t have to cover the costs yourself.

How do you finance a large construction project?

Commercial construction loans are different from other loans. Most loans are structured so that the borrower receives the full amount of the loan as one lump sum. Once the loan is received, the borrower begins to pay back the loan through scheduled payments over a set period of time. Commercial mortgages, for example, often have a monthly repayment schedule over 10 years or longer.

With commercial construction loans, the full amount of the loan is not received up front. Instead, the borrower will work with the lender to create a draw schedule. This means that partial amounts of the loan will be released as the project hits new milestones. For example, the first draw will be for the clearing and development of land. The next draw may then occur when the foundation is poured. Another draw will be released when the building has been framed, and so on.

As each milestone is completed, a lender will typically require an inspector to confirm that the work is completed before releasing the next draw. This will continue until all milestones have been completed and the full amount of the loan has been distributed.

With a commercial construction loan, you will only pay interest on the portion of the loan proceeds that have been received. If the total cost of your new construction is $500,000 but the lender has released just $100,000, you will pay interest on $100,000.

Typically, a commercial construction loan is structured so that the borrower pays only the interest until the loan has been fully disbursed. Borrowers can then pay off the principle in one lump sum at the end of the construction project.

But once the project is done and the full amount of the loan is due, what does a borrower do next? Instead of having to make one large payment, the borrower now can receive a commercial mortgage. The property will serve as collateral, and the borrower will use the funds from the commercial mortgage to pay back the commercial construction loan. With the new mortgage, the lender will now be locked into more affordable monthly payments over a longer period of time.

Other commercial construction loans like the Small Business Administration CDC/504 loan provides more long-term options so an additional loan following the completion of the project will not be needed.

What is the current rate for commercial construction loans?

For commercial construction loans, borrowers should expect to pay interest rates between 4% and 12%. Borrowers with the best credit scores will receive the lowest interest rates. The type of lender you work with is also a factor. A commercial construction loan from a bank will typically have the lowest interest rate, while hard money lenders charge more interest for their loans.


There are several fees that may be associated with taking out a commercial construction loan. The fee types and amounts vary by lender. Some fees you may have to pay for this type of loan include:

Guarantee Fees

Processing Fees

Documentation Fees

Project review Fees

Fund control Fees

Down Payment

Because a commercial construction loan is a high-risk loan, a down payment is required. By paying a down payment, the borrower takes some of the risk off of the lender. Typically, down payment requirements are 10% to 30% of the total project cost. Rarely will a lender fund 100% of the costs of a commercial construction project.

Conventional lenders use a calculation known as loan-to-cost for commercial construction loans. The loan-to-cost ratio is calculated by dividing the total amount of the loan requested by the total project cost. Let’s say, for example, a business is requesting a loan of $190,000 for a project with a total cost of $200,000. The loan-to-cost in this example would be 95%.

Though requirements vary by lender, most require a loan-to-cost of 80% to 85%. For the example above, the lender would loan $160,000 at 80% and $170,000 at 85%.

If this occurs, what does the borrower do? While they may be forced to come up with the remaining costs out-of-pocket, there is another option — mezzanine loans — which we’ll discuss a little later.

Borrower Requirements: How Commercial Lenders Evaluate Eligibility

Not all construction projects are eligible for a commercial construction loan. There are several factors that a lender will consider in order to determine eligibility.

One of the first things that a lender will look at is your credit score. Because these are high-risk loans, lenders want to work with low-risk borrowers with high credit scores. Though credit requirements vary by lender, you should have a credit score at least in the high 600s before applying to qualify for loans such as the SBA CDC/504 loan. Other lenders may require a minimum score in the 700s. Business credit scores will also be evaluated.

The lender will also consider your debt-to-income ratio, also known as DTI. This ratio shows the relationship between the income and the debt of your business on a monthly basis. Typically, lenders look for a debt to income ratio of 43% or less, although some lenders may have stricter requirements. The lower your DTI, the higher your chances for approval. To calculate your DTI, use the following formula:

Total Monthly Debt Payments / Gross Monthly Income = DTI

Lenders will also consider your debt service coverage ratio, or DSCR. This shows the relationship between the income and debt of your business on an annual basis. To calculate for yourself, use the following formula:

Net Operating Income / Current Annual Debt Obligations = DSCR

The DSCR is a bit different from DTI because you want this number to be higher. This shows that your business is bringing in enough income to cover new debts. Most lenders look for a DSCR of 1.25 or higher, but again, requirements vary by lender. Learn more about calculating your DSCR.

The lender will also look at your industry experience and your current business financials to determine if you qualify for a loan. You’ll need to submit detailed construction plans for approval before a loan can be issued. In some cases, the plans may need to be altered based on any risks spotted by the lender, so your ability to be flexible in your plans is key.

Types Of Commercial Construction Loans

Now that you know more about the commercial construction loan process, it’s time to explore the different types of loans available.

SBA CDC/504 Loan Program

The Small Business Administration (SBA) CDC/504 loan is one of the most popular commercial construction loans. This is because these loans come with low down payments, competitive interest rates, and credit score requirements in the high 600s.

Borrowing Amount

No maximum, but the SBA will only fund up to $5 million

Term Lengths

10 or 20 years

Interest Rates

Fixed rate based on US Treasury rates

Borrowing Fees

CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)

Possible prepayment penalty

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business


Collateral required; usually the real estate/equipment financed

Down Payment

10% – 30%

With this loan, an SBA-approved Certified Development Company will fund 40% of the costs to renovate existing facilities, build new facilities, or purchase/improve land. Up to $5 million is available for borrowers.

Another lender will need to provide 50% of the project costs, while the borrower will be responsible for the remaining 10%. In some cases, borrowers may be required to pay 20%. Repayment terms are available up to 20 years, and interest rates are based on the market rates of U.S. Treasury issues.

SBA 7(a) Loan Program

The SBA also has the 7(a) program, which can be used for the purchase or construction of commercial real estate.

Through this program, borrowers can receive up to $5 million with repayment terms up to 25 years. Interest rates are based on the prime rate plus a maximum of 2.75%. To qualify, borrowers should have a credit score in the high 600s and a down payment of 10% to 20%.

Here are the base rates and markups for a 7(a) loan from the SBA:

Loan Amount      Less Than Seven Years    More Than 7 Years

Up to $25,000

Base rate + 4.25%

Base rate + 4.75%


Base rate + 3.25%

Base rate + 3.75%

$50,000 or More

Base rate + 2.25%

Base rate + 2.75%

Bank Loans

A traditional commercial construction loan from a bank is another option for business owners. Rates, repayment terms, and down payment requirements vary. Generally, a minimum down payment of 10% is required, maximum repayment terms of 25 years are standard, and fixed and variable rates are available.

You can start your lender search by talking to your current financial institution about your financing needs. See our post on the best bank loans for small business if you’re interested in specific recommendations.

Mezzanine Loans

Earlier in this post, we discussed loan-to-cost ratios. When a loan-to-cost ratio is lower and the borrower needs to come up with additional money, a mezzanine loan may be an option. This type of loan is secured with stock. If the borrower defaults, the lender can convert to an equity stake. With a mezzanine loan, the borrower has more leverage and can achieve a loan-to-cost ratio of up to 95%.

Where To Find Commercial Construction Loans

You know about the types of loans available to you, so where do you find a lender? This all depends on the type of loan you’re seeking.

An SBA-approved intermediary lender (which includes banks, credit unions, and private lenders) distributes 7(a) loans. For CDC/504 loans, an SBA-approved non-profit CDC provides this funding, although you’ll also have to find another lender to finance 50% of your project costs.

Banks and credit unions provide many commercial construction loan options, including SBA loans, traditional loans, and mezzanine loans.

Finally, commercial construction loans can be obtained through hard money lenders. These are private money lenders that provide short-term funding options for commercial construction projects. While there are a few benefits to working with these lenders, including minimal upfront costs and faster funding, these loans typically come with higher interest rates and fees than options from other lenders.

What is the best place for a commercial construction loan?

Winston Rowe and Associates can find you a lender for your commercial construction loan, the next step is to begin the application process.

Contact them at processing@winstonrowe.com or call 248-246-2243.

During this process, the lender will evaluate your personal and business financials, your credit score, and other factors that will determine both whether you’re approved and what your interest rates and terms will be.

Because construction loans are considered high-risk, you will need to provide the lender with a detailed business plan. This should include an overview of what your business does, its financials to date, details about your current operations, and future projections.

You will also need to provide your lender with details about the project. This includes a complete plan with specs and designs. An expected project cost, including estimates for contractors, materials, and other expenses, must be provided with your application.

Personal and business financial documents will also need to be submitted during the application process. These include, but are not limited to, personal and business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules showing current debt obligations. Documentation requirements will vary by lender.

The lender will pull your credit score during the process. Remember, lenders are looking for scores in the high 600s. With some lenders, negative items such as bankruptcies, foreclosures, and past defaults on loans may automatically disqualify you from receiving a loan. For negative items on your credit report, an explanation to the lender may be required.

Because this is such a high-risk loan product, lenders will typically take at least a minimum of several weeks to go over your information. During this time, more documentation may be required or your lender may have questions, so make sure to make yourself available to expedite the process.

Once the lender underwrites and approves your loan, you’ll move into the closing process. This entails going over the loan agreement, which will include all dates and milestones throughout the process. Once all paperwork has been signed and the closing process is complete, you’ll be ready to begin the expansion of your business.

Final Thoughts

It’s always exciting to reach a point in your business when it’s time to expand, but getting the financing you need can be a challenge. If your future plans include constructing new facilities or upgrading your current building, getting a commercial construction loan doesn’t have to be stressful.

If you understand the types of loans and requirements and do some prep work ahead of time, you’ll be able to approach your lender with confidence and get through the lending process with ease.

5 Ways to Spot Fake Landlord References

One of the most crucial aspects in tenant screening is that of checking your prospective tenant’s landlord references, so here are 5 ways to spot fake landlord references.

Unfortunately, some tenants have been known to make up references or list friends or family members as previous landlords. There are even companies that hire themselves out to pose as landlords.

As a property manager, you are bound to receive landlord references day in and day out. Some are beautifully written testaments to the incredible nature of these individuals looking to rent, while others are simply fake, with bogus testimonials about the tenant.

5 ways to spot fake landlord references

No. 1 – Call the references yourself

For starters, on most landlord references, they will provide a phone number.

One of the first things you can do to tell if the reference is a fake is to call the number inquiring about a rental. If it is fake, the number either won’t work or will lead to a completely different person or place.

In rare instances, a fake number does lead to an individual, but they may seem to be either untruthful or not detailed in their answers.

No. 2 – Check up on the reference’s name

Go online and Google the reference’s name and look them up on social-media platforms.

Check to see if this person is tied to the potential tenant through tagged pictures and/or posts. If there is a lot of overlap in the people’s profiles, these individuals may have a personal relationship and not a tenant/landlord relationship.

No. 3- Look at tax records

The tax records for all property owners are in the public domain. All you have to do is look up the records for the address where the applicant claims to have lived.

The name on the tax record should match the name you’ve been given. Double-check that the property hasn’t been sold, but otherwise this is a great way to spot a fake.

No. 4 – Analyze a reference’s answers

It’s best to always fall back on your knowledge as a landlord and analyze the answers that the potentially fake landlord reference has given you.

If their answers are vague and don’t have details then it’s likely that they aren’t a real landlord and are instead a friend or family member of the person who is trying to rent from you.

No. 5 – Ask for advice from the reference

Landlords tend to have the same frustrations, interests, and problems.

It wouldn’t be at all unusual for you as a property manager to ask for some advice from another landlord while calling for a reference. Ask for their procedure for getting rid of a tenant who doesn’t pay, for instance.

A real landlord will have an actual answer, even if they’re not interested in spending much time on the phone with you. A fake, on the other hand, will likely have nothing specific to say. This can help you further determine whether the person on the other line is a real landlord, or someone just posing as such.

In conclusion

As a property manager, a significant part of your job involves filling properties with quality, long-term tenants. Including thorough reference verification as part of your tenant screening process, such as the strategies above, can help you avoid costly mistakes and keep you a few steps ahead of the game.

For Multifamily Commercial Real Estate Financing Contact Winston Rowe and Associates No Upfront Fee Commercial Loans

What to Consider When Purchasing Distressed Real Estate Debt

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Real estate assets across the United States have suffered the adverse effects of the COVID-19 pandemic and the resulting shutdowns of businesses.

This unfortunate circumstance will present opportunities to purchase the debt encumbering these properties, whether as a way of generating yield, or as part of a “loan to own” strategy.

Whatever the business case, purchasing distressed real estate secured debt presents considerations and hurdles which may not be completely familiar to buyers whose experience lies in purchasing direct interests in real estate.

As the fallout from COVID-19 continues to manifest, some sectors of the real estate industry have been hit harder than others.

Retail properties, many of whose tenants were suffering pre-pandemic from the continued expansion of online shopping, have been hit hard.

Hotel properties have been hit as hard or harder, as many were forced to shut down or severely ramp down operations, either due to legal restrictions or pragmatically given a lack of guests and a need to preserve cash.

Office properties, especially suburban offices, seem to be faring relatively well thus far, as have multifamily properties (although whether that will continue when CARES Act stimuli and state and local eviction moratoria expire is a big question).

Industrial properties may be doing better than any other sector, due at least in part to increased demand for on-line shopping.

Thus far, lenders generally have been working to provide relief to borrowers, especially those whose properties were doing fine pre-COVID-19, including temporary (e.g., three to six month) interest deferrals, extensions of forthcoming maturities and temporary waivers of covenant compliance requirements.

More extensive, longer term loan modifications seem not yet to be occurring on a broad basis, although anecdotally those we have seen typically require some form of collateral enhancement for the lender, such as principal pay-downs, enhanced guaranties, cash collateral reserves and letters of credit, and cash sweeps, among others.

For borrowers with properties which are able to take advantage of these lifelines offered by lenders, such modifications provide an ability to continue to ride out the pandemic storm in the hope better days are not far off, allowing the cash flow and value of their properties to recover.

But what of those properties where the borrowers and lenders have not been able to find a modification solution, whether due to the pre-and/or post-pandemic prospects for the property, regulatory pressures, or otherwise?

Therein lies the opportunity for investors looking to take advantage of situations where lenders prefer to sell off their debt rather than continue to try to work things out or take over the real estate.

If you are one of these potential investors, here are some considerations for when opportunities to purchase distressed debt are available.

Be prepared to assess based on less information

Debt typically is “distressed” because the underlying real estate is having issues, so one key in valuing the debt is understanding those issues. In a “normal” real estate purchase or financing transaction, the owner of the real estate has built in motivations to be cooperative and forthcoming with information about its property and operations.

So, if it wants to sell, or it wants to get a new loan, it will provide potential buyers and lenders much, if not all, of the information it may be requested to provide. This may not be the situation potential investors interested in purchasing distressed real estate secured debt will encounter.

First—be prepared for a situation where on-site due diligence is not available.

In addition to the pandemic related widespread “shelter in place” or “stay at home” orders which may limit traditional on-site property diligence, the borrower may not be willing to grant access for due diligence purposes, and the selling lender may not want to signal to the borrower it is considering selling off the debt even if the borrower might be willing to provide such access.

As for documentary diligence, if previously or currently engaged in workout discussions with its borrower, the lender may have received updated financials on the property, the borrower and any guarantor(s).

But depending on the extent and tenor of those negotiations, some of the information a selling lender may have could be incomplete and/or relatively “stale” by the time the potential investor gets it.

The lender may not even have information on the property beyond what it is entitled to receive under the regular reporting provisions of the loan documents (e.g., monthly, quarterly and/or annual financial reports) – and if the borrower is uncooperative, even some or all of that information may be unavailable.

Additionally, the lender may not have copies of all of the leases (or any modifications entered into without its consent, especially if such consent was not required), and is even less likely to have copies of other relevant property-level contracts, unless it has been able to acquire these items during any workout discussions.

A copy of the lender’s title insurance policy, and maybe even a relatively recent title update, should be available, but an updated survey beyond that obtained at origination is unlikely, particularly in light of the property access issues noted above.

So potential investors should be prepared to “make do” without the array of documentary diligence materials it typically expects to obtain and review in buying or financing the real estate.

Be aware this all could have to be done in a relatively compressed time-frame compared to “regular” real estate transaction as well.

Further, although the lender may be willing to provide certain representations regarding the debt itself in the loan purchase agreement (as discussed below), an investor should not expect a selling lender to provide any representations regarding the underlying real estate to fill in “gaps”, as a seller/borrower might in a property sale or loan origination transaction.

This is not an insurmountable hurdle, just one for which the average real estate investor who has not had much (if any) experience in the recent economy in purchasing distressed real estate secured debt must prepare.

This may mean, for example, digging in deeper into the materials which are available—the monthly and/or quarterly financials, rent rolls, the available major leases, etc. – and doing more cross checking and extrapolating to gain an understanding of the current and future prospects of the underlying real estate (including, if applicable, its tenants).

The less clarity provided by the available data, the more likely the investor may be compelled to build a bigger discount factor into its pricing in purchasing the debt.

How “good” are the sponsors?

Another key in valuing the debt is evaluating the strength of the sponsorship. The available information regarding the borrower, guarantors and underlying real estate obviously will be used to assess the performance and value of the debt and the real estate.

But this information also must be used to assess the sponsor’s ability to address the property’s issues and possibly maintain ownership of the real estate. Put another way, does the sponsor have equity or other exposure to protect, and the financial wherewithal to try to do so?

This is important to assess for the investor whose primary motivation is to purchase the debt for yield purposes—i.e., can the investor, with a lower basis in the debt, figure out a deal with the sponsor on revised loan terms where the current lender could not?

This is equally important for the investor whose primary goal is obtaining ownership of the underlying real estate—i.e., will the sponsor be motivated and financially capable of making it difficult for the new loan holder to exercise remedies to obtain the real estate, or is it more likely to be amenable to giving a deed-in-lieu of foreclosure?

Understand what can (and can’t) be done in enforcing the loan documents

Whether the primary goal is to turn the distressed real estate secured debt into a performing loan on revised terms, or ultimately to acquire the underlying real estate, the investor also must gain an understanding of what the loan documents provide, and the remedies which may or may not be available in the applicable jurisdiction to enforce those documents.

As noted above, the lender looking to off load distressed real estate debt may have limited or imperfect information on the underlying real estate and sponsor, but it should have a complete set of loan documents for the loan it is selling.

The investor should insist on receiving a complete set of fully-executed loan documents (and should confirm each was executed by the proper parties), and confirmation the lender possesses the original note(s) evidencing the loan, before becoming too enmeshed in this process; absence of these basic elements could create significant enforcement and other issues for the holder of the loan.

The investor also should obtain access to the lender’s and any servicer’s loan file, including all correspondence between the lender and the sponsor, which also may impact enforceability of the loan documents (e.g., facts giving rise to potential lender liability claims or other defenses).

Some of the questions to consider in reviewing those loan documents include:

Are there provisions requiring cash management, and have they been implemented?

What other defaults may exist beyond any payment default, and what rights and remedies do those defaults create for the lender?

What reserves are provided for, are they properly funded, and what use can the lender and sponsor make of those funds while a default exists?

Once access is obtained, the investor must assess not only the economic terms, but also the legal terms and remedies available under the documents and applicable state law.

For example, for debt secured by California real property, the state’s relatively unique “one action” and “anti-deficiency” statutes will impact how those remedies may be enforced.

The intricacies of the California framework is beyond the scope of this article, but in simplest terms the “one action” provisions will require a foreclosure (judicially or non-judicially) of the real estate under the mortgage/deed of trust; the “anti-deficiency” statutes, and whether there is a judicial or non-judicial foreclosure, will affect the ability to recover from the borrower and guarantors if the property sells for less than the outstanding debt at the foreclosure sale.

If available in the applicable jurisdiction, a non-judicial foreclosure sale usually may be completed much quicker and more cost-effectively than a judicial foreclosure, but the requirements and ramifications of the options available should be considered carefully.

Also, appointment of a receiver may be advisable to protect the collateral while a foreclosure is pending.

Given the proliferation of lenders requiring special purpose entities (SPEs) own only the subject real estate as borrowers, the guarantor(s) and guaranty(ies) which are part of the loan package are very important.

If there is a guarantor with assets from which to recover, the guaranties supporting the loan can be a source not just of potential value/revenue to support the debt purchase, but also as leverage in accomplishing the investor’s goals.

As noted above, the information available hopefully will provide some indication of the financial viability of any guarantor.

A credit worthy guarantor with exposure under one or more guaranties may be very motivated to facilitate a workout, or to prevent the holder of the loan from exercising remedies, or to facilitate the transition of ownership of the property.

The loan may include a completion guaranty (if the loan has a renovation component, even if the loan otherwise is not a construction loan), a full or partial payment guaranty, an interest and carry guaranty, and/or an environmental indemnity, all of which must be reviewed to determine whether they are enforceable and whether recovery rights have been or may be triggered.

The same goes for any non-recourse carve-out guaranty, which may require the most scrutiny, both as to what the document says, as well as to determine whether any facts exist which may trigger any of the carve-outs.

The factual aspect of this assessment may not be fully possible until after the debt is acquired, so the investor’s initial diligence should be directed towards what “bad acts” are covered by the guaranty, and what level of liability is triggered by each act (e.g., liability only for losses attributable to the carve-out, or full recourse for the entire loan).

Some examples of relevant carve-outs include bankruptcy/insolvency-related events, which often (although not always) trigger full recourse for the debt against the guarantor.

Similarly, a carve-out for interfering with the lender’s exercise of remedies may trigger recourse (full or losses/damages recourse).

These may prove to be sufficient to discourage the sponsor from taking such actions and interfering with or delaying the investor’s desired outcome in purchasing the debt.

Carve-outs for “waste” or misapplication or misuse of funds, before or after an event of default exists, also could prove relevant; events triggering one or more of these recourse provisions may or may not be discernable from the financial and other information available – but those facts may not always be obvious.

A real-world example: while engaged in workout discussions with the original lender, a borrower was able to lease space to a new tenant (which the original lender approved).

The lease required tenant improvements to be paid for by the landlord/borrower; not having enough cash on hand, the borrower’s investors advanced funds.

Ultimately, the debt was sold, and the new debt holder discovered the borrower had re-paid the equity advances from available cash flow while still in default – a violation of the loan documents which triggered recourse for recovery of that cash.

The threat of potential liability for the guarantors created tremendous leverage for the new holder of the debt, and ultimately resulted in the borrower giving a deed-in-lieu of foreclosure (and also paying back some of the funds).

Ultimately, the loan documents, the remedies available under the applicable state law framework, and the facts around the loan and sponsors will affect the outcome for a given loan, so all must be assessed as thoroughly as possible in determining whether and how much an investor is willing to pay to purchase the distressed debt given the investor’s desired outcome.

Other potential factors to consider

Purchasing distressed real estate secured debt also could involve a number of other considerations, some of which could include:

Others in the Capital Stack:

Although this article is focused on potential purchase of a real estate secured loan, mezzanine lender(s) and/or preferred equity holders in the capital stack may have rights and motivations which could affect attaining the investor’s goal. Such players in the capital stack could prove a positive (e.g., another party motivated to step up to help turn the mortgage debt into a performing loan) or a negative (e.g., by invoking rights or taking other actions which could delay exercising remedies to gain ownership of the underlying real estate).

Loan Purchase Agreement:

Negotiating an acceptable agreement to purchase the loan also may prove to be a process different than a typical purchase agreement for real estate.

Although real estate purchase and sale agreements commonly state the property is being sold “as is, where is,” just as commonly the seller will provide a “market” set of representations and warranties the buyer can rely upon (with limitations on survival and liability). In the context of a loan purchase and sale agreement, expect there will be much fewer reps from the selling lender (sometimes limited only to organizational and authority reps, ownership of the subject loan, and the outstanding balance of the loan), with few (if any) reps relating to the underlying real estate or the related information provided, and very limited survivability and exposure for breaches to the selling lender.


Acquisition of the underlying real estate, via foreclosure or deed-in-lieu of foreclosure, may trigger transfer taxes or a reassessment of real estate taxes (although the latter may not necessarily be a negative if the property’s value has declined from the most recent assessment). These factors should be reviewed in the applicable jurisdiction.


In situations such as the current pandemic, or other general market declines, a third-party manager may have been doing a very capable job, but for those circumstances.

Investors should assess whether continuing current management, under existing or revised terms, makes sense for a given property. In the context of a hotel, for example, an otherwise well-performing management company which knows the property and the market, and has good relationships with a franchisor, could prove to be an asset.

Of course, if the management company has a management contract which cannot be disturbed by a foreclosure/deed-in-lieu or workout, its continued management of the property will have to be factored into the assessment of the property and debt.


In challenging, uncertain times such as these, all investment decisions carry a greater degree of uncertainty and risk. Even in “normal” times, however, the most successful investors are those who best assess and value assets and the attendant risk.

For investors pursuing distressed real estate secured debt, those best prepared and able to execute their strategies by carefully considering the limitations and challenges such as those described above will have the most success.


Strategies for Managing the Commercial Loan Post-Closing Process

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After a commercial loan transaction closes, it’s easy to feel that all the important work has been completed, but the truth is there are many post-closing matters that still require the lender’s attention.

Often, the tasks that must be performed after a loan closing involve perfecting the lender’s collateral liens, and in many situations, lenders need the borrower’s cooperation in order to satisfy post-closing requirements.

However, borrowers are often eager to focus on managing their businesses, creating difficulty for the lender to redirect their attention back to the loan closing. Taking an opportunity during the closing process to define and communicate the responsibilities of each party, including post-closing expectations, can help simplify the cumbersome post-closing process for lenders.

A crucial step in an efficient post-closing process is letting borrowers know that their cooperation may still be required after a loan closes, which is why we recommend using a Post-Closing Agreement with all loan transactions.

These agreements outline specific requirements that need to be satisfied post-closing, and they provide an opportunity to manage the borrower’s expectations while informing them that they still have a responsibility to communicate and work with their lender after their loan closes. It is advisable that all post-closing requirements have specified deadlines listed in the agreement.

Another document we recommend lenders use is an Errors and Omissions Agreement. This document requires borrowers to provide additional information and execute additional documentation, as may be required by the lender after a loan closing.

The closing process presents several opportunities for mistakes to be made, including omitting certain documents from the closing document package, incorrect signatures on documents, and execution of outdated versions of documents.

The Errors and Omissions Agreement is a good way for all parties to agree to resolve these potential issues after closing.

An additional tool that lenders can use to help manage post-closing issues is the Loan Agreement. A good Loan Agreement clearly outlines each party’s ongoing responsibilities, and in doing so, helps manage the borrower’s expectations. Loan Agreements are particularly useful in more complicated transactions because the agreements can be tailored to fit various scenarios and include additional terms a lender may require.

The Loan Agreement may include events of default should the borrower fail to satisfy any post-closing requirements prior to the applicable deadlines.

Depending on the type of collateral involved in a transaction, there can be many different potential post-closing issues for a lender to track and resolve.

Real estate is a good example of a potentially complicated type of collateral to deal with post-closing because it involves ensuring mortgages get recorded properly, tracking receipt of recorded documents and final title policies, confirming the adequacy of title policies, and working with title companies to resolve any issues or unexpected exceptions that may appear on a final policy.

Automobile liens can also be especially tricky, and not only require the correct documentation from the borrower, but also may require substantial interaction with the DMV in the state where the vehicle is titled.

Additional post-closing responsibilities include review of executed loan documents, filing UCC financing statements, obtaining confirmation of UCC terminations, tracking financial reporting covenants, ensuring proper documentation is received in connection with draw requests, and following-up on collateral insurance expirations.

As complicated as the post-closing process can be, lenders can help ease the burden by utilizing Post-Closing Agreements,

Errors and Omissions Agreements, and Loan Agreements, all of which clarify the responsibilities of each party and help manage post-closing expectations with borrowers.


Banking Association Directories

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Banking Association Directories

The American Bankers Association proudly represents banks of all sizes and their two million dedicated employees.

The Independent Community Bankers of America® creates and promotes an environment where community banks flourish.

National Bankers Association | United States | Trade group representing minority-owned financial institutions and women-owned institutions.

MBA is the only association representing all segments of the real estate finance industry.

Michigan Bankers Association

Banking Associations. Below is a list of the world’s bank associations, listed by country.

The American Bankers Association is a Washington D.C.-based trade organization representing banks of various sizes.

List of National Banking Trade Association Websites for the United States.

Welcome to the official website of the Oregon Bankers Association and Community Banks of Oregon.

NEW YORK BANKERS ASSOCIATION. For over a century, NYBA has provided advocacy and leadership for the State’s financial services industry.

Providing member banks with the resources they need to succeed in California’s dynamic and innovative marketplace.

As the voice for the Nebraska banking industry, our mission is to provide extraordinary service for extraordinary members.

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How To Get A Great Commercial Real Estate Deal

To be a player in commercial real estate, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage.

Map Out a Plan of Action

Setting parameters is a top priority in a commercial real estate deal get a sense of how much you will pay over the life of the mortgage.

Learn to Recognize a Good Deal

The top real estate pros know a good deal when they see one. What’s their secret? First, they have an exit strategy – the best deals are the ones where you know you can walk away from. It helps to have a sharp,

Key Commercial Real Estate Metrics

The common key metrics to use for when assessing real estate include:

Net Operating Income (NOI)

The NOI of a commercial real estate property is calculated by evaluating the property’s first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.

Cap Rate

A real estate property’s “cap” – or capitalization – rate, is used to calculate the value of income producing properties. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.

Cash on Cash

Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare the first-year performance of competing properties.

Look for Motivated Sellers

Like any business, customers drive real estate. Your job is to find them – specifically those who are ready and eager to sell below market value.

Approach to Evaluate Properties

Be adaptable when searching for great deals. Use the internet, read the classified ads and hire bird dogs to find you the best properties.

How to Find Tenants for Your Rental Property

How to Find Tenants for Your Rental Property

Methods to find tenants for your rental property vary depending on the sort of rental property you own and its location. For example, I’m in the single-family-home rental business in a so-called “flyover state.” Therefore, my process might not be the same as landlords in New York City or Los Angeles. While there’s really no national one-size-fits-all approach to finding tenants for your rental property, there are best practices, some of which are region specific, for marketing your rental.

Finding tenants on your own

Some people automatically contact a real estate agent to get their property rented. And you might need to do that as well, especially if your rental property is in NYC, where using a broker is the norm. But many times, you no longer need to rely on an agent to put your listing on the MLS: You can list your rental property yourself.

Zillow Rental Manager is top dog in this arena now. They currently charge $9.95 weekly to list your property with them. They also syndicate your listing to Trulia and HotPads. Another option is Cozy.co, where you can list for free.

Cozy syndicates to Realtor.com and Doorsteps.com. And there’s always Craigslist and social media as well. With all that at your disposal, you’ll probably get lots of eyes on your rental property, with no agent being involved.

Set the rent price

You need to know how much you plan to charge for your rental before you can list it. If you set your rent too high, you might have trouble finding a renter; too low and you lose potential income.

To help you determine what to charge, pretend you’re the one looking to rent. Perform an online search to see what rentals similar to yours in your geographic are going for. You can also use online tools, usually for a fee, that will perform a comparative market analysis to help you set the price. Note that a real estate agent can do this for you, so this would be a benefit of using one if you can’t determine what to charge.

How to advertise

Just because you can list on your own doesn’t mean you shouldn’t do your due diligence. If you don’t advertise it correctly, your listing could be one that a prospective tenant would pass by. You not only want people to see your listing, but you also want them to respond to it.

The way to help make that happen is to have professional photos of the property. Yes, you can easily take some pictures of your property yourself and then upload them to the listing site, but professional photos usually look much better, meaning your rental will stand out. Attaching a professionally made video walkthrough is becoming more important to attract consumers as well, especially during the COVID-19 pandemic.

You should also write a description that points out the property’s best features, including its location and what’s nearby. Be careful not to oversell, because you don’t want people disappointed when they view the home in person. Just stick with the facts, pointing out the advantages. Read other descriptions to give you an idea.

Using a real estate agent

If you don’t have the time or inclination to find tenants on your own, set the rental price, market your property, and show your property, hiring a real estate agent could be a good idea.

A real estate agent can help with the following:

An agent could find a potential tenant for you through word of mouth, particularly if they are with a large brokerage. Agents tend to share this information with other agents at their office.

Real estate agents are pros when it comes to listing property for sale or rent. Your listing will probably look great if a real estate agent lists it.

Agents can take over the showing aspect of the process. Again, they are pros at pointing out the features of the rental property and the neighborhood.

As mentioned above, a real estate agent can probably set a reasonable price for your property by performing a comparative market analysis.

Agents who are Realtors have access to official state lease forms through their state chapter of National Association of Realtors. (Note that landlords can draw up their own lease or hire an attorney to draw one up. They don’t have to use the state-approved lease, but the lease needs to reflect the laws of the state.)

The trick to finding good tenants

There are three keys to finding a quality tenant: screening them by conducting a credit and background check, interviewing them in person or through video chat, and checking references.

There’s no shortage of screening services out there. Just search online for “tenant screening.” Most services will give you the following data:

  • Credit check
  • Credit report and/or credit score
  • Percentage of credit used
  • Total monthly payments
  • Total debt
  • Late accounts
  • How much time being late
  • Background check
  • Criminal history
  • Bankruptcies
  • Evictions
  • Sex offender status
  • Once you’ve reviewed this information, you should be able to make a decision as to whether an applicant will be considered or not.

If the applicant will be considered, you can then check references, particularly past and current employers and past landlords. If the applicant leaves a phone number for an employer, it’s usually a good idea to search online for the employer and call that number. There’s a chance you could be calling a friend of the applicant instead of the actual employer if you go by the phone number on the rental application.

If that step goes well, you can then ask follow-up questions. This is a good way to make a decision if you have more than one qualified applicant. You might want to know, for example, how long they think they’ll rent. An applicant who knows they’ll stay only for a short term might not be as good as one who plans to rent your place longer. You can ask any questions you like, but you must be mindful of Fair Housing Laws.

Be mindful of Fair Housing laws

When you ask tenants questions, you first must be familiar with the Fair Housing Act, which prohibits discrimination based on these protected classes:

  • Race.
  • Color.
  • Religion.
  • Sex.
  • Familial status.
  • National origin.
  • Mental or physical disability.

You can ask questions, such as when they would like to move in, whether they can pay all your move-in costs (first month rent and security deposit, for example), whether they have pets, and why they wish to leave their current place.

You cannot ask about where there were born (national origin), whether they have a service animal (disability), how many children they have (familial status), whether they would like directions to the nearest church (religion), or anything else that could be interpreted as possibly being discriminatory against one of the seven protected classes.

Set criteria

Although it’s wise to have criteria to weed out a bad tenant: credit score over 630, income at least three times the rent, limited pets, etc., you might find you wish to waive some criteria based on the overall financial picture of the applicant.

For example, maybe the applicant had a short sale on their record that tanked their credit score, making it difficult for them to buy or rent anywhere. But they might have an excellent and established job that pays more than what you seek. You might disregard the credit score for this good tenant. That’s an advantage “mom-and-pop” landlords have over big, institutional leasing outfits, which tend to not be as flexible.

About using a property manager

A property management company can make your life as a landlord easier. A good property manager handles getting and screening tenants, collecting rent, drawing up a lease, being the point person when an emergency hits, handling move outs and/or evictions, and arranging for repairs and maintenance.

But the wrong property manager might not be worth the cost, especially if you find yourself managing the property manager. Fees vary based on the management company. You can figure spending about 10% of your rental income on property management.

If you live far from your rental property and/or manage many properties, you’ll likely benefit from using a property manager. But if you live close to your properties and you have the time and inclination, you can manage your properties yourself.

How about a property management tool?

If you want to manage your own properties, you might want to consider using a property management tool that would automate certain tasks like listing your property, collecting rent, and scheduling property maintenance. You can perform an online search for “property management tools” to find one that best suits your purposes.

Virtual tours and open houses

COVID-19 changed the showing game a bit. More people are becoming comfortable viewing a house online, but they’re wise to the fisheye lens photos that make the rooms look bigger than they are. If they’ll fill out an application without physically entering the property, applicants usually want to view a virtual walk-through. So make sure you include that with your listing.

Some people still, understandably, want to physically walk through the property, and open houses are an efficient way to accomplish this. But again, with COVID-19, this process has changed somewhat too. It’s wise to either stagger the times people show up in 15-minute increments or have people wait inside their cars until it’s their turn to view the property.

How To Calculate Loan To Cost For A Commercial Mortgage

Calculating Loan to Cost Ratios for Commercial Real Estate Loans

Loan to cost (LTC) compares the financing amount of a commercial real estate project to its cost. LTC is calculated as the loan amount divided by the construction cost.

Some examples of costs include purchase price, materials, labor, and insurance costs.

Other costs, depending on the scope of the project could include soft costs, like architectural plans and impact fees or even finance costs like interest and fees.

The formula to calculate LTC is as follows:

LTC = Loan Amount / Cost

A higher LTC result in higher risk for the lender than would a lower LTC. Since lending is risk based, higher leverage loans call for more conservative pricing and terms.

Commercial property loans with a lower LTC command more competitive structure with lower rates and more favorable loan terms.

The loan to cost ratio is essential in determining the qualification for a loan, other factors lenders pay close attention to include location, borrower financial strength, pro forma income and expenses, and asset class.

Winston Rowe and Associates prepared this article. They are a national consulting firm specializing in the due diligence and preparation of commercial loan proposals to submit to their network of capital sources.

They also have a free book “Commercial Real Estate Finance” available on their website.

You can contact them at 248-246-2243 or visit them online at https://www.winstonrowe.com


States Are Forcing Business Owners Into Technical Commercial Loan Default

States that are not allowing businesses to open are causing commercial mortgages and business loans to go into technical default even though they are not missing payments.

Most commercial and business loan documentation contains one or more financial covenants that will cause you to become in technical default including cash flow covenants, such as a debt service coverage ratio, a fixed charge coverage ratio, or an interest coverage ratio, leverage ratios comparing total debt to cash flow and liquidity covenants.

With continued shut downs of state and local economies many businesses will not survive.

What is technical default of a commercial mortgage?

A technical default will result in payment of the commercial mortgage or business loan to be made in full. If the business owner can not pay in full, the business and its assets are liquidated.

Some examples of commercial mortgage technical default.

Property Value
Lack of Cash Flow
Changing Type of Business
A Second Position Mortgage with Out A Subordination Agreement
Local Economic Factors
Force Majeure
Rise in Crime
Environmental Factors
Not Raising Rents or Rents Below Market Rates
The Business Not Being Properly Capitalized

Since business and life in general is about managing risk the economy should be opened sooner rather than later.

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Land Contracts Explained

It is basically a rent-to-own agreement entered into between parties, and the contract is not considered a purchase transaction.

If you would like a land contract to become a purchase transaction you will need to be on the property title with the seller as a lien holder recorded at the County Register of Deeds Clerks Office.

If you’re not on the title you will not be able to refinance with a lender.

In order to refinance out of your land contract with a lender the following is the basic loan structure.

Loan to Value 60%

Occupancy Rate 90% +

Debt Service Ratio 1.25

Other Names for Land Contracts

Trust Deeds.

Deeds of Trust.

Home Notes.

Privately Held Mortgages.

A contract for Deed.

Why Are Land Contracts Used?

As with other types of seller financing, a land contract may be advantageous to both buyer and seller.

Benefits to buyers. There may be a buyer interested in the real estate for sale but who, because of their credit history or other reasons, cannot obtain approval for a needed mortgage. The parties can enter into a sale by land contract so that the buyer makes monthly payments directly to the seller.

Benefits to sellers. The seller does not receive the full purchase price up front, like the seller would if the buyer used a mortgage or paid all cash, but the seller may have more options for potential buyers. Also, the seller may be able to negotiate a higher purchase price on the property by offering a sale by land contract. The seller may also require and receive a large cash down payment.

This article was prepared by Winston Rowe and Associates, a national consulting firm. They can be contacted at https://www.winstonrowe.com

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Commercial Mortgage Brokers Handbook

Getting Started with Commercial Mortgages

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Learn about the industry

Educating yourself about commercial mortgage is crucial to your success as a broker. There are plenty of resources for brokers looking to get started in this field, from publications dedicated to the industry and company blogs, to webinars and in-person seminars aimed at helping brokers learn.

Getting to know the commercial mortgage industry will help you to earn credibility and develop great relationships with lenders, sources and borrowers, leading to more closed deals.

Connect with reliable lenders and referral sources

Another important piece of the puzzle for brokers new to the commercial industry is establishing partnerships with reliable lenders and referral sources. In order to increase your business and earn more, you’ll need a steady flow of deals from referral sources in your pipeline, as well as lenders with a consistent track record of closing these types of loans.

Get to know financial professionals in your area, as well as lenders you’d like to do business with, and develop an understanding of how everyone can benefit from your services.

Get to know your borrowers

To succeed in the commercial mortgage industry, you need to learn about the consumers who are most likely to utilize your services to find these loans. Generally, you’ll be working with small business owners who, for any number of reasons, cannot qualify for bank loans.

You need to get a sense of the challenges these borrowers face in order to get them to the right lender and get the deals done.

Once you’ve done the legwork of getting to know the industry, lenders, referral sources, and borrowers, you’ll have a much better sense of how to use your experience as a residential broker to close commercial mortgages.

With this knowledge, you can build connections and advertise your services in order to close more loans and earn more income.

How to Close a Commercial Mortgage Quickly

Many borrowers seeking commercial financing need it fast. Whether they need the funds to pay off a ballooning mortgage, take advantage of a great inventory deal or purchase a property quickly, it’s a broker’s job to get them the mortgage they need in the time frame they require.

Here’s what you need to do:

Find a lender with a track record of getting deals done quickly.

If your borrower doesn’t have time to wait for commercial financing, it’s important to seek out lenders who have a reputation for quick closings.

Your best bet in a scenario where your borrower needs funds fast is to connect with alternative commercial mortgage lenders. Because they aren’t constricted by the same regulations as banks and other traditional lenders, non- conforming lender can often close deals in a matter of weeks.

Determine what documents are needed for a submission.

Once you’ve found a lender who can get your borrower’s deal done fast, you need to ask them what is required to submit the commercial mortgage request.

Make sure to collect all necessary documentation and get it to your lender as quickly as possible.

Cooperate with your lender throughout the process.

In order for a deal to close fast, you and your lender need to be on the same page and willing to work together. Your lender is likely to have questions throughout the process and will probably need additional information after the original submission.

Get them the answers they need as promptly as possible so that your borrower can get their funds in the necessary time frame.

Commercial borrowers on a tight schedule often rely on brokers to help them obtain a mortgage, so it’s important to understand what you need to do to make this happen.

Selecting the right lender, understanding what is required to submit the deal and cooperating with your lender throughout the financing process are all necessary to get your borrowers they commercial mortgages they need. Following the above tips will help you close more loans fast and earn you more income.

Know What Makes a Commercial Mortgage Borrower Non-Bankable

Closing commercial mortgages is a quick and easy way for brokers to increase their income. However, in order to close these loans, you need to understand the borrower’s you’ll be working with and the challenges they’ve faced.

Being able to tell whether your borrower will qualify for bank financing or whether they’ll need an alternative product is important.

Here are a few clues that will let you know if a commercial mortgage borrower is non-bankable:

They’ve had credit issues in the past.

Because of stricter regulations, banks and other traditional lenders have a fairly narrow credit box, which disqualifies a lot of commercial borrowers right out of the gate.

If your borrower’s credit score reflects the fact that they’ve hit a few financial bumps in years past, you’ll need to work with a commercial lender that’s willing to consider your borrower’s full financial picture, and not just their credit score.

They have past-due taxes.

Banks won’t lend to borrowers who owe the IRS. If you’ve got a borrower looking to secure a mortgage to pay off back taxes, you’re going to need to direct them to a non-conforming lender.

They own a unique property.

Most traditional lenders have a number of commercial property types that they won’t lend on for any number of reasons. It’s in your best interest as a broker to develop relationships with lenders that will finance a variety of commercial properties.

They need a mortgage.

Borrowers seeking smaller commercial mortgages are likely to hit a wall with banks and many other commercial lenders, particularly if they need a loan size under $1 million.

That’s why brokers who are in the business of closing commercial mortgages should find at least one lender who specializes in commercial mortgages.

For brokers looking to earn more and increase their business, commercial mortgages are a great option.

Borrowers in need of this financing will often have had past credit or tax issues, a unique property type or a smaller loan for their property.

Once you know how to spot the borrowers who will need alternative financing, cultivating leads and getting loans closed will be much simpler.

Overcoming Common Objections in Commercial Mortgage Sales

If you’re a broker working with non-bankable borrowers, you’re going to hear some common objections when trying to sell a commercial mortgage.

Many will initially see the rate as too high, the LTV as too low, or the process as too costly.

However, if it’s the only way for them to secure the financing necessary to achieve their goals, you need to help them to understand that.

Here’s how you can overcome common objections and sell the deal: Manage your borrower’s expectations.

When you’re working with non-bankable borrowers, a good rule of thumb is to under-promise and over-deliver. The last thing you want is for your borrower to expect a bank rate and terms when it’s not something for which they qualify.

These expectations will make it harder for you to sell the deal and close the loan, so it’s crucial that you manage them and assure your borrower that you’ll find them the best commercial mortgage for which they can qualify.

Focus on positive aspects of the deal.

Many non-bankable commercial borrowers’ first objections involve their interest rate and the deal’s LTV. Generally, borrowers who need a non-conforming commercial mortgage are going to see higher rates and lower LTV’s, so you should make sure to accentuate the positive.

  • Is the loan going to close quickly?
  • Is your borrower getting a mortgage with fixed and fully-amortizing rate?
  • Did the lender get them a good deal on a commercial appraisal?
  • Focus on these benefits to keep your borrower on track.

Keep your borrower’s eyes on the prize.

One of the best ways to overcome your commercial borrower’s objections is to keep them focused on their goals.

If a mortgage from a non-conforming commercial lender is the only way your borrower can secure financing, you need to make sure they understand that it’s the best way to achieve their objective, whether that’s purchasing a new property, paying off credit card debt, or making improvements to their building.

Brokers are going to run into challenges when working with non-bankable borrowers who are seeking commercial financing.

In order to succeed, you need to know how to address your borrower’s objections in a way that sells them on the commercial mortgage they need.

Make sure to manage expectations early on, accentuate the positives and keep your borrower focused on what they want to achieve.

Taking these steps will make it easier to address your borrower’s concerns, sell the deal and close more commercial mortgages.

Consider These Factors When Working with Non-Bankable Borrowers

If you’re a broker working with non-bankable commercial borrowers, you’re going to want to focus on more than just the interest rate when selling the deal.

While the rate will certainly be an important factor in your borrower’s decision, you should also discuss other aspects of the deal that will impact your borrower when presenting them with their options.

Here are some things aside from the rate that your borrower should consider when seeking a commercial mortgage:

The terms the lender is offering:

As stated above, your borrower’s interest rate is important, but it’s not the only thing that should be considered.

Whether or not the mortgage is fully-amortizing, the prepayment penalty structure and lender fees are all factors that will impact your borrower, and you should review all of these components with your borrower.

Additionally, your broker fee is included in the terms of the deal, so consider lenders that will allow you to charge an appropriate commission for the amount of work you’re doing.

The way a lender services a mortgage:

There are many commercial mortgage lenders that package and sell their loans as commercial mortgage-backed securities.

If your borrower chooses one of these lenders, they end up making payments to a company they don’t know and may not trust. Working with full-service portfolio lenders eliminates this issue altogether.

They’ll work with your borrower through the life of the loan, which makes things simpler.

The flexibility of the lender:

Non-conforming commercial mortgage lenders are going to be more willing to work with borrowers who have faced financial challenges in the past.

This flexibility will allow you to find your borrowers the best mortgage solution and means that you’ll be able to close more loans more easily.

The turnaround time that they can expect:

If you’re working with a borrower who needs a mortgage fast, non-conforming lenders are your best bet.

These lenders aren’t constrained by the same regulations that banks deal with, so they can close a mortgage much more quickly.

Your borrower’s interest rate is an important factor in their decision, but it shouldn’t be the only thing they consider.

Make sure that you discuss the terms that potential lenders offer them, the way their mortgage will be serviced, and the lender’s flexibility and average turnaround time.

All of these factors have an impact on your borrower and will help to determine the type of commercial mortgage that will best meet their needs.

Developing Great Commercial Mortgage Referral Sources

One of a commercial mortgage broker’s most important resources is their referral network.

Without trusted financial professionals referring deals, it can be difficult for mortgage brokers to find borrowers.

So, in order to succeed you need to build and maintain a strong network of referral sources.

Here’s what you need to know to get started:

Know your lead sources.

In order to generate commercial mortgage leads, you need to know where to find them.

Reach out to accountants, lawyers, real estate agents and bankers in your area and let them know that you can get their non-bankable borrowers the financing they require.

These sources all have clients who can’t qualify for traditional financing, so selling your skills as a resource for them is a good strategy.

Make communication a priority.

Touching base with your growing referral network is a crucial part of keeping it strong. Contact your sources on a regular basis, but be careful not to become overbearing.

A call or an email every couple of weeks is a good starting point, and make sure to ask them what they want out of your partnership and how you can help them.

If they contact you, be sure to reply in a timely manner.

Be upfront about what you can offer.

In order to maintain strong relationships with your referral sources, being frank about the mortgages you can get their clients is very important.

For example, don’t promise bank rates and terms if you know a borrower won’t qualify.

Being open about the mortgages for which certain borrowers can qualify will make it easier to sell these deals, and will affirm your sources’ confidence in you as a trustworthy and competent business partner.

Understand your lenders’ programs.

Throughout the lending process, both borrowers and referral sources are likely to have some questions, so it’s important for brokers to understand all of their lenders’ programs.

If you can’t explain the products a lender can offer, referral sources are likely to take their business and their clients elsewhere.

A referral network is an important asset for any commercial mortgage broker.

You need to provide your sources with information that lets them know that you’re an experienced professional and that your services will benefit them and their clients.

Letting lead sources know that you’re a good resource for your clients and that your services are valuable is a great way to build and maintain your network and close more loans.

Simple Marketing Tips for Commercial Mortgage Brokers

When you’re just starting out, it’s important to take steps to market your services as a commercial mortgage broker.

Without the right approach, it will be difficult to drive leads and increase your business. In order to succeed, you’ll need to develop connections with potential borrowers and referral sources and keep them engaged.

Here are some basic tips for those of you who are interested in closing commercial mortgages:

Choose the right channels.

Between traditional and digital media, there are many ways that commercial mortgage brokers can reach out to borrowers and referral sources, and it’s important to select the best way to connect with them.

Do some research and figure out which social networks your audience is most likely to use and the best ways to communicate with them in order to drive leads.

Keep it simple.

When you’re new to marketing commercial mortgages, it can be easy to bite off more than you can chew and get overwhelmed.

For example, trying to update multiple social media channels, writing a company blog and creating video content can be difficult if you try to do it all at once.

Instead, choose a few things to start with, and add more marketing approaches as you grow more experienced.

Use your own voice.

One of the biggest mistakes you can make in marketing is foregoing your own unique voice in an effort to sound more knowledgeable.

Generally, this just makes you seem inauthentic. No matter what kind of marketing content you create, make sure to use your own words.

Utilize calls to action.

When marketing your services, you’ll want to drive potential clients and referral sources to take some sort of action.

Whether it’s clicking a link to your website or a social media profile, or calling your office to learn more, be sure to include a call to action in all of your marketing materials.

Don’t be “always selling.”

An immediate sales pitch tends to be jarring for most consumers who aren’t ready to take the plunge. Instead, provide potential borrowers with helpful information about commercial mortgages.

This shows them you’re a credible and experienced professional, and they’ll be more likely to contact you when they’re ready to hear a sales pitch.

For commercial mortgage beginners, a simple and effective marketing strategy will be a major component of your success.

Remember to keep your audience in mind when choosing marketing channels and strategies, and keep them engaged on all of the platforms you choose to use.

With the right approach, you’ll see more leads and more closed loans.

Building a Solid Commercial Mortgage Leads Network

Referral sources that provide commercial mortgage leads are crucial to any broker’s success in the industry.

If you’re new to the commercial mortgage niche, building a network that will keep your pipeline healthy might seem a bit daunting at first, but it’s simple.

You just need to know who the best sources will be, how to market your services to them and be ready to communicate consistently.

Here’s how you can build a great commercial mortgage leads network:

Know your sources.

First, brokers need to be aware of which financial services professionals are the best referral sources for commercial mortgages.

Bankers, CPAs, attorneys and realtors are generally the best people to ask about borrowers seeking commercial financing.

These professionals will know who cannot qualify for a bank loan and all have a vested interest in helping these individuals to find a funding source.

Tailor your marketing.

Once you’ve determined the professionals with whom you’ll be seeking to build partnerships, it’s time to develop a plan to market your services as a commercial mortgage broker.

You can use a variety of traditional and digital tools to advertise your business to referral sources, but the most important thing to remember is to sell your skills and explain how those skills will benefit your commercial mortgage sources.

Follow up regularly.

Make sure that you routinely connect with the professionals in your referral network.

Whether you send them an email, give them a call or meet them in person, it’s important to do so consistently. If a source contacts you first, be sure to return their call or reply to their email in a timely manner.

Again, remember to focus on how your services will benefit them and always ask how you can help them.

Developing a solid commercial mortgage leads network is the best way for brokers to achieve success.

If you’re willing to put the effort into building and maintaining a referral network, you can expect to close more commercial mortgages and earn more income.

Succeed as a Commercial Mortgage Broker through Networking

If you’re a mortgage broker new to the commercial mortgage industry, it can be difficult to know where to start your search for leads.

This is where networking comes into play. There are plenty of groups and events that can give you access to potential borrowers, as well as potential referral sources and lenders.

If you want to build your network, here are some great places to start: Join your local Chamber of Commerce.

A town or city’s Chamber of Commerce is a great place for commercial mortgage brokers seeking to expand their network of potential borrowers and referral sources.

Once you join, you’ll be able to interact with small business owners in your area, as well as financial professionals who work with clients who may be in need of financing for their commercial properties.

Participate in online industry forums.

The internet is one of the most important tools at your disposal, and every commercial mortgage broker should take advantage of the opportunities it presents.

Across many social platforms, there are plenty of groups for both small business owners, as well as professionals in the commercial mortgage industry. Join these groups and begin connecting with potential borrowers, as well as referral sources and commercial mortgage lenders.

Attend trade shows and conferences.

If you’ve got the time and resources, industry trade shows and conferences are worthwhile. These events allow you to build connections with lenders, referral sources and even other brokers.

Not only are these events great networking opportunities, there are often seminars with experienced commercial mortgage professionals, so you can learn more about how to succeed in the industry.

Develop a follow-up procedure.

No matter how you connect with borrowers, referral sources and lenders, you should establish how you’re going to follow up with each of them.

Whether it’s the occasional phone call or regular emails or a combination of both, be sure to remain consistent and always let them know how your services will benefit them.

All of these networking groups are great sources for commercial mortgage brokers. Joining local networking groups, like the Chamber of Commerce, establishes you as a commercial mortgage expert in your area, while internet forums and trade shows allow you to connect with people outside your area.

No matter which groups you join or events you attend, remember to go out of your way to help your new connections and to let them know how you can help them.

As long as you are an active member of the above groups and are willing to help your fellow group members succeed, you shouldn’t have much trouble finding new sources of commercial mortgage leads.

Building Connections in the Commercial Mortgage Business

Mortgage brokers looking to break into the commercial business should focus on developing relationships with borrowers and referral sources in order to drive leads.

If you want business, you must prove that you’re a competent and knowledgeable broker.

By concentrating on building connections with both borrowers and referral sources, you’ll build the sense of trust necessary to grow your business and close deals.

Here’s how you can get started:


Provide useful information.

Whether it’s through the blog on your company website, an email blast or a phone call, it’s important to give your borrower information that will help them to understand the type of commercial mortgage for which they qualify, and what they need to do to get it.

Give them industry insights, tips on making sure the lending process goes smoothly, and an overall sense of what they can expect.

Engage with them.

If a borrower calls you, emails you or connects with you through social media, talk to them and answer any questions they have. Make sure to answer them in a timely manner.

Keep it simple.

Avoid industry jargon wherever possible and give your borrower information about commercial mortgages in the most basic terms.

Referral Sources Contact them regularly.

To build a relationship with a referral source, it’s important to reach out to them on consistent basis.

Send emails and call regularly to check in with them and remind them that you can help clients in need of commercial financing.

Focus on problem-solving.

If you want financial professionals like CPAs, bankers or realtors to send you deals, you need to let them know how they benefit from your services.

Whether it’s preserving a relationship with a client or saving a sale, make sure you explain what’s in it for them if they refer their clients to you.

Your success in the commercial mortgage industry is all about developing connections to keep your pipeline full.

Whether you’re trying to build a relationship with a borrower or a referral source, it’s important to make sure they understand how your services will benefit them. If you can do that, you’ll be able to close more commercial mortgages and earn more income.

How to Turn Commercial Mortgage Leads into Closed Deals

We’ve discussed the best sources for commercial mortgage leads, as well as effective ways to communicate with potential borrowers in the past. But what do you do when you start receiving these leads?

How to you convert them into closings and commission checks? It might seem like a challenging task, especially if you’re working with a non-bankable borrower, but taking the steps below will help you to close commercial mortgages.

Ask questions.

Before you do anything else, you need to ask the borrowers some basic questions. You should find out how much money they need and what their plans for the money are, as well as some basic information about the property (type, size, location, etc.) and their credit history.

The more information you get from your borrowing before sending the scenario to a lender, the easier it will be to get the underwriting process started.

Submit the right paperwork.

The documentation needed for a mortgage request will vary from lender to lender, so it’s important to ask yours what they expect.

If you’re working with a non-bankable borrower and a non-conforming lender, you’ll likely need to submit a completed 1003, a credit report with trade lines and scores, a summary of the deal, and current photos of the property if you have them.

Make sure you ask your lender exactly what they’ll need to evaluate the deal and get that information to them.

Keep your borrower’s expectations in check.

One of the trickiest parts about getting a non-bankable borrower the commercial mortgage they need is to make sure they’re expectations align with the deal for which they’ll qualify.

You need to make sure that the borrower understands what kind of rate and terms they can expect so that selling the deal isn’t an uphill battle.

To succeed as a commercial mortgage brokers, you need to be able to convert your leads to closed deals.

Having all of the important information about your borrower and their situation ready, submitting all of the necessary documents and managing your borrower’s expectations will keep the process moving smoothly and allow for you to close loans fast and earn more income.

Understand the Commercial Mortgage Underwriting Process

Closing commercial mortgages is a simple way for brokers to earn more, and taking the time to learn about and understand the underwriting process will make it even simpler.

Once you know what goes into underwriting a commercial mortgage, you’ll be able to provide your lenders will all of the necessary information in order to close these loans as quickly and smoothly as possible.

Here are some of the various factors that affect the commercial mortgage underwriting process:

The application:

When submitting a commercial mortgage scenario, the more information you send to your lender, the better.

Most lenders will need your borrower’s application to include a completed 1003, a recent credit report with scores and trade lines and a summary of the deal to get started.

Without these items, the underwriting team will be unable to evaluate your borrower’s request, so make sure you have these documents.

Additional documentation:

Every lender has different requirements when it comes to the information, they’ll need to fully underwrite your borrower’s commercial mortgage.

Additional documentation might include tax returns to make sure your borrower has filed with the IRS, an agreement of sale if they’re looking to purchase a property or a rent roll if they rent out all or part of the building to tenants.

Talk to your lender to get a better understanding of all the documentation they’ll need to fully underwrite the deal and get them that information as quickly as possible.

Determining the rate:

Many factors go into determining the rate of your borrower’s commercial mortgage.

Their credit history, especially how well they’ve met past financial obligations, and their experience in their business are two of the most important factors used to determine the risk of lending to a borrower and thus their rate.

Make sure you understand this so you can explain if your borrower has any questions about their rate.

Determining the LTV:

Like the rate, there’s a lot that goes into determining the loan-to-value (LTV) ratio, which dictates the maximum loan amount a lender can offer your borrower.

The value of the property as determined by a commercial appraisal, the property type, where it’s located and how well the property debt services are all crucial factors in determining the loan amount for which your borrower can qualify.

Understanding the commercial mortgage underwriting process will help you to provide your lender with the information they need in a timely manner.

Getting to know how your lenders underwrite deals will help you to submit more complete applications, which will in turn lead to faster closing and additional income earned.

The Different Types of Interest and Terminology

There is much to be gained from having a basic understanding about interest rates, the different types of interest rates that are available, and how interest rates are calculated before you enter into any loan arrangement.

The more you know about interest rate formulas the better you’ll be positioned to make a more informed judgement when it comes to taking out a loan and, in doing so, ensure that you keep as much of your money in your pocket as possible.

What is ‘interest’?

In its simplest form, ‘interest’ is the cost of borrowing money, and it is normally expressed in terms of a percentage of the overall loan.

Not only will you have to pay back the original amount of money borrowed (the principal), but you’ll also have to pay back the cost of borrowing that money (the interest, plus any setting up fees etc.)

How much interest you have to pay on any given loan is subject to a number of different factors, depending on which lending institution you borrow the money from and the terms of the loan.

Fixed Rate Interest

Fixed rate interest is simply as the name suggests: a ‘fixed’ percentage of the loan must be paid back during the life of the loan.

For example (using dollars as our currency), a $1,000 loan with a fixed rate of interest of 5% per annum, means that if the loan amount were to be paid off in 12 months, the total amount the borrower would pay back would be $1050.

Fixed rate interest loans make it very easy to calculate the exact amount of money the borrower will have to pay back each month as the amount never changes.

Variable Rate Interest

Variable rate interest loans allow the lender to set the interest rate to whatever market conditions demand at any given time during the life of the loan.

The attraction of variable interest rate loans is that you can benefit from any future drop in market interest rates when your monthly repayments are reduced to reflect the lower interest rate.

However, the opposite also holds true. If the market decides it is time for interest rates to rise, so too will your repayments.

Mortgage loans, for example, are mostly set up with a variable interest rate, as it is virtually impossible to predict market conditions years ahead.

In many cases you can opt for a fixed rate for a few years but after this period the loan reverts to a variable rate (these deals vary from lender to lender).

Make sure you fully understand the consequences of a variable interest rate loan if you are considering taking one out. If interest rates rise dramatically you could find yourself in financial difficulties.


APR, or ‘Annual Percentage Rate’ is the total cost of the loan based on a yearly metric. In most cases this includes set up fees, administration costs and so on. In many countries, financial lenders must disclose the APR so that consumers have the chance to measure all lenders against a common metric.

Simple Interest

Interest rates are seldom calculated using the simple interest rate formula but rather are more likely to be calculated using the compound interest formula.

However, to explain, simple interest is calculated by multiplying the loan amount (e.g. $1000) by the interest rate (e.g. 5%) by the number of payment periods over the life of the loan (e.g. 24 months).

The thing to keep in mind here is that the interest rate may be expressed in terms of an annual rate, e.g. 5% per annum, whereas the payment periods might be expressed in months, e.g. 24 months. To ensure your calculation of simple interest is accurate, you need to make sure that both the interest rate and the payment periods are expressed in the same manner, say annually or monthly.

For example, using the figures above our $1000 loan would be at 5% per annum, and taken out over just 2 years (as opposed to 24 months). So here the calculation would be 1000 x 0.05 x 2 (loan x interest x term) = 100. So, the amount of simple interest that we would pay on this loan over the Two-year term would be $100.

Compound Interest

Compound interest relates to charges the borrower must pay not just on the principal amount borrowed, as in simple interest, but also on any interest outstanding at that point in time.

To illustrate the difference between compounding interest and simple interest, consider the following (very simplified) scenario of a $1000 loan taken out at 10% over 2 years (assuming no monthly payments are made on the loan):

Example of Simple vs Compound Interest Simple Interest:

First year: $1,000 x 1-year x 10% = $100 in interest Second year: $1,000 x 1-year x 10% = $100 in interest Total Interest: $200

Total of the principal amount plus interest = $1,200

In this scenario, the total amount of interest paid over the life of the loan would be $200 Compound Interest:

First year: $1,000 x 1-year x 10% = $100 in interest

Second year: $1,100 ($1000 principal plus $100 accrued interest) x 1-year x 10% = $110 in interest

Total Interest: $210

Total of the principal amount plus interest = $1,210

In this scenario, with interest compounded annually, the total amount of interest paid is $210

his is a very simplified example but it should be enough to highlight the workings of compound interest.

How to Analyze A Commercial Real Estate Deal

When you’re considering commercial property, you need to know as much as you can about the income and expenses before you even consider making an offer.

There are Four calculations that every real estate investor should utilize to determine a potential income property’s investment quality.

They are the ensuing:

  • Gross Rent Multiplier
  • Net Operating Income
  • Capitalization Rate
  • Debt Service Ratio

Gross Rent Multiplier (GRM):

The gross rent multiplier is a simple method by which you can estimate the market value of a commercial income property. The advantage is, this is very easy to calculate and the GRM can serve as an extremely useful precursor to a serious property analysis, before you decide to spend money on an appraisal.

To Calculate the GRM:

Gross Rent Multiplier = Market Value / Annual Gross Scheduled Income Transposing this equation:

Market Value = Gross Rent Multiplier X Annual Gross Scheduled Income Net Operating Income (NOI):

Net Operating Income is a property’s income after being reduced by vacancy and credit loss and all operating expenses. The NOI represents a property’s profitability before consideration of taxes, financing, or recovery of capital.

To Calculate the NOI:

Net Operating Income = Gross Operating Income Less Operating Expenses

Capitalization Rate (Cap Rate):

The capitalization rate is the rate at which you discount future income to determine its present value. The cap rate is used to express the relationship between a property’s value and its net operating income (NOI) for the coming year.

To Calculate the Capitalization Rate (Cap Rate): Capitalization Rate = Net Operating Income / Value Transpose this formula to solve for the ensuing variables. Value = Net Operating Income / Capitalization Rate

Net Operating Income = Value X Capitalization Rate Debt Service Ratio (DSR):

Debt service ratio is the ratio between the property’s net operating income (NOI) for the year and the annual debt service (ADS). Potential mortgage lenders look carefully at the DSR and its future projections, basically they want to know if the property can generate enough income to pay the mortgage in addition to cash reserves and a profit.

To calculate the Debt Service Ratio (DSR):

Debt Service = Annual Net Operating Income (NOI) / Annual Debt Service

How to Process A Commercial Real Estate Loan

Lenders typically begin the process by pre-qualifying potential borrowers first.

They do this by evaluating the individual’s financial, business, credit history and income. They also take other factors into account, such as existing debt and the purpose for the loan.

Once the pre-qualifying stage is complete, the borrower must then fill out a loan application form.

Applying for a commercial loan requires a significant amount of paper work and documentation.

If the purpose of the loan is to fund a new or existing business, for example, the petitioner may have to provide background information on their business or a business plan for the future that includes projected earnings and profit.

Other standard requirements may include personal tax returns dating back at least three years, liabilities and personal financial statements including all assets.

Once the application has been completed, the loan officer will review the applying individual’s credit history, available collateral and income.

Collateral for such loans typically includes real estate, stocks, bonds, and other guaranteed items of high value. Collateral is of course required to provide the lender with confidence that the borrower will be able to repay the loan even in the event that loan obligations fail to be met.

Once the paperwork has been considered and approved, the loan application is forwarded to a loan underwriter or loan committee.

It is their sole purpose to approve or deny the loan based on the information provided.

Shortly thereafter, a processor presents the loan applicant with a letter of intent or term sheet which must be approved and signed.

This document includes all pertinent information regarding the terms of the loan, including the total amount to be financed, the type of collateral applied to the loan, and the terms of repayment.

The primary purpose of this document is to ensure that all parties involved have in fact agreed to the same terms and conditions.

The decision to approve or reject the loan usually takes about five days, during which the applicant may be asked to provide additional documentation to the loan committee should they require it.

Once the letter of intent has been submitted, the lender may also ask for a check intended to serve as a deposit or to cover the costs of generating certain reports necessary for the loan approving process.

The complete loan application package is then resubmitted to the loan committee for final approval. If and when the loan is approved, the applicant will have to sign the finalized loan documents.

If the applicant has a closing agent (such as an attorney, escrow representative or title company), all closing documents will be sent to them. It is then up to the agent to file and complete all the remaining paperwork (i.e. deed transfers and mortgages, title insurance, exchanging funds, etc.).

Closing generally takes place within days of final approval, at which time the lender provides the loan in the form of a draft, electronic wire transfer to the applicant’s bank account, or cashier’s check.

Commercial Mortgage Supporting Document List

The ensuing is a list of supporting documents that are required to perform the initial due diligence review your proposed purchase commercial loan request.

Completed Transaction Summary Questionnaire from Winston Rowe & Associates

Business Financial Supporting Documents:

  • Name and Address of Corporate Bank
  • All Business’s Profit & Loss Statements for 3 Years List of Business’s Owned

Property Supporting Documents:

  • Subject Property Income & Expense Statement YTD for the last 3 Years Subject Property Profit and Loss
  • Schedule of Tenant Leases Copies of Tenant Leases
  • Verification of Land or Building Purchase with Mortgage Balance Most Recent Survey
  • Schedule of Units with Square Foot Per Unit Excel Format Schedule of Improvements to be made with Cost Breakdown
  • Exterior Photos of Subject Property Photos of Parking Lot, Street view Interior Photos of Subject Property
  • Most Recent Appraisal
  • Copy of the First Page of the Insurance Binder List of All Litigation Past and Present Purchase agreement
  • Current Mortgage Information, Contacts and Rate and Term Guarantor Supporting Documents:
  • 4506 (T) Executed
  • Three Bureau Credit Report
  • Valid Government Issued Photo ID Front and Back Copy
  • Most Recent Business and Personal Bank Statement YTD for
  • 3 Months Personal Financial Statement for all Guarantors YTD for 12 Months Business and Personal Federal and State Tax Returns for 3 Years Articles of Incorporation

There will always be additional documents required by a lender or bank to complete the formal underwriting process.

What Every Broker Should Know About Commercial Appraisals

A major part of determining the size of a commercial mortgage is understanding the value of the property that your borrower plans to pledge as collateral.

The best way to determine this value is through an appraisal report. Because they’re such crucial tools in the lending process, it’s important for brokers to understand a few things about these reports.

Here’s what you should know:

A commercial appraisal is more expensive.

The average appraisal report for a commercial property generally costs about $1,500-$3,000. Depending on the collateral, the location and the availability of comparisons, it can cost more or less than this, but it’s definitely going to be more expensive than a residential appraisal. Brokers should be aware of the cost and should discuss it with their borrowers before submitting an application to a commercial mortgage lender.

The reports are more complex.

Part of the additional cost is the complexity of commercial appraisal reports. While a residential property generally requires a simple form appraisal, many lenders require more in-depth reports complete with sales and income approaches included in order to fund mortgage requests for commercial property owners.

The complexity increases if your borrower owns a unique property or if the collateral is located in a rural area where comparisons are harder to find.

Lenders usually order the appraisals.

Because commercial appraisals are more involved, lenders generally have trusted approved appraisers from whom they order reports. It’s important to check in with your lender and make sure that you’re on the same page about who’s ordering the appraisal. Otherwise, your borrower could end up paying for two.

In order to make the lending process as seamless as possible, it’s important for brokers to understand the basics about appraisal reports and to prepare their borrowers for what to expect.

These reports are more expensive and complex, and are incredibly important to the lender when determining the final LTV of a loan. Be sure to discuss the proper procedure with your lender when it comes to commercial appraisals, and be willing to work with them should any issues arise.

Submission Process and Procedure for Winston Rowe & Associates

A completed Transaction Summary Questionnaire must be initialed and signed by the prospective client to be considered as a client of Winston Rowe & Associates.

Your commercial real estate mortgage request will never fund if you do not adhere to our and the capital sources policies, procedures or are less than truth full during the submission processes(s).

Winston Rowe & Associates cannot make a guarantee or promise of any kind that your proposed request for financing will be successful, because the final determination is made by the capital source(s).

Winston Rowe & Associates utilizes a best efforts approach to perform the initial due diligence review, our work product pursuant to the proposed general terms and conditions as detailed in the Winston Rowe & Associates executed Letter of Interest.

Step 1 Transaction Summary:

Upon receipt of the completed and signed transaction summary questionnaire, the material facts as presented by the client will be reviewed by Winston Rowe & Associates.

Step 2 Processing & Initial Due Diligence Review:

Winston Rowe & Associates will schedule a call with the client to review and verify the material facts as presented by the prospective client and then provide to the prospective client a list of supporting documentation required to begin the initial due diligence review (our work product).

After an initial due diligence review of said required supporting documents, then based on the Transaction Summary Questionnaire and information provided in the conference call, Winston Rowe & Associates will issue the client a LOI (Letter of Interest)

This Letter of Interest is not a commitment or promise to fund your proposed financing request.

Winston Rowe & Associates does not guarantee that the loan terms or interest rates offered are the lowest interest rates or best loan terms in the market that are made available by its capital source(s) from time to time.

When all of the required supporting documentation has been submitted to Winston Rowe & Associates, they will begin the initial due diligence review to prepare (package) the proposed financing request for the capital sources(s) underwriting at their sole discretion.

Please note; the proposed financing request will not be submitted to the capital source until all of the required documentation has been provided.

Step 3 Submissions to The Capital Source(s) For Underwriting:

Once Winston Rowe & Associates completes the initial due diligence review of the proposed transaction it will be formally submitted at Winston Rowe & Associates sole discretion to the pre-determined capital source(s) for underwriting and potential funding.

Winston Rowe & Associates is not a lender and does not make loans or credit decisions in connections with loans.

The capital source(s) make the determination pursuant to all funding requests. Step 4 Commitment Documents, Reports & Loan Closing:

Upon completion of underwriting the pre-determined capital sources will issue general terms and conditions defined within a Letter of Interest or conditional commitment documents.

The client will be placed in direct contact with the capital source to finalize the transaction. Once the proposed transaction has completed underwriting; property reports are then ordered.

These reports are paid for, prior to funding by the client which include; appraisals, surveys and studies.

Report types vary according to real estate type.

Winston Rowe & Associates does not order or accept fees for any reports, surveys or studies. The capital source(s) order reports, surveys and studies pursuant to their policies.

When the necessary property reports are completed, the title work is ordered and a closing is scheduled.

Commercial Real Estate Financing Glossary of Terms

1031 Exchange

An exchange of business or investment property for another property of equal or lesser value for which Internal Revenue Service (IRS) Code 1031 allows capital-gains deferral. To satisfy the IRS regulations, a replacement property must be identified within 45 days of the sale of the original property, and closing must occur within 180 days. Third-party 1031-exchange intermediaries are often employed to monitor timing, prepare documentation and hold funds between sale and purchase.

4506, 4506-T or 8821

Consent forms that grant the lender rights to obtain and verify borrowers’ tax-return information from the Internal Revenue Service (IRS). The forms are used for the following purposes:

Form 4506, “Request for Copy of Tax Return,” is used to obtain a complete copy of the tax returns submitted to the IRS.

Form 4506-T, “Request for Transcript,” is used to obtain a line-item summary of the tax returns submitted to the IRS, as well as 1099 and W-2 information.

Form 8821, “Tax Information Authorization,” is used to gain information about previous taxation issues. It is not used to obtain tax returns or transcripts.


A mortgage lender’s right to demand immediate payment from a borrower who defaults on a loan.

Acquisition and development loan

A loan provided for the purpose of developing raw land. Additional advance

Supplemental loans given to borrowers while they are completing their mortgage transactions. These advances are often paid as a percentage of the mortgage.


A process by which borrowers make monthly principal payments to gradually reduce their mortgage debt.

American Society of Testing Materials (ASTM)

Organization that defines environmental regulations used to set the benchmark for standardized environmental reporting. Commercial real estate developers can satisfy Comprehensive Environmental Response, Compensation and Liability Act requirements using ASTM standards for environmental site assessments.

Annual percentage rate (APR)

The annual cost associated with borrowed funds expressed as a percentage. Appraisal

A dated, written document in which the property’s value has been determined by a qualified real estate expert. From a lending perspective, the appraised value is considered valid for 120 days.


The increase in value of an asset. Real estate may appreciate due to a number of factors, including inflation-rate increases, limited supply of inventory, highly desired location or the local economy’s growth rate.

Balloon payment

An oversized payment due at the end of a mortgage, commercial loan or other amortized loan. Because the entire loan amount is not amortized over the life of the loan, the remaining balance is due as a final repayment to the lender. Balloon payments are often prepackaged into what are called “two-step mortgages.” In this type of mortgage, the balloon payment is rolled into a new or continuing amortized mortgage at the prevailing market rates. Balloon payments can occur within fixed-rate or adjustable-rate mortgages (ARMs).

Blanket loan

A mortgage loan with multiple properties as collateral. Bond

Long-term debt sold to investors. Mortgage loans are often bundled together and sold as mortgage-backed bonds. Proceeds from the sale of the bonds generate new revenue streams for banks, allowing them to continue issuing new loans.

Bridge loan

A short-term loan given to a borrower until permanent financing becomes available. Building permit

A government-issued document that gives a builder authority to construct or modify a structure. Business credit report

A compilation of a commercial entity’s credit history and risk. Capital gain

The difference between an asset’s appreciation and the price paid when it was acquired.

Capital-gains tax

Tax on profits received from the sale of capital assets. Cash-out refinance

Refinancing a current mortgage at a higher loan amount and taking the difference in cash. Certificate of occupancy (C of O)

A key piece of documentation in commercial real estate that is issued when building construction is complete. The C of O indicates that no other work is required and that all inspection requirements have been satisfied. In commercial finance, when the borrower receives the C of O, the lender will close a temporary bridge loan and, once the final project costs are calculated, issue a permanent loan.

Closing costs

Fees associated with the acquisition of real estate. These include, but are not limited to, lender fees, credit checks, title insurance, and survey and recording fees.

Commercial mortgage-backed securities (CMBS)

A type of mortgage-backed security that is secured by loans on commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders.


Used to determine the market value of a property, based on comparisons of like-properties sold within a specific geographical area and time period. Also known as comps.

Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980

A federal law designed to clean up and establish liability for hazardous waste sites, also known as Superfund sites.

Construction completion loan

A loan provided to cover project cost overruns. Typically, a bank will lend a set amount for construction projects, and borrowers are required to pay for or finance any additional costs. If borrowers experience a cash shortfall, construction completion loans cover the difference.

Because the borrower is typically in a critical situation, interest rates on these loans are generally higher than for conventional loans.

Construction loan

A loan issued for the construction or major renovation of a property. As work is completed during the various stages of construction, money is paid out to borrowers incrementally in the form of draws.

Construction output price index (COPI)

A measure of the cost of work being executed in a given period. The index was originally designed to measure the inflation-adjusted value of construction output, but is also used in a range of other statutory and contractual applications.

Contingency fund

Money reserved as a buffer to cover cost overruns or unexpected expenses in a project. In loan underwriting, the fund is often tied to and calculated as a percentage of estimated construction costs.

Correspondent lender

A mortgage broker/banker who originates, funds and sells mortgage loans through a relationship with a larger lender, in accord with the larger lender’s underwriting guidelines and program offerings.

Credit report (Personal)

A record of consumers’ credit activities. These activities are tracked by three credit bureaus: Equifax, Experian and TransUnion. According to the Federal Reserve Bank of San Francisco, four main categories are documented in personal credit reports:

Identifying information: Full name, any known aliases, current and previous addresses, Social Security number, year of birth, current and past employers and, if applicable, similar information about spouses.

Credit information: Accounts held with banks, retailers, credit card issuers, utility companies and other lenders. Listed by type of loan, such as mortgage, student loan, revolving credit or installment loan; the date the account was opened; the credit limit or loan amount; any co-signers of the loan; and consumers’ payment pattern over the past two years.

Public-records information: State and county court records on bankruptcy, tax liens or monetary judgments. Some consumer-reporting agencies also list non-monetary judgments.

Recent inquiries: The names of those who have obtained copies of the consumer’s credit report within the previous two years.

Credit score

A numerical valuation based on personal credit reports that is used to evaluate a borrower’s credit risk. The range on credit scores is 300 to 850. Also referred to as a FICO score.

Debt-service-coverage ratio (DSCR)

A calculation used in commercial real estate underwriting to determine whether income from a property can service the debt associated with the property. To calculate debt service coverage, divide the net operating income by total debt service for the subject property. A DSCR greater than 1 indicates a positive cash flow, and a DSCR less than 1 indicates negative cash flow.

Ideally, lenders look for a DSCR of 1.2 or higher. Debt-to-income ratio (DTI)

A calculation based on total monthly debt payments divided by total monthly income. This is a percentage-based result, and measures the level of lending risk.

Deed of trust

A document created under state law that documents a pledge of real property to secure a loan. The deed of trust involves the trustor (borrower), the beneficiary (lender) and the trustee. The trustee is a third party who holds title and is empowered to foreclose on the property should the trustor default.


The failure of a debtor to meet a legal obligation of a loan, i.e. the failure to make a payment, or payments, on a mortgage loan.

Deferred interest

Interest that accrues, but remains unpaid. For instance, on some adjustable-rate mortgages for which borrowers choose a fixed monthly payment, the monthly payment may not satisfy the entire monthly expense as the interest rate changes. The outstanding unpaid interest is added to the loan amount.

Down payment

A borrower’s initial contribution toward a property purchase. To obtain a loan, most lending programs require some form of down payment, based on a percentage of the total purchase price.

Draws on demand

Taking funds from a construction budget to pay suppliers and contractors on demand. EB-5 Immigrant Investor Program

A program created by federal law, under which immigrants to the U.S. may be granted visas by investing minimum amounts ranging from $500,000 to $1 million in new commercial enterprises. Investments must meet location and job-creation criteria.

Environmental risk

The potential loss of value because of the presence of hazardous materials on a property. Such materials may include asbestos, polychlorinated biphenyls, radon or leaking underground storage tanks.


The difference between a property’s market value and the debt owed on the property. If a borrower owes $700,000 on a loan for a property valued at $1 million, the borrower has

$300,000 in equity in the property. Can also be expressed in negative terms.

The value of shares issued in a commercial real estate enterprise, or other company. Equity line of credit

A credit product in which a property owner borrows against the owner’s equity in a commercial property, as needed. Typically, there is a fixed period of time that a borrower can draw on the loan, after which it is converted to a term loan.

Escrow account

A trust account in which cash or other assets are held to pay expenses pending satisfaction of contractual obligations.

Financial statements

Historical financial reports of assets, liabilities, capital, income and expenses. Fixtures

Items that are attached to a property. These may include heating and air-conditioning systems, wall-mounted shelves and security systems.

Flagged hotel

A hotel belonging to a nationwide corporation or franchise. Flood zone

A geographical area designated by the federal government as subject to potential flood damage. Lenders must complete a Federal Emergency Management Agency (FEMA) flood-hazard- determination form prior to funding a property to determine whether a property is located in a potential flood zone and required to carry flood insurance. The 100-year floodplain — or areas where floods have a 1-percent chance of equaling or exceeding the elevation each year — is the basis for most FEMA determinations.

Floating rate

An interest rate that is allowed to move up and down with the rest of the market or with an index. This contrasts with a fixed interest rate, in which the interest charged on a debt obligation stays constant for the duration of the agreement. A floating interest rate is also referred to as a variable interest rate.

Foreign national

An individual residing in a country, but who has not been granted the legal right to permanent residency.


A business method in which independent owners operate under a right or license agreement to distribute goods or services.

Free and clear

Ownership of an asset without debt obligations. Garden apartment

In real estate finance, this usually refers to a multifamily development or project in which tenants have access to a shared lawn area.

Good-faith deposit

A monetary deposit made by a purchaser to indicate genuine interest in the purchase of a property.

Graduated-payment mortgage

A loan designed to start with smaller initial payments. Payments then increase at a predetermined rate.

Hard-money loans

A type of financing that typically provides funds for hard-to-fund projects or short-term purposes. Hard-money lenders generally give more consideration to the value of the property, or collateral, than to credit history. Loan-to-value ratios are usually less than 75 percent, and credit scores, if required, can be less than 500. Also referred to as equity lending.

Improved land

A parcel of land that has been developed for use. Improvements may include electrical, water, telephone or sewer lines; grading, landscaping, roads or gutters; and construction of permanent structures.

Individual Taxpayer Identification Number (ITIN)

An alternative to a Social Security number, which is used for federal and state taxation purposes. ITINs are assigned to those who do not qualify for Social Security numbers, such as foreign nationals working in the U.S.

Installment loan

A loan that requires regular, fixed payments over a specific period of time, such as car and student loans.


Assets that lack physical substance, such as goodwill, patents and trademarks. Interest

The price paid for borrowing money, calculated on an annual percentage basis. Interim financing

A short-term loan issued prior to permanent financing. Interim statements

Financial statements issued for periods of less than one year. Investment property

Real estate owned for income or capital appreciation rather than the owner’s personal use. Joint tenancy

An ownership structure between two or more people. Under joint-tenancy law, if one of the owners dies, the surviving owners are granted the decedent’s interest.

Leasehold improvements

The cost of improvements made on leased property, often paid by the tenant. Lien

A legal claim against an asset for an outstanding debt. If the asset is sold, all liens against the asset must be cleared before a transfer of title can occur.

Loan-to-cost ratio (LTC)

A percentage calculated by dividing the loan balance of a construction project to the cost of building the project.

Loan-to-value ratio (LTV)

A percentage calculated by dividing the loan balance of a property by its market value. The higher the LTV, the greater risk for the lender. Consequently, loans with more than 80-percent LTV have higher interest rates and typically require private mortgage insurance.

Market value

Determined by a property appraisal, an estimate of what a buyer would expect to pay for an asset under current market conditions.


The time at which a loan’s principal balance must be paid. Mezzanine financing

A loan that comes with a warrant that lets the lender convert to equity-interest in a property if the loan is not repaid in full.

Mini-perm loan

A commercial loan with a balloon payment and a three- to five-year term. Mini-perms are obtained for projects without an established operating history. The loans provide funding while projects are being established, with the assumption that they will be converted into permanent loans once the property is in use.

Mixed-use properties

Properties built and/or zoned for commercial and residential use. They typically feature ground- level commercial space with residential apartments or condominiums above.


A loan that is paid over time and secured by real estate. The lender retains the legal right to acquire and sell the property if there is a breach in the loan contract, such as a failure to pay.

Mortgage broker

An individual who sources mortgage loans and serves as an intermediary between borrowers and lenders. Brokers charge a fee for their services, which is typically based on a percentage of the loan amount.


Properties that are constructed for multiple-family use, such as apartments or duplexes. If the building is sold as a complete unit, condominiums can also be considered multifamily properties. However, condominiums typically are sold as individual units, and not considered multifamily properties.

Net-net lease

A lease in which, in addition to the rent, the tenant pays for property taxes and insurance. Commercial tenants are also might also be required to pay maintenance costs on a property (See Triple-net lease).

Non-owner-occupied property

Income-producing property in which the owner does not live or operate a business. Many lenders consider non-owner-occupied properties to be higher-risk, and as a result, mortgages for these properties may carry a higher interest rate.

Nonrecourse loan

A loan that is secured by collateral (e.g., a home or building), but for which the borrower is not held personally liable. If the lender seizes the property and the sale does not cover the loan, the borrower is not responsible for the shortfall. Nonrecourse loans typically have a lower loan to value ratio (80 percent to 90 percent) to increase the lender’s level of protection should the loan go into default.

Nonresident aliens

Immigration status granted to foreign nationals living and working in the United States on nonimmigrant visas. The most common types of visas are tied to a sponsoring institution or employer (e.g., EB-1, F-1, H-1B, J-1, etc.). For tax purposes, nonresident aliens are taxed on U.S.-based trade, business or employment income.

Office condos

Office units that business owners can buy rather than lease. On-time completion bonus

A bonus given to a contractor for finishing the construction of a home or commercial project within an allotted time frame.


A property-owner who assumes responsibility for the overall job of building a property, rather than using a general contractor.

Owner-occupied businesses

Businesses that operate out of the building they own. Par pricing

An interest rate used as the reference point for which a mortgage lender will neither pay a rebate (yield spread premium or negative points) or require discount points for a mortgage.

Passive real estate

Income-producing properties that do not require active involvement in their day-to-day operations, such as storage facilities and carwashes.

Permanent resident aliens

Foreigners who have been granted permanent residence in the United States and have been issued a permanent-resident card (aka, green card) but who do not have U.S. citizenship. For tax purposes, permanent residents are taxed on their global income.


Personal Financial Statement Planned urban development (PUD)

A type of community zoning classification that is planned and developed within a city, municipality and/or state that contains both residential and non-residential buildings (such as shopping centers). Open land, such as for parks, is also often included PUD zones.


Preferred lending partner Power of attorney

The legal right to make decisions on another’s behalf. Prepayment

Early repayment of a loan. Prepayment penalty

A fee charged to borrowers for early repayment of their loan, to compensate the lender for lost interest payments.


The original amount of money borrowed on a loan. Principal reductions with re-amortization

Reducing the loan’s principal balance and applying the existing interest rate to the remaining principal over the life of the original loan term.

Private money

Typically, short-term, high-interest-rate loans by private individuals or small companies. Also known as hard money.

Pro forma

Financial adjustments made off the balance sheet, reflecting the impact of recent or anticipated changes.


Financial statements that predict future income, cash flow and balance sheets. They typically span multiple periods of time.

Quit-claim deed

A legal term indicating one party has terminated its interest in the property. Raw land

Land that remains unused and in its natural state. Raw land is historically free from any improvements such as grading, construction or subdividing.


Process by which a loan is paid off with proceeds received from a new loan. The same property is used as collateral for the new loan. Loans may be refinanced for several reasons, including more favorable terms, change of lenders, access to equity, change of guarantors, etc.

Rent roll

A detailed list of tenants on a property, outlining the square footage and area leased, amount paid in rent, lease terms, etc.

Rent step-up

A rental agreement in which the monthly rent payment increases over a fixed period, or for the life of the lease.

Right of rescission

Borrowers’ ability to back out of a loan, usually established by law as a specific time period. Small Business Administration (SBA) loans

The federal Small Business Administration guarantees bank loans that are structured to meet SBA requirements. The 7(a) program is the most popular for starting, acquiring and expanding businesses. The 504 program supports long-term, fixed-rate mortgages for fixed assets – usually buildings, land and machinery. The loans are intended to promote economic growth, and are offered at terms that are often more favorable that conventional bank financing.

Securitized mortgage

The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Seller carry-back

An agreement in which the seller provides financing for all or part of the purchase price of a property.

Special-use/single-purpose property

An income-producing property designed for a specific purpose. In most cases, a significant expense would be required to convert this type of property to a general-purpose facility.

Examples include restaurants, car washes and hotels. Subdivision construction loans

Loans for the construction of single-family and multifamily subdivisions, typically ranging from two to 30 homes. Financing is provided for all phases, including land acquisition, development and construction.

Subordinate financing

A secondary or “junior” lien on a property. If there is a foreclosure, the primary-lien holder is paid first. For lenders, taking a subordinate position involves more risk, as well as the potential that they won’t get paid in a foreclosure. Consequently, the interest rate is usually higher.

Sweat equity

Providing labor, rather than cash, toward the completion of a project. Often this term applies to a property under construction for which the owners do some of the work. This is a cost-saving technique with a fair market value. Lenders accept sweat equity on a case-by-case basis, which varies by lender.

Tenants in common (TIC)

Two or more individuals holding title on a property. Title

Evidence of legal ownership. With real estate, it establishes the owner’s right to occupy and eventually sell the property without a third-party interest.

Title insurance

Insurance policy that protects borrowers and lenders against title defects. The fee for this is typically included in real estate closing costs and paid to a title company or attorney who provides due diligence to ensure the property is marketable.

Treasury bill (T-bill)

A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, they provide a return to the bondholder through appreciation.

Triple-net lease (NNN)

A lease in which, in addition to rent, the tenant is required to pay for property taxes, insurance and maintenance. Commercial leases might also require tax and insurance payments, but not the cost of maintenance (See Net-net lease).


A legal form that a creditor files to give notice that it has an interest in the personal property and/or income related to the collateral backing a commercial mortgage.


Process used by lenders to determine borrower eligibility and ability to repay a loan. A number of factors are evaluated, including personal credit history, financial statements, employment history and salary. In commercial real estate finance, these factors also include business financial records, history and projections.

USDA Business and Industry Loan Program (USDA B&I)

United States Department of Agriculture loan-guarantees made to rural businesses to improve a community’s economic condition.

Warehouse line

A line of credit extended to mortgage bankers to allow them to provide mortgage loans. With the line, they often can make faster lending decisions and fund loans faster than through typical bank approval process.

The Best Free Property Management Tools

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Property management software is a critical component when managing any property or block of properties. It helps with efficiency in handling different tasks that would otherwise be challenging and time-consuming.

Such duties include financial management, marketing, tracking of inventory, and rental application screening, to name a few.

If you’re looking to get started with property management, whether that’s through Right-to-Manage or you’re a property owner wanting to manage your own portfolio, these FREE property management tools will help you get going.


Cozy enjoys a lot of market popularity, and the basic package is free. Some of the benefits include comprehensive online property listings, in-depth lease agreement terms, photo gallery, and pet and amenity policies, among others. Tenants can also apply directly under the portal.

  • Pricing: The software is free to use. You will, however, pay for screening reports, rent estimates, card payments, and express payouts.
  • Pros: All the core benefits are free and there is no limit on number of tenant applications.
  • Cons: It could be difficult to use for some people and it doesn’t provide access to accounting and maintenance reports.

Rentec Direct

The basic platform on Rentec Direct is free and works well for small property owners. Some of the functionalities include expense and income tracking, tenant and property accounting, as well as tenant screening.

  • Pricing: The basic package is free. The pro and premium packages cost $35 and $40 per month, respectively
  • Pros: It will help you streamline your Property Management services, and the software is easy-to-use
  • Cons: The task organization and Financial Reporting features need improvement, and you can only manage up to ten units on the free version

Tenant Cloud

Tenant Cloud has the advantage of being free for the first 75 units. For numbers above that, you will need to pay a minimum of $9 per month, which is still very affordable. You get help with different property management tasks such as vacancy listings, handling maintenance requests, collecting rent, among others.

  • Pricing: Free for up to 75 units
  • Pros: Includes lots of features to help you and is easy-to-use
  • Cons: The accounting and reporting features need improvement

How to Obtain an SBA Coronavirus PPP Loan and Have It Forgiven

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It is important that you apply early on. There are 30 million small businesses in the U.S. and $350 billion allocated to the program. Our capital source expect funds may run out before everyone can receive a loan.

There are two [2] documents that you need to complete and submit.

  1. SBA Application
  2. Excel Work Book for the Lender

SBA PPP Program Details

The number-one pressure on small-business owners right now is payroll. Whether you’re a sole proprietor one-person-show or a company with 500 employees, you’ve certainly felt the pressure.

Maybe you’ve already stopped paying yourself, have laid off workers or cut hours. Well, you can thank your federal government for the best aid program recently offered for small business, the Paycheck Protection Program loan (aka Coronavirus Stimulus Loan, or PPP Loan).

The PPP Loan was signed into law on March 27, 2020. On March 31, the SBA issued its guidance and sample application for the loan to be used by banks. Here’s a summary of the details you need to know.

Who Qualifies?

A small business with fewer than 500 employees that was in business on or before February 15, 2020. This can be an S Corp, C corp, LLC, sole proprietorship or independent contractor.

It also includes certain nonprofits, tribal groups and veteran groups. When obtaining the PPP loan, you need to certify that your business has been economically affected or that economic uncertainty make the loan necessary.

How Much Can I Get?

Up to $10 million dollars. But the amount each business gets is based on its payroll costs. The amount you qualify for is based on 2.5 times your average monthly payroll costs. Your monthly average payroll is calculated based on your prior 12 months of payroll costs.

You take that average monthly payroll number and multiply it by 2.5. For example, if your monthly average payroll was $20,000, then you would qualify for a $50,000 PPP Loan.

What’s Included in Monthly Payroll Costs?

It includes salary, wages, commissions, payment of vacation, sick, parental/family/medical leave, payment of retirement contributions, group health coverage premiums and state and local taxes assessed on payroll. It doesn’t include federal payroll taxes though.

It also doesn’t include payroll costs for those making more than $100,000. Their first $100,000 is considered, but anything in excess is not considered for determining average monthly payroll costs.

What Can I Use This Money For?

First and foremost, payroll for you and your employees, but you can also use the money for rent, mortgage obligations, utilities and other debt obligations you may have.

What Is the Interest Rate?

Half a percent. that’s right. It’s nearly an interest-free loan. The bill allowed for a maximum rate of 4 percent, but the guidance issued by the U.S. Treasury is stating that the maximum rate would be 0.5 percent.

Your government is stepping up as they’re backstopping these loans for the banks. Now, this rate could certainly change, but under the law it cannot exceed 4 percent.

When Do I Have to Pay It Back?

The loan term specified by the treasury guidance is two years. Loan payments are deferred for the first six months. There is no pre-payment penalty though, so you can repay or have the loan forgiven earlier.

Do I Have to Put Up Collateral or Sign a Personal Guarantee?


How Do I Get This Loan Forgiven?

This is the critical question. The loan forgiveness provision is the best part. You are eligible for loan forgiveness for the amounts you spend over the next eight weeks after receiving the loan on certain qualifying expenses.

The qualifying expenses of the business over the eight-week period includes payroll costs, rent, interest on mortgage debt and utilities.

If the number of full-time employees is reduced over this time period or if your payroll costs are reduced 25 percent or more, then the amount of the loan eligible for forgiveness will be reduced.

The bank who granted the loan is who will determine the loan forgiveness amount based on the criteria above.

The business will request forgiveness of the loan with evidence to the bank, and the bank will have 60 days to approve or deny the forgiveness.

Will the Business Get Forgiveness of Debt Income Via a 1099-C?

Now, this is a question only your tax lawyer or account would ask. In other words, will I have to pay taxes on the amount of debt forgiven on the loan?

Nope. The new law specifically stated that forgiven PPP Loans will not be considered forgiveness of debt income.

Do I Still Qualify If I Already Have an SBA Loan?

You can have more than one SBA loan. You just can’t exceed the total SBA loan maximums when all loans are combined.

What About the SBA Economic Injury Disaster Loans (EIDL)?

This is another good loan option. It is up to two million dollars and is the loan typically used for natural disasters that has been approved for businesses effected by the coronavirus pandemic.

If you have a low payroll or need funds in excess of the amounts you qualify for under PPP, consider the EIDL loans, as they have low rates, longer repayment terms and can be used for more purposes than the PPP loans. However, they do not offer any form of loan forgiveness.

But they do include a quick $10,000 grant to effected businesses that does no need to be repaid.

So, let’s run a quick scenario on the facts above for a PPP Loan. Let’s say your total “payroll costs” over the prior 12-month period is $240,000. As a result, your monthly average payroll is $20,000. We then multiply $20,000 by 2.5 and get the maximum loan amount of $50,000.

Let’s further assume that over the eight-week period after you receive the loan that you use $40,000 for payroll costs, $9,000 for rent and $4,000 on utilities.

You would then have totally qualifying expenses for forgiveness of $53,000. Since you have qualifying expenses in excess of the loan amount, you would be eligible for forgiveness of the entire loan. Not bad, huh? Not bad at all.

Finally, we have a stimulus bill that small businesses can be excited about.

So, What Should You Do Now?

It is important that you apply early on. There are 30 million small businesses in the U.S. and $350 billion allocated to the program.

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6 Books for Rental Property Investors

6 Books for Rental Property Investors

When discussing his favorite book, Warren Buffett, who reads approximately five to six hours a day, remarked, ‘‘I can’t remember what I paid for the first copy of ‘The Intelligent Investor.’ Whatever the cost, it would underscore the truth of Ben [Graham]’s adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben’s book was the best.’’

Despite being relatively inexpensive, books can be extremely valuable to entrepreneurs and investors. With just a few sentences, book readers can walk away with new insights and practical lessons that they could use to improve both their personal and professional lives.

This is especially true for rental property investors. Whether you are a new or veteran real estate investor, these six books will add value to your rental property portfolio.

  1. Investing with No Money Down

The best book on how to invest with no money down is “The Book on Investing in Real Estate With No (and Low) Money Down” (2014), by Brandon Turner. Unlike stocks, bonds, and mutual funds, investing in real estate requires a significant amount of money. Even if an investor plans to finance the acquisition or development of a property with debt, he or she will still need to have enough money to make a strong down payment to secure a loan.

  1. How to Manage Rentals

On managing rentals, “The Book on Managing Rental Properties” (2015), by Brandon and Heather Turner is the top book. It serves as a comprehensive guide for rental property owners after they have closed on their deals. In the book, the Turners provide advice on a wide range of aspects associated with the day-to-day property management. This includes how actually to find and screen tenants, how to properly collect rent owed to you, as well as important clauses to include in your rental lease and bookkeeping tips.

  1. Considering Cash Flow

When it comes to considering and managing cash flow, “What Every Real Estate Investor Needs to Know About Cash Flow—And 36 Other Key Financial Measures” (2015, Updated Edition), by Frank Gallinelli is the best book.

Unfortunately, the world of real estate has a lot of financial jargon that often confuses new investors, but luckily “What Every Real Estate Investor Needs to Know About Cash Flow” helps investors understand important terms such as discounted cash flow, return on equity (ROE) and capitalization rate. The physical nature of real estate often makes it easy for investors to fall in love with a property even though it may not make much financial sense to acquire it. This book can help a person avoid speculating and making emotional decisions when investing in real estate because it teaches readers how to analyze a deal and make calculated predictions on its future revenue.

  1. Protect Yourself

On protecting yourself with investing in real estate, “Loopholes of Real Estate” (2013), by Garrett Sutton is the go-to book.

Part of the Rich Dad Advisor’s book series, “Loopholes of Real Estate” contains a number of strategies to protect yourself legally when investing in rental property as well as several tax loopholes to take advantage of to maximize profits.

  1. Taxes

“Every Landlord’s Tax Deduction Guide” (2015, 12th ed.), by Stephen Fishman J.D. is the best book on managing taxes. Every year, many rental property investors overstate their net income. This results in a higher than needed tax bill.

Jamaican Billionaire Michael Lee-Chin once remarked that in order to be a successful investor, one needs to “minimize their taxes.” “Every Landlord’s Tax Deduction Guide” shares a long list of available deductions that are often forgotten by real estate investors. Knowing this can help reduce an investor’s tax liabilities while staying on the right side of the IRS.

  1. Grow Your Empire

“Multi-Family Millions” (2008), by David Lindahl is the perfect book for ambitious investors who instead of owning individual houses would like to own and operate apartment complexes, often known as multi-family real estate. The book provides readers with a step by step guide to acquiring their first multifamily property, how to finance a deal of such scale, and how to eventually exit the investment.

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Commercial Mortgage-Backed Securities (CMBS) Definition

Commercial Mortgage-Backed Securities

Commercial mortgage-backed securities (CMBS) are fixed-income investment products that are backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike.

Because there are no rules for standardizing the structures of CMBS, their valuations can be difficult. The underlying securities of CMBS may include a number of commercial mortgages of varying terms, values, and property types—such as multi-family dwellings and commercial real estate.

CMBS can offer less of a pre-payment risk than residential mortgage-backed securities (RMBS), as the term on commercial mortgages is generally fixed.

How Commercial Mortgage-Backed Securities Work

As with collateralized debt obligations (CDO) and collateralized mortgage obligations (CMO) CMBS are in the form of bonds. The mortgage loans that form a single commercial mortgage-backed security act as the collateral in the event of default, with principal and interest passed on to investors.

The loans are typically contained within a trust, and they are highly diversified in their terms, property types, and amounts. The underlying loans that are securitized into CMBS include loans for properties such as apartment buildings and complexes, factories, hotels, office buildings, office parks, and shopping malls, often within the same trust.

A mortgage loan is typically non-recourse debt—any consumer or commercial debt that is secured only by collateral. In case of default, the lender may not seize any assets of the borrower beyond the collateral.

Because CMBS are complex investment vehicles, they require a wide range of market participants—including investors, a primary servicer, a master servicer, a special servicer, a directing certificate holder, trustees, and rating agencies. Each of these players performs a specific role to ensure that CMBS performs properly.

The CMBS market accounts for approximately 2% of the total U.S. fixed-income market.

Types of CMBS

The mortgages that back CMBS are classified into tranches according to their levels of credit risk, which typically are ranked from senior—or highest quality—to lower quality.

The highest quality tranches will receive both interest and principal payments and have the lowest associated risk. Lower tranches offer higher interest rates, but the tranches that take on more risk also absorb most of the potential loss that can occur as the tranches go down in rank.

The lowest tranche in a CMBS structure will contain the riskiest—and possibly speculative—loans in the portfolio.

The securitization process that’s involved in designing a CMBS’s structure is important for both banks and investors. It allows banks to issue more loans in total, and it gives investors easy access to commercial real estate while giving them more yield than traditional government bonds.

Investors should understand, however, that in the case of a default on one or more loans in a CMBS, the highest tranches must be fully paid off, with interest, before the lower tranches will receive any funds.

Free Business And Real Estate Investing eBooks

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Welcome to Winston Rowe and Associates knowledge blog, scroll down to the right for posts about commercial real estate.

This is a list of free books about real estate investing, commercial real estate financing and business strategy.

We’re always on the lookout for great free books so bookmark this blog and check back for monthly updates.

These links are not affiliate marketing links, just publications that we feel may add value to people and businesses.

Commercial Real Estate Finance

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

Real Estate Investing Articles

This is a link to 1226 real estate investing articles written by industry veteran’s.

25 Productivity Tips for Successful Business Owners

Productivity is critical to your success at work. Business owners, managers and executives all want to get the most from their employees. If you’re not performing as efficiently or effectively as others, your long-term job prospects could be in trouble.

Real Estate Investing: How to Find Cash Buyers and Motivated Sellers

“Real Estate Investing: How to Find Cash Buyers and Motivated Sellers” teaches real estate investors and those interested in learning to invest in real estate how to define and target ideal cash buyers and motivated sellers. The book covers absentee owners, rehab investors, Section 8 landlords, and other buyer types. Some of the marketing topics include mailing lists, postcards, both online and offline marketing strategies along with examples. Anyone who wants to wholesale a house or is curious about flipping houses should pick this book to get educated on cash buyers and motivated sellers for their real estate investing.

Real Estate – Breaking Bad How to Flip Decaying Real Estate Properties for Profit

Tired of working 9 to 5? You should think of making money with real estate! Yes, the effort is well worth it! You just have to ditch the misconceptions and embark with all the passion you have in store for this amazing trip of rehabbing old houses and giving them a new look and a new owner.  Your reward? A nice profit!

Real Estate Forms Portfolio

A FREE and ready-for-download eBook consisting of a comprehensive collection of real estate-related forms for real estate investors.

Real Estate Secrets Exposed

This FREE e-Book sheds some light on the often mysterious and sometimes daunting world of real estate.

Use 1031 Real Estate Exchanges to Create Multiple Streams of Income

Discover how to use 1031 tax-free exchanges, tenants in common interests, and zero cash flow properties to create new sources of income. Learn how to offer bundled services and attract new clients. This FREE, ready for download eBook is perfect for anyone involved in real estate, taxes, mortgages, insurance, or law.  Download it now!

Make Money Through Real Estate Renovations

Download this FREE eBook and learn how a successful investor makes thousands of dollars from real estate renovations. Download it now!

Discover the Secrets of How to Fund Your Real Estate Deals with Private Lenders

Download this FREE e-Book, and discover the new secrets of funding real estate deals in the post-bubble real estate market, where traditional lending sources are getting very difficult to obtain. Download it today!

Real Estate Investing Strategy for Rehabs

This eBook is about residential rehabbing and the multiple strategies that can be used to maximize profits in this current economic climate. My goal has always been to share knowledge with folks that are truly interested in rehabbing and view it as not only for monetary gain but also see is as an “art and science” like I do. Happy Rehabbing!!

How to Be A Super Property Investor

A FREE, step-by-step guide that will help you become a super real estate property investor. Learn all the basic and some advanced investing techniques that have generated millions for property investors. Ready for download now!

Financial Terms Dictionary – 100 Most Popular Financial Terms Explained

This practical financial dictionary helps you understand and comprehend more than 100 common financial terms. It was written with an emphasis to quickly grasp the context without using jargon. Every terms is explained in detail with 600 words or more and includes also examples. It is based on common usage as practiced by financial professionals.

The Prince by Niccolò Machiavelli

Niccolò di Bernardo dei Machiavelli was an Italian diplomat, politician, historian, philosopher, writer, playwright and poet of the Renaissance period. He has often been called the father of modern political philosophy and political science.

The Science of Getting Rich by W. D. Wattles

This book is pragmatical, not philosophical; a practical manual, not a treatise upon theories. It is intended for the men and women whose most pressing need is for money; who wish to get rich first, and philosophize afterward. It is for those who have, so far, found neither the time, the means, nor the opportunity to go deeply into the study of metaphysics, but who want results and who are willing to take the conclusions of science as a basis for action, without going into all the processes by which those conclusions were reached.

Sun Tzu Art of War

Written in the fifth century B.C., Suntzu and Wutzu still remain the most celebrated works on war in the literature of China. While the chariot has gone, and weapons have changed, these ancient masters have held their own, since they deal chiefly with the fundamental principles of war, with the influence of politics and human nature on military operations; and they show in a most striking way how unchanging these principles are.

Make Extra Money Flipping Houses While On Vacation by Jason Medley

Reveals his simple and proven systems to automate, delegate and outsource nearly every function of his business except cashing his checks. He shows the exact steps that has allowed him to go on multiple vacations with his family throughout the year while having his system continue to flip houses for him.

Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business

Have you ever thought about making money with real estate? In Achieving Wealth Through Real Estate: A Definitive Guide to Controlling Your Own Financial Destiny Through a Successful Real Estate Business, author and entrepreneur Kirill Bensonoff takes you through the process of starting your own real estate business step-by-step, featuring his expert tips and tricks.

Business Loans Uncovered

Knowing if you qualify is one of the most important things to know when applying  for a loan of any type. Blindly applying for a loan and being declined increases the chances of you being declined again and again because you not only lower your credit score each time you apply, multiple inquires also serves a red flag to other lenders and as a result lenders put you in a high risk category and charge higher interest rates in the event of an approval Includes: ​Traditional Lenders, Government Sources, The 7(a) loan guarantee program, SBA Low Doc loan program, SBA Express loan program, Factoring, Venture Capitalists, Angel Investors.

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Real Estate Finance and Investment

This course is an introduction to the most fundamental concepts, principles, analytical methods and tools useful for making investment and finance decisions regarding commercial real estate assets. As the first of a two-course sequence, this course will focus on the basic building blocks and the “micro” level, which pertains to individual properties and deals.

Introduction to the Law of Property, Estate Planning and Insurance

Introduction to the Law of Property, Estate Planning and Insurance is an up-to-date textbook that covers legal issues that students must understand relating to real estate (an especially important business asset), as well as estate planning and insurance.

The text is organized to permit instructors to tailor the materials to their particular approach. The authors take special care to engage students by relating law to everyday events with their clear, concise and readable style.

Defensive Real Estate Investing: 10 Principles for Succeeding Whether Your Market is Up or Down

As the real estate market changes after years of aggressive growth, investors everywhere are faced with uncertainty, wanting to know how to prepare for a potential real estate bust and make sure they don’t lose money.   In his authoritative new work, Defensive Real Estate Investing, bestselling author and real estate expert William Bronchick provides guiding principles to safe investments for beginning to intermediate real estate investors.

Private Real Estate Investment: Data Analysis and Decision Making

Fiduciary responsibilities and related court-imposed liabilities have forced investors to assess market conditions beyond gut level, resulting in the development of sophisticated decision-making tools. Roger Brown’s use of historical real estate data enables him to develop tools for gauging the impact of circumstances on relative risk. His application of higher level statistical modeling to various aspects of real estate makes this book an essential partner in real estate research. Offering tools to enhance decision-making for consumers and researchers in market economies of any country interested in land use and real estate investment, his book will improve real estate market efficiency. With property the world’s biggest asset class, timely data on housing prices just got easier to find and use

Construction Funding: The Process of Real Estate Development, Appraisal, and Finance

Construction firms operate on narrow profit margins and the success of construction projects is hinged upon proper financing. Construction Funding is the only single volume, concise text on the financial aspects of building and developing.

The book acquaints the reader with a set of procedures specifically designed to solve the unique financial challenges facing the construction industry. It guides the reader step-by-step through each phase of financing a development project, from simple one-family residences to large multi-unit complexes. Construction Funding also addresses raising capital, selecting markets, rating sites, insurance, joint ventures, loan options, and cash flow management. Separate sections are devoted to the conduct of profitability studies and to finding after-tax rates of return. Construction Funding, Fourth Edition, has been updated to provide current costs and funding methods and additional learning features such as key terms, review questions, and learning objectives.

How to Make Money With Real Estate Options: Low-Cost, Low-Risk, High-Profit Strategies for Controlling Undervalued Property….Without the Burdens of Ownership!

I have dabbled with real estate for years usually making good money and sometimes being hammered (like with the last crash in the RE market). But overall RE has been good to me. Be that as it may, I have lost enough to know that I wanted to minimize my risk while still having plenty of upside potential. Real estate options are a vehicle to accomplish this goal. Thus, I started educating myself on the subject and found this most excellent book. Mr. Lucier is thorough and detailed and relates the reality of what it takes to profit (not like some of these dream weaver real estate gurus who like to sell you on how “easy” it is).

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Marketing Strategies for Real Estate Photography

One of the biggest problems that real estate photographers have once they have set up their business as a legal entity, obtained all the right equipment and perfected their technique is obtaining new clients.

Clients and customers are the lifeblood of any business, but how do you obtain new clients after starting your business?

By developing and executing a strategic marketing plan tailored to your business.

This short guide has been written to help real estate photographers develop their marketing plan and assist with winning new business.

It includes a series of digital and direct marketing strategies along with useful tips and lessons the author has learned from his own experiences that can save you time and money when growing your business.

A marketing action plan template has been included to help photographers execute the strategies learned in this guide book.

Books by Dr William Edward Deming

William Edwards Deming (October 14, 1900 – December 20, 1993) was an American engineer, statistician, professor, author, lecturer, and management consultant.

Educated initially as an electrical engineer and later specializing in mathematical physics, he helped develop the sampling techniques still used by the U.S. Department of the Census and the Bureau of Labor Statistics.

In his book The New Economics for Industry, Government, and Education Deming championed the work of Walter Shewhart, including statistical process control, operational definitions, and what Deming called the “Shewhart Cycle, which had evolved into Plan-Do-Study-Act (PDSA). That was in response to the growing popularity of PDCA, which Deming viewed as tampering with the meaning of Shewhart’s original work.

Deming is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry. That work began in July and August 1950, in Tokyo and at the Hakone Convention Center, when Deming delivered speeches on what he called “Statistical Product Quality Administration”.

Many in Japan credit Deming as one of the inspirations for what has become known as the Japanese post-war economic miracle of 1950 to 1960, when Japan rose from the ashes of war on the road to becoming the second-largest economy in the world through processes partially influenced by the ideas Deming taught

How To Get a Commercial Loan

Apply For Commercial Loan

To get a commercial real estate loan, you need to apply to either a commercial bank or a commercial mortgage company.

The word commercial is just a fancy word for “business”. For example, whenever you see the term, “commercial bank”, it simply means “business bank” or a bank that is in the business of accepting deposits and making business loans; i.e., an everyday, garden-variety bank, as opposed to an investment bank, which primarily sells investments, like stocks and bonds.

Most home loan lenders do NOT make commercial loans. In other words, you can’t just apply for a commercial loan to the guy who refinanced your home.

Commercial lending is pretty sophisticated, and few loan agents can competently be experts in both residential lending and commercial mortgage lending.

There are five major types of commercial mortgage companies – life insurance companies, conduits, commercial banks, credit unions, and hard money commercial lenders.

Life insurance companies (called “life companies”) have, by far, the lowest interest rates on commercial loans; but few mortals can qualify.

To qualify for a commercial loan from a life company, the commercial loan must usually be for at least $5 million, the property has to be young, if not brand new, it has to be fully-leased, and your loan-to-value ratio cannot usually exceed around 53%.

Conduits have the cheapest, fixed rate commercial loans of all of the commercial lenders who actually close loans for mortals like you and me.

Conduits are mortgage banking companies that originate large, fixed rate commercial loans according to very strict guidelines. These loans are eventually placed into pools and securitized.

The good news is that conduits offer very low interest rates on commercial loans, and they will sometimes stretch to 65% (68%?) loan-to-value.

The bad news is that most conduits prefer loans over $5 million, and all conduit loans have prepayment penalties large enough to choke a horse.

Commercial banks make most of the commercial mortgage loans for regular guys like you and me. The best place to start is your own bank.

The only commercial lender who can make you a better commercial loan than your own bank is … well, your mother.

If your own commercial bank won’t make approve your commercial loan, try some of the commercial banks located close to your commercial property.

And don’t forget about credit unions. Prior to 2011, credit unions almost never made commercial loans. Since 20111, many credit unions have become quite active in the commercial loan business.

In less than three years, they have seized over 3% of the commercial mortgage loan market. Look for credit unions located close to the subject property. Like all commercial lenders, credit unions greatly prefer to make commercial loans close to one of their offices.

No discussion of commercial loans would be complete without mentioning SBA loans and USDA Business and Industry loans.

To qualify for an SBA, your company must occupy, or intend to occupy, at least 51% of the subject property. To qualify for a USDA B&I loan, the subject commercial property must be located in either a small town or a rural, lowly-populated area. Both SBA loans and USDA B&I loans are partially-guaranteed by the Federal government. They are therefore easier to get.

3 Common Myths Around Online Rent Collection

Tenant Rent Collection Strategies

Myth 1 – It’s Complicated

Sure, you’ve been doing it by hand for years, and despite all the time, effort, and headaches, it eventually gets the job done.  We get it.  But did you know, online rent collection software is easy to set up and flexible enough to support your current business processes?

Just think how amazing your life could be if you could instantly reduce the monthly stress of collecting rent. No more texts, calls, or emails chasing after rent. Technology does it for you… automatically… for every tenant… every month.

Whether you manage your properties by yourself or with a team, online rent collection automates invoice creation, rent reminders, payment collection, and direct deposits. No need for excess reporting or tasks to CYA.

Are you still having to track down tenants after the fact to collect late fees? If your tenants are late paying rent, rent collection software will automatically calculate the late fee, add it to their invoice and send continuous reminders until rent is paid or you decide other action is necessary.

Support When You Need It

Most online rental management solutions have support teams ready to help you and your team during the transition. In some cases, these support teams can even help your tenants set up the software so you can focus on your work instead of playing the role of customer service.

When searching for the best solution, we recommend checking out their website, make a list of questions and schedule a demo. Once you’re on a call, you’ll be able to share your specific needs and challenges to ensure you’re choosing the best online rent collection solution for your business.

Myth 2 – My Tenants Don’t Use Technology

A common misconception is that tenants don’t have access to technology or worse yet, don’t have an email address.  Did you know that according to a recent 2019 study, 96% of Americans own a cellphone and over 70% of Americans use some form of social media?

To pay rent online all a tenant needs is an internet connection and an email address.  If they use a smartphone and log into Facebook, Twitter, Snapchat, LinkedIn, or any other form of social media (and there are lots out there) they have an email address.

Technology isn’t Scary When you Communicate

Introducing change can sometimes seem scary, especially if you’ve been doing the same thing for a while.  However, when we communicated that we were switching to an online payment option, we found that our tenants were not only relieved, but grateful to finally have a more convenient way to pay rent.

These days, people are used to the convenience of digital payment methods for everything like paying credit cards, car loans, utilities, online shopping and student loans.

Why not add rent to the list? Once we introduced online payments, not only did our late payments decrease, but 30% paid before rent was even due.   With the ease of automated email and text rent reminders, it takes less than one minute to pay rent.  Making things more convenient for your tenants is a benefit to them and a benefit to you. We call that a win-win.

Myth 3 – My Tenants Don’t Have Bank Accounts

Just because your tenants pay you in cash or money order doesn’t mean they don’t have a bank account. According to a 2017 FDIC survey, 94% of Americans have bank accounts yet only 40% actually write checks.  Because of debit cards and ATM’s, fewer people own checks.

Before offering an online rent payment option, our tenants had to make a special trip to the bank to get a money order, or worse, because rent was more than $500, they had to make multiple trips to the ATM to get cash.  We never realized what a hassle it was for our tenants to pay rent.

With online rent collection you give them the option to use the free digital check service or pay with a debit/credit card (for a small fee), all from the comfort of their home.  No more trips, no more hassle.

What About Credit/Debit Card Fees?

Many rental management solutions offer the ability to process credit or debit card transactions with no cost for you. Tenants pay the transaction fee along with their rent payment. And although it’s an extra cost, often it’s less than a late fee.

It’s Expensive

There are many solutions available that you can quickly work into your budget without breaking the bank. And with the amount of time you’ll save using an online solution, you’ll more than cover the cost in free time…and as everyone knows, time is money.

Your time is valuable and equates to real dollars. That’s why an online rent collection software is designed to not only save you headaches, but also help you streamline processes, which saves time and money across your operations.


The “Five Cs” of Credit Analysis

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan.

Payment history of existing credit relationships — personal or commercial — is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you have personally invested in the business and is an indication of how much you have at risk should the business fail.

Prospective lenders and investors will expect you to have contributed from your own assets and taken on personal financial risk to establish the business before asking them to commit any funding.

Collateral or guarantees are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan.

A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory?

The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.

Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees also will be taken into consideration.

What do the 5 Cs of Credit mean to a small business?

One of the most common questions among small business owners seeking financing is, “What will the bank be looking for from me and my business?” While each lending situation is unique, many banks utilize some variation of evaluating the five Cs of credit when making credit decisions: character, capacity, capital, conditions and collateral.

  1. Character. What is the character of the company’s management? What is management’s reputation in the industry and the community?

Lenders want to put their money with those who have impeccable credentials and references. The way the owner/manager treats employees and customers, the way he or she takes responsibility, timeliness in fulfilling obligations are all part of the character question.

This is really about the owner or manager and his/her personal leadership. How the owner or manager conducts business and personal life gives the lender a clue about how he/she is likely to handle leadership as a manager.

It’s a banker’s responsibility to look at the downside of making a loan. The  owner/manager’s character immediately comes into play if there is a business crisis, for example.

Small business owners place their personal stamp on everything that affects their companies. Often, banks do not differentiate between the owner and the business. This is one of the reasons why the credit scoring process evolved, with a large component being personal credit history.

  1. Capacity. What is the company’s borrowing history and record of repayment? How much debt can the company handle? Will it be able to honor the obligation and repay the debt?

There are numerous financial benchmarks, such as debt and liquidity ratios, that lenders evaluate before advancing funds. Become familiar with the expected pattern in the particular industry. Some industries can take a higher debt load; others may operate with less liquidity.

  1. Capital. How well capitalized is the company? How much money has been invested in the business? Lenders often want to see that the owner has a financial commitment and has taken on risk for the company.

Both the company’s financial statements and the personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will the owner be prepared to add more of his or her own money?

How far will his or her personal resources support both the owner and the business as it is growing? If the company has not yet made profits, this may be offset by an excellent customer list and payment history. All of these issues intertwine.

  1. Conditions. What are the current economic conditions, and how do they affect the  company? If the business is sensitive to economic downturns, for example, the bank wants to feel comfortable with the fact that the business is managing productivity and expenses.

What are the trends for the industry, and how does the company fit within them? Are there any economic or political hot potatoes that could negatively affect the growth of the business?

  1. Collateral. While cash flow will nearly always be the primary source of loan repayment, bankers should look closely at the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment.

Alternatively, accounts receivable and inventory can be pledged as collateral, though in some countries, these “movable assets” are not well supported by the legal framework. The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge.

Until the business is proven, a loan should nearly always have collateral. If it doesn’t come from the business, the bank should look to personal assets.

Keep in mind that, in evaluating the five C’s of credit, lenders don’t give equal weight to each area.

Lenders are cautious, and one weak area could offset all the other strengths. For example, if the industry is sensitive to economic swings, the company may have difficulty getting a loan during an economic downturn — even if all other factors are strong. And if the owner is not perceived as a person of character and integrity, there’s little likelihood he or she will receive a loan, no matter how good the financial statements may be.

Lenders evaluate the company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be the owner.

Developing A Business Strategic Plan – Winston Rowe and Associates

A strategic plan is a roadmap to grow your business.


Executive Summary

The Executive Summary is important since it will help other key constituents, such as employees, advisors, and investors, quickly understand and support your plan.

Elevator Pitch

An elevator pitch is a brief description of your business. Your elevator pitch is included in your strategic plan since it’s key to your business’ success, and often times should be updated annually.

Company Mission Statement

Your company mission statement explains what your business is trying to achieve.


They key is to first identify your 5 year or long-term goals. Next, identify your one-year goals; that is, what you must achieve in the next year for it to be successful and to put your company on the right trajectory to achieving your 5-year goals.

Key Performance Indicators (KPIs)

Great businesses understand their metrics and KPIs. By tracking your KPIs, you know exactly how your business is performing and can adjust as needed.

Target Customers

In this section of your strategic plan, you will identify the wants and needs of each of your target customer groups. This is important in focusing your marketing efforts and getting a higher return on investment on your advertising expenditures. This is because the more you can “speak” directly to your target customer wants and needs in your marketing, the better you will attract them.

Industry Analysis

Your industry analysis doesn’t have to be a comprehensive report on what’s going on in your market. However, you should conduct an analysis to ensure the market size is growing (if not, you might want to diversify), and to help identify new opportunities for growth.

Competitive Analysis & Advantage

Similarly, to your industry analysis, your competitive analysis doesn’t have to be a thorough report listing every detail about every competitor. Rather, in addition to defining who your key competitors are, you should list their strengths & weaknesses.

Most importantly, use this analysis to determine your current competitive advantages and ways to develop additional advantages.

Marketing Plan

In addition to your strategic plan, I recommend you develop a comprehensive marketing plan describing how you will attract prospects, convert them to paying customers and maximize your lifetime customer value.

Include a summary of your marketing plan in your strategic plan.

Operations Plan

Your operations plan helps you transform your goals and opportunities into reality. In this section of your plan, you will identify each of the individual projects that comprise your larger goals and how these projects will be completed.

Financial Projections

The final section of your strategic plan is your financial projections. Your financial projections help in multiple ways. First, you can use a financial model to assess the potential results for each opportunity you consider pursuing.

You should develop your complete strategic plan each year, and then update it monthly as actual results come in and you gain more clarity and intelligence. While you will rarely achieve the precise goals established in your strategic plan, scores of research show that you’ll come much closer to them versus if you didn’t plan at all. So, develop your strategic plan today, and achieve the goals you desire.


10 Fundamentals Beginning Real Estate Investors Should Know

  1. The Cup Is Always Half Full

New real estate investors are very nervous on the first deal and start to panic at every obstacle. These emotions are natural considering most are spending their life savings on an investment property. Never let your emotions get too high or too low because both can cost you time and money.

  1. The Value Is in The Experience

Your first flip isn’t all about the profits. Many first-time investors won’t make a killing off of their first property, so it’s key to keep in mind that there’s also value in the time spent managing the acquisition and renovations, learning from mistakes and seeing the project through to completion.

  1. Setting Aside Working Capital Is Key

Many new investors fail when they are hit with unexpected and major expenses or income loss such as significant repairs or a major tenant vacating. To avoid this, make sure to set aside enough working capital in reserves to account for these problems so that you can carry the property through the tough times.

  1. Discipline Will Help You Stay on Budget

First-time investors are sometimes so eager to get started; they will abandon their set numbers. This may lead to overspending on the acquisition or on the improvements. My most disciplined clients won’t go over their set budget. What seems like a negligible amount can impact returns.

  1. Return Calculations Can Be Misleading

In commercial real estate, it is very common to advertise cash on cash returns, capitalization rates, and internal rate of return for investment properties. I wish more early investors understood how easily manipulated those figures can be and that you could provide 10 seasoned industry professions the same data and come up with a wide range of IRR estimates

  1. Lying Will Ruin Your Reputation

Reality TV shows are pure entertainment and do not accurately reflect investing, so don’t rely on them at all for your education. Get involved with people who actively invest in your local area.

  1. You Won’t Get Far Without Mentors and Partners

There are successful investors out there, right now, with decades of experience, who would be happy to help you on your journey. Find a way to add value for them, and in return ask if they can help you in your real estate investing business.

  1. Having the Right Team Is Priceless

Working with a well-seasoned professional team is key. Often, real estate investors are looking to rent out the property, but the first-timers don’t work with a team of professionals to think through cost estimates, financing options, profitability and different aspects of being a landlord or occupancy rates.

  1. The Details Are in The Contracts

I can’t tell you how many people I have known, including myself early on, that just trusted the personality running the deal, and never understood what they were investing in.

  1. Plans Are Useless, But Planning Is Indispensable

We see a lot of first-time investors purchasing investment properties. While there is a multitude of impactful factors, the end reason the project is being done is to make money. To keep everything on track and in perspective, create a Pro-forma (projected) profit and loss statement to determine the impact and timing of decisions and investments.


3 Ways To Maximize Rents At Your Apartment Building

3 Ways To Maximize Rents At Your Apartment Building

Before you advertise your next apartment vacancy, here are three ways to maximize rents that many property managers and investors in multifamily properties are looking to do.

No. 1 – Do the little things to maximize rents

Tenants don’t want to show up to a property where the landscaping is overrun, paint is peeling, or trash is strewn about.

Take the time to address these low-cost fixes. First impressions matter when you are trying to achieve market rents.

Just as you wouldn’t want to show up to your own home in this condition, tenants feel the same way. They will reward you with fair rents and longer-term tenancy.

Exterior paint is a key to letting tenants know you take care of the property.

No. 2 – Complete a thorough renovation of an older or dilapidated unit

Could your rent be $100, $200 or even $500 higher if the apartment was remodeled?

If so, you may be missing out on a great opportunity to gain a high return on your investment.

Many owners look at the time it will take to recover the cost of the remodel and get discouraged. However, if you invest $10,000 into a unit that allows you to achieve $200 more per month, that is a whopping 24 percent annual return on your investment!

A $200 rent bump also translates into almost $50,000 in value at a 5 percent capitalization rate. Now that’s a great investment!

If you invest $10,000 into a unit that allows you to achieve $200 more per month, that is a whopping 24 percent annual return on your investment!

No. 3 – Understand your market’s rents

A wise person once said, “If you don’t know where you’re going, then you don’t know where you are.”

In other words, how can you tell if your rents are below or even far below the market if you don’t know where market rents are?

Market rents will vary between quality, condition and location even within the same neighborhood.

You can do your own research by going online and see what others are asking and what they are offering. For insider info, you can consult with a local property manager or an apartment real estate broker.

Cash Flow vs. Asset-Based Business Lending: What’s the Difference?

Cash Flow vs. Asset-Based Business Lending

Whether a company is a startup or a 200-year-old conglomerate like E. I. du Pont de Nemours and Company (DD), it relies on borrowed capital to operate the way that an automobile runs on gasoline.

Business entities have many more options than individuals when it comes to borrowing which can make business borrowing somewhat more complex than the standard personal borrowing choices. Companies may choose to borrow money from a bank or other institution to fund its operations, acquire another company, or engage in a major purchase.

To do these things it can look to a multitude of options and lenders. In a broad generalization, business loans, like personal loans, can be structured as either unsecured or secured. Financial institutions can offer a wide range of lending provisions within these two broad categories to accommodate each individual borrower. Unsecured loans are not backed by collateral while secured loans are.

Within the secured loan category, businesses may identify cash flow or asset-based loans as a potential option. Here we will look at the definitions and differences of the two along with some scenarios on when one is more preferred to the other.

Both cash flow based and asset-based loans are usually secured with the pledge of cash flow or asset collateral to the lending bank.

Cash Flow Lending

Cash flow-based lending allows companies to borrow money based on the projected future cash flows of a company. In cash flow lending, a financial institution grants a loan that is backed by the recipient’s past and future cash flows.

By definition, this means a company borrows money from expected revenues they anticipate they will receive in the future. Credit ratings are also used in this form of lending as an important criterion.

For example, a company that is attempting to meet its payroll obligations might use cash flow finance to pay its employees now and pay back the loan and any interest on the profits and revenues generated by the employees on a future date.

These loans do not require any type of physical collateral like property or assets but some or all of the cash flows used in the underwriting process are usually secured.

To underwrite cash flow loans, lenders examine expected future company incomes, its credit rating, and its enterprise value.

The advantage of this method is that a company can possibly obtain financing much faster, as an appraisal of collateral is not required. Institutions usually underwrite cash flow-based loans using EBITDA (a company’s earnings before interest, taxes, depreciation, and amortization) along with a credit multiplier.

This financing method enables lenders to account for any risk brought on by sector and economic cycles. During an economic downturn, many companies will see a decline in their EBITDA, while the risk multiplier used by the bank will also decline.

The combination of these two declining numbers can reduce the available credit capacity for an organization or increase interest rates if provisions are included to be dependent on these criteria.

Cash flow loans are better suited to companies that maintain high margins on their balance sheets or lack enough in hard assets to offer as collateral.

Companies that meet these qualities include service companies, marketing firms, and manufacturers of low-margin products. Interest rates for these loans are typically higher than the alternative due to the lack of physical collateral that can be obtained by the lender in the event of default.

Asset-Based Lending

Asset-based lending allows companies to borrow money based on the liquidation value of assets on its balance sheet.

A recipient receives this form of financing by offering inventory, accounts receivable, and/or other balance sheet assets as collateral. While cash flows (particularly those tied to any physical assets) are considered when providing this loan, they are secondary as a determining factor.

Common assets that are provided as collateral for an asset-based loan include physical assets like real estate, land, properties, company inventory, equipment, machinery, vehicles, or physical commodities.

Receivables can also be included as a type of asset-based lending. Overall, if a borrower fails to repay the loan or defaults, the lending bank has a lien on the collateral and can receive approval to levy and sell the assets in order to recoup defaulted loan values.

Asset-based lending is better suited for organizations that have large balance sheets and lower EBITDA margins. This can also be good for companies that require capital to operate and grow, particularly in industries that might not provide significant cash flow potential.

An asset-based loan can provide a company the needed capital to address its lack of rapid growth.

Like all secured loans, loan to value is a consideration in asset-based lending. A company’s credit quality and credit rating will help to influence the loan to value ratio they can receive.

Typically, high credit quality companies can borrow anywhere from 75% to 90% of the face value of their collateral assets. Firms with weaker credit quality might only be able to obtain 50% to 75% of this face value.

Asset-based loans often maintain a very strict set of rules regarding the collateral status of the physical assets being used to obtain a loan. Above all else, the company usually cannot offer these assets as a form of collateral to other lenders. In some cases, second loans on collateral can be illegal.

Prior to authorizing an asset-based loan, lenders can require a relatively lengthy due diligence process. This process can include the inspection of accounting, tax, and legal issues along with the analysis of financial statements and asset appraisals.

Overall, the underwriting of the loan will influence its approval as well as the interest rates charged and allowable principal offered.

Receivables lending is one example of an asset-based loan that many companies may utilize. In receivables lending, a company borrows funds against their accounts receivables to fill a gap between revenue booking and receipt of funds.

Receivables-based lending is generally a type of asset-based loan since the receivables are usually pledged as collateral.


Both cash flow-based and asset-based loans are usually secured.

Cash flow-based loans consider a company’s cash flows in the underwriting of the loan terms while asset-based loans consider balance sheet assets.

Cash flow-based and asset-based loans can be good options for businesses seeking to efficiently manage credit costs since they are both typically secured loans which usually come with better credit terms.

Business Loan Options and Underwriting

Businesses have a much wider range of options for borrowing than individuals. In the growing business of online financing, new types of loans and loan options are also being created to help provide new capital access products for all kinds of businesses.

In general, underwriting for any type of loan will be heavily dependent on the borrower’s credit score and credit quality.

While a borrower’s credit score is typically a primary factor in lending approval, each lender in the market has its own set of underwriting criteria for determining the credit quality of borrowers.

Comprehensively, unsecured loans of any type can be harder to obtain and will usually come with higher relative interest rates due to the risks of default. Secured loans backed by any type of collateral can reduce the risks of default for the underwriter and therefore potentially lead to better loan terms for the borrower.

Cash flow-based and asset-based loans are two potential types of secured loans a business can consider when seeking to identify the best available loan terms for reducing credit costs.

Important Things to Consider When Renting Out Property

Important Things to Consider When Renting Out Property

To avoid problems, owners should be mindful of the things that can affect the rental value of their property.

Tenant Reference and Employment Checks

This should go without saying, however, too many landlords meet prospective tenants in person and trust them because they are nice and affable people.

Systems Failing and Things Breaking

Have a plan before things break and systems fail. Build relationships with plumbers, electricians, handymen, etc., creating a strong network of vendors that you can trust.

Eviction Rights

Don’t rent to anyone you can’t evict. Who rents your home will make or break your rental income?

Realistic Rent Amounts

Check local rental listings to find out what you can realistically charge. If you want to find a good tenant, the rent must be comparable to the going market rate.

Local Laws

Landlords will be tempted to rent more space than is locally allowed, such as a finished basement that is not approved as a legal unit.

Your Investing Goals

One thing many first-time landlords forget to do is define their investing goals. We certainly did this with our first rental property.

If the Numbers Work

Before you get emotionally invested in the idea of converting your home into a rental, you have to run the numbers.

Condition of The Home’s Maintenance

In assisting a client with finding a rental property, you must consider the condition of the home’s maintenance.

Getting Long-Term Tenants

Consider finding tenants that are interested in longer-term leases as this will save you time and money in the long run.

Renters Insurance

Make sure that the tenants who rent my clients’ properties have rental insurance coverage.

Vacancy Costs

Remember that pricing a property at market rate helps you become cash flow positive sooner and lowers vacancy costs.

Home Warranty Plans

Becoming a landlord? Be sure to pay a few hundred dollars a year on a home warranty plan that covers repair costs with a minimum fee upfront and make the tenant pay the fee each time.

Property Inspection

Getting a property inspection prior to tenants moving in is always a good idea.

Winston Rowe and Associates provides consulting services for commercial real estate investors nationwide. Review them on line a www.winstonrowe.com 

Developers Are Hiring Property Managers During Construction

Developers Are Hiring Property Managers During Construction

Developers are bringing property managers into the fold earlier. The emerging trend is an effect of the massive amount of multifamily product under construction. With several thousand units per year coming to market, developers are leveraging property managers earlier to help curb competition. Property managers are also requesting that developers hire them early on in the development cycle to better prepare for leasing.

Analyzing both existing apartment stock and the construction pipeline is integral to developing a leasing strategy. The most important aspect of preparing to lease a new community is analysis of what is currently working combined with research on what is coming to market, both locally and on a national level.

This includes looking at current design trends and amenity offerings among the apartment product that is under development. We look at new trends in apartment homes such as bike repair rooms, pet-friendly amenities including pet daycare and grooming, as well as new fitness offerings, and from there we make strategic recommendations on what is needed at the property level. We also look carefully at how our team will communicate with residents, and gather details on how our prospective residents like to shop for apartments.

In addition to analyzing the market and potential competition to develop a leasing strategy, hiring a property manager during construction can give developers an opportunity to form its operational strategy. We can also work with the developer to ensure that all operational processes and procedures are in place so the property can operate smoothly from the start. This will help to garner positive resident experiences from the beginning, which can be shared to attract new residents as the lease-up continues.

Forming operational policies early can also help to curate the leasing strategy and ensure it is strong well after the delivery. From there, we draw upon tried-and-true leasing strategies that our team has used to successfully lease multifamily properties throughout the U.S. In the current market, this means setting up and preparing for the property’s digital footprint, including creating, running, and monitoring online and social marketing sites. In addition, we typically plan a series of on-site events to ensure potential residents have the opportunity to connect personally with the property and our team.

FICO vs. Fakes: Are You Getting the Wrong Credit Score?

If you’ve applied for a loan recently and had your credit score pulled, chances are you are aware that you have more than one credit score. FICO issues a score, and each of the three major credit bureaus also offers its own credit score, too.

Knowing your credit score is important for wise financial management. But you should understand which credit scores are “real” and which are “fake.”

What Is a FICO Score?

This is the credit score most lenders use to determine your creditworthiness. The FICO score comes from the Fair Isaac Company, which has developed an algorithm to determine your creditworthiness using information contained in your credit reports from the three major credit bureaus (Equifax, TransUnion, and Experian).

Lenders and others buy access to the algorithm. Fair Isaac offers different credit scores that emphasize specific borrowing behaviors, such as varying weights for different actions like buying a home or buying a car.

Your FICO scores from each of the three different credit bureaus are different, too. FICO’s formula is applied to the information in each of your credit reports, and since your information may not be the same in all three, your scores can differ.

Each bureau has a different name for its FICO, but they all come from Fair Isaac:

Equifax = BEACON Score

TransUnion = EMPIRCA

What about Experian, the other of the big three credit bureaus? If you attempt to buy a FICO score from Experian, you’ll be out of luck. Experian offers its own, non-FICO credit score for purchase.

Fair Isaac has a fairly tight grip on the credit scoring industry, but that doesn’t mean that no one else has developed their own credit score algorithms. The catch? These scores might not be what lenders — particularly mortgage lenders — use to determine your creditworthiness.

FAKO Scores and Your Credit

Other credit scores have acquired the designation FAKO (from “fake-o”). For the most part, these are not FICO scores. Instead, they are scores from companies that have developed their own scoring models. These scoring models look similar to FICO scores, and even have a similar scale. Some examples include:


This is a scoring model developed by the three major credit bureaus together. It includes information from all three reports. You can get your VantageScore from each of the three credit bureaus. It was designed to compete with FICO, but so far, few lenders actually use it.


Experian developed its own credit scoring model, based on information in the Experian report. However, this is a consumer credit score and not used by lenders. It’s purely educational.


The credit bureau TransUnion developed the TransRisk score based on information from that bureau.

Experian credit score:

This is a score based on the information in your Experian credit report and based on Experian’s proprietary model.

It’s true that these scores can provide you with a general idea of your creditworthiness, but since they are not widely used, they might not actually tell you how lenders see you.

Alternative scores can help you keep tabs on your credit situation and alert you to potential problems, but they can’t replace your FICO score.

Where to Get Your Credit Scores

You can buy your FICO score directly from the source at myFICO.com, but you can also purchase your FICO score from two of the three major credit bureaus.

TransUnion and Equifax each sell a version of the FICO score based on their own information. Each of the three major bureaus also sells a score based on their own models, and you can purchase your VantageScore from each of the bureaus.

While it might be worth it to purchase your FICO score, though, it usually isn’t worth the cost to purchase a FAKO score. You can usually find these alternative scores for free at web sites like Quizzle, Credit Karma, and Credit Sesame. Keep tabs on your situation with free scores, but if you are serious about fixing your credit before applying for a major loan, check your FICO score.

It’s also important to watch out for those “free credit score” web sites. First of all, most of them offer FAKO scores, rather than FICO scores. Secondly, you normally have to sign up for a credit monitoring service in order to get your “free” score. You are much better off going through official channels to get your credit score.

What About a Free FICO Score?

While it’s fairly easy to find FAKO scores for free, getting your free FICO score is a little more difficult. (Remember, your FICO score isn’t the same thing as your free annual credit report.) For the most part, you will need to pay $19.95 at myFICO in order to see your score. That’s $19.95 for one score based on one bureau, so you will have to pay another $19.95 for another score. (Experian charges $15.95 for its non-FICO score.)

It is possible to get a free credit score if you have been denied credit or if you don’t receive the best possible terms. However, lenders only have to provide you with the credit scoring method used and an explanation of why you were denied credit.

A recent law requires lenders to either provide you with the credit score used (so, if it’s FICO, you get the FICO score) OR provide you a Risk-Based Pricing Notice. This means that lenders can get around providing you with a free copy of your credit score by analyzing why you didn’t get the best rate or why you were turned down.

If you want to stay on top of your credit score at all times, you can sign up for Score Watch at MyFICO. They’ll send you alerts when there are changes to your credit score and provide you with tools to understand the factors affecting your score. The 1-month trial costs $4.94; each month after that costs $14.95.

Bottom Line

Your credit score is a numerical representation of your creditworthiness. Banks and other lenders use it to make judgments about whether to approve your loan, and what terms you receive. The most common score used is the FICO score; if you are going to pay for a score, make sure it’s that one.

Prospecting 101 For Commercial Real Estate Professionals

One common thread links the newest commercial real estate sales or finance professional to the most seasoned commercial real estate veteran.

The need to acquire new clients and maintain existing relationships. Without clients, you don’t have a business, so prospecting is the lifeblood of any brokerage firm. And the most effective way to turn prospects into clients is to pick up the phone and have a conversation with them.

You enter the business cycle by going to the market to find prospects with whom to do business.

Once you have found a prospect, you analyze their needs, make a presentation, and win the right to represent them. Of course, winning the business isn’t enough, since you also need to fulfill the assignment and close the deal.

All these steps are important, but many commercial real estate sales and finance professionals place their emphasis on the win and fulfill stages. To keep your brokerage pipeline healthy, you need to always keep re-entering the cycle by finding new prospects. This keeps all three buckets in your sales prospecting continuum full.

Building a Prospect List:

Before you pick up the phone, develop a solid strategy based on two essential elements: determining who your prospect is and what you are going to say. You can have the best list in the market, but if you cannot clearly articulate the purpose of your call and the value to your audience, your great list is worthless.

Alternately, you can have a silver tongue and deliver consistently, but if your calling list is outdated and not validated, you are not any better off than the broker in the first situation.

Two popular research sources for company information are Hoover’s and LexisNexis. Hoover’s “First Research” product provides good insight and suggested questions for key decision makers. For more direct research, leveraging an online assistant such as Elance or Guru allows you to delegate your research activities.

The next step is to determine whom to call. When building your prospecting database, try to only include the most qualified prospects.

Formulating Your Presentation:

Once you’ve identified your prospects, research what would interest them. This last step is often forgotten. Determining a prospect’s issues gives you a good reason to call and move the relationship forward. Learning about them, their companies, and their real estate needs can help you to have a more pointed conversation that is more likely to lead to a face-to-face meeting.

Making the Call:

Once you have finished preparing, generate a call list so you can sit down and do your prospecting in one block of time. As you go through your call list and contact your prospects, remember the reason that you are calling — to get the prospect to sit down with you.

If the client says yes, book the meeting and end the call as quickly as possible. Send a confirmation via email and, if the meeting is more than one week out, send additional information between your call and the appointment that adds value. For example, if you are meeting to discuss a lease, send a client testimonial regarding a lease you just renewed or a tenant you successfully relocated.

When the prospect says no, try to find an area of interest that you can use to book a meeting. Remember the cardinal rule of WIFM. Use your research to address possible business issues the prospect is facing, or share what their competitors are doing in the market. Also, if the prospect is rude or hurried, consider that you may have called at a bad time. In that case, call back in one to three months.

When the client asks you to send information, consider offering to send it as long as they agree to have another conversation with you to discuss it. You can send the information without such a commitment, but inevitably you will end up chasing the prospect for weeks if not months.

If the prospect isn’t interested in meeting with you, find out why. If the timing isn’t right for them, attempt to get a sense of a better time to call. This is also an excellent opportunity for you to re-examine the value proposition that you’re presenting on the phone. If it’s not compelling, you probably will get a lot of uninterested responses. Sharpen your pitch and call them back in one to three months.

Commercial Loan Programs

Commercial Loan Programs

Winston Rowe and Associates has almost 200 capital sources nationwide. This enables us to provide a full spectrum of options to clients that traditional banks and many lenders can-not.

Capital Deployment:

  • $1,000,000. – $50,000,000.
  • 48 Contiguous US States Only
  • SBA, Hard Money, Bridge, Portfolio, CMBS, Conventional, Private Capital, Preferred Equity, Mezzanine and Private Equity.

Loan to Value Criteria:

  • Refinance 70% – 80%
  • Purchase 70% – 80%
  • Cash Out Refinance 70% – 80%

Documentation Criteria:

  • Full and Limited
  • No FICO or Low FICO Score
  • Asset Value Only
  • Income Approach / Cash Flow Only

Basic Underwriting / Due Diligence Criteria:

  • Personal Financial Statement
  • Purchase Agreement
  • Three Bureau Credit Report
  • Use of Proceeds for Cash Out
  • Valid Government Issued Photo ID
  • Completed and Signed Transaction Summary Questionnaire from Winston Rowe & Associates
  • Populated Supporting Document Due Diligence List. Pursuant to the specific transaction type.

Commercial Property Types:

  • Our capital sources will consider vacant and occupied commercial properties.
  • All commercial property types considered.

News Sources Commercial Real Estate Professionals Should Check Daily

News Sources Commercial Real Estate Professionals Should Check Daily

Information is king in commercial real estate. Each piece of data you consume may come in handy as you prospect new tenants or update your owners about recent leasing activity. But with so much information floating around, how do you prioritize what to read and what sources to trust?

Check out these Commercial Real Estate News Sources

Each offers great market insight, but they made our list for something unique:


Founded 15 years ago, GlobeSt.com specializes in doing in-depth interviews with thought leaders from around the industry. It’s a great way to keep a pulse on what individuals are thinking about different trends.


Bisnow made our list because it has a unique insight on trends thanks to its enormous event circuits. Subscribe to get updates for your specific market, or just peruse the national section. The Morning Digest pulls the biggest news of the last day or two from several different sources. It also doesn’t hurt that it’s written in a fun tone (almost never boring!).


To lump BizJournals into one publication is almost a disservice to this publication powerhouse. The media company fuels 42 different websites, 64 publications, and reaches over 10 million people a year. Bookmark your market-specific publication and get great insights about both the CRE industry and the overall market.

WSJ’s CRE Section:

The WSJ highlights large deals, changes by major players, and changing market dynamics. Although it might not help you lease any faster, it will definitely help you talk shop with owners.


National Real Estate Investors (NREI) does a particularly great job of synthesizing major trends (and fun listicles) into articles with effective takeaways.


Curbed offers a very bottoms-up perspective of major markets across the US by highlighting specific properties, spaces, and neighborhoods. Although it introduced a healthy dose of residential news into the mix, it can help you keep track of the overall trends of different cities and neighborhoods.

Commercial Property Executive:

CPE is an important read because it categorizes its articles by property type and business specialities, allowing you quickly find the insights you want.


Travis Barrington recently started cre.tech with the basic assumption that: “Technology is changing the commercial real estate business.” With that in mind, he covers and compiles the major technology trends (and companies) that are contributing to these revolution.

The News Funnel:

The News Funnel is the largest news and blog aggregator for the real estate industry. Founded in 2011, the platform has become a fountain of both unique and aggregated content, all relevant to CRE professionals. You can specify your choice markets or just see what’s trending.

What Landlords Need To Know About Selling A Tenant Occupied-Property

What Landlords Need To Know About Selling A Tenant Occupied-Property

The time has come to sell your tenant-occupied property. As a landlord, you care about your tenants and want to show them respect. Although the house they are living in is yours to sell, you always want to keep their best interest in mind throughout the sales process, as an angry tenant could slow down the selling process significantly. It is also important that you abide by the terms of the lease and do not violate any tenant agreements you have made.

The Month-To-Month Tenant

Let’s start with a best-case scenario: the month-to-month lease. Depending on the city and state you live in, this is typically the most flexible rental situation because the renter only needs about 30 to 60 days’ notice before they need to move out. It is important that you provide adequate notice to your tenant and abide by the terms of the rental agreement detailing the day their lease will end.

Although you as the landlord do have the ability to end a month-to-month lease without explanation and are not required to tell your tenant that your home is on the market, I strongly advise keeping them in the loop on your plans to sell. Keeping the tenant informed will most likely make them more inclined to assist you in the selling process and will be far easier on them than being forced out of their living space with little or no notice at the last minute.

Here is how I recommend proceeding:

  1. First, send a letter to your tenant advising them on the exact date their lease will end.
  2. Inform the tenant that they must be completely moved out and return the keys on or before the date specified in the letter.
  3. Make the tenant aware that if they do not move out, the eviction process will, unfortunately, be the next step.

The Fixed-Term Lease

A fixed-term lease can make the selling process a little bit lengthier than you might like. Assuming your tenant pays rent on time and doesn’t violate any terms of the lease agreement, he or she has the right to live on the property until the lease expires — unless there is an early termination clause. Unless you are in extenuating circumstances, I advise waiting until your tenant’s lease has expired before selling your property.

The Difficult Tenant

If you find yourself in the unfortunate situation of having a challenging tenant, I recommend waiting until the lease has ended to put your home on the market, as he or she could make the sales process very difficult.

An uncooperative tenant might leave the home messy when prospective buyers come by to see it, or they might refuse to leave the home during open houses, making the situation uncomfortable for everyone involved.

However, if they go beyond merely being difficult and go as far as violating any lease terms, you may have the ability to terminate the lease before it ends. The lease can be terminated if your tenant commits any of the following:

  • Fails to pay rent altogether (or continuously pays rent significantly late).
  • Engages in illegal activities on your property.
  • Causes major damage to your property.
  • Includes false information on their application.
  • Becomes a nuisance to neighbors.
  • Violates a non-pet clause, if applicable.

Rent Concession

Whether you have an easy-going or challenging tenant, I advise offering a discount on rent (such as offering a full or half month free). In return, work out a deal with the tenant so that they agree to keep the house clean for open houses, take any pets out of the house when prospective buyers visit and accommodate last-minute showing requests (within reason).

What if my tenant doesn’t want to leave?

There are a few options available to you and your tenant if they feel attached to the property:

  1. Sell your home to your tenant: Your tenant could turn out to be the ideal buyer. They know the home well and are already completely moved in. If your tenant is unable to obtain a mortgage, seller financing could be a feasible option. If you decide to go that route, you would act as both the seller and the lender, thereby letting your tenant make payments to you. Although this might not be the most ideal situation, it will spare you from having to go through the lengthy process of finding a buyer and waiting for your tenant’s lease to end.


  1. Pay your tenant to leave: If you are under a time constraint and need to sell your property as quickly as possible, it might be necessary to pay your tenant to vacate. This can include paying for the cost of movers, paying their security deposit for their new apartment or paying for a month’s rent in their new space.


  1. Sell to an investor: Finding an investor can be challenging, but if you do find someone who is willing to purchase the property while your tenant’s lease is still active, the investor must allow the tenant to remain in the home until their lease expires. In nearly every state, the security deposit and fixed-term lease are transferred with the property when it is sold, making the investor the new landlord.

If you’re selling a tenant-occupied property, you’ll want to be sure you take everything into consideration as your tenants can make selling either super easy or a nightmare for you. Sometimes offering perks — whether it’s financial concessions or even baked goods — can go a long way in them working to help you get your home sold.

Multifamily Borrowers Will Continue to Have Access to Multiple Capital Sources in 2019

Multifamily Borrowers Will Continue to Have Access to Multiple Capital Sources in 2019

Multifamily borrowers will have lots of choices on where to get permanent loans in the new year—despite worries about rising interest rates, high property prices and overbuilding.

“There is nothing out there that is going to create a lack of liquidity,” says Gerard Sansosti, executive managing director with capital markets services provider HFF.

Multifamily investors can get permanent loans from a growing list of lenders, including Freddie Mac and Fannie Mae lenders, banks and life companies. Many private equity fund managers have also created debt funds to provide loans on apartment properties.

“Rising rates aside, 2019 should feel the same as 2018 in terms of liquidity,” says Peter Donovan, executive managing director with CBRE’s capital markets multifamily group.

Debt funds provide ready money

Even developers whose new projects are taking too long to lease up can find loans to take out their construction loans. Many private equity fund managers have created debt funds that now provide bridge financing on apartment properties. “There are out there in force,” says Donovan. “They are the new unregulated lenders.”

These loans can cover up to 85 percent of the value of a property, with interest rates often floating at 275 to 300 basis points over the 30-day LIBOR.

Once the property has fully leased, the borrower can find convention permanent financing to take out most of the bridge loan, so the remainder of the bridge loans from the debt fund functions as a much smaller mezzanine loan. Value-add investors also use these debt funds to secure bridge financing for their properties.

Interest rates still low

The interest rates are still relatively low for permanent loans, despite two years of rate hikes from the Federal Reserve.

At the end of 2018, lenders offered all-in interest rates from 4.25 percent to 4.50 percent, for permanent loans from Fannie Mae or Freddie Mac programs that cover up to 75 percent of the value of a stabilized, fully-leased property. That’s up roughly half a percentage point from the end of 2017.

That increase is far below the rate hikes from Federal Reserve officials, who have been pushing their benchmark Fed funds rate higher by 25 basis points at a time for the last two years—from close to zero to well over 2.0 percent. The Fed is expected to raise its rates several more times in 2019.

To keep their all-in interest rates low, permanent lenders have cut their spreads—the amount that they add to their interest rates. The current interest rates from Freddie Mac and Fannie Mae work out to a spread over the yield on 10-year Treasury bonds of about 150 to 160 basis points.

The yields on Treasury bonds have also stayed low. The yield on 10-year Treasury bonds was about 2.7 percent in the last trading days of 2018. That’s only a little higher than in 2017 when the yield hovered in the mid-2-percent range. The Treasury bond yield has risen to over 3.0 percent for much of the fall but fell back as the stocks markets grew volatile at the end of the year.

Eventually, Treasury bond yields are likely to rise again. That will eventually push interest rates higher for permanent loans. “Rising rates start to pinch at 3.25 percent. Certainly, at 3.5 percent you are going to start to feel it in loan proceeds,” says CBRE’s Donovan.

New overseer for Freddie Mac and Fannie Mae

All the biggest lenders are expected to stay busy in 2019. Freddie Mac and Fannie Mae were still the biggest sources of capital for apartment loans in 2018, and are likely to hold onto that spot in 2019, despite having a new federal overseer in 2019.

Mel Watt will step down in 2019 as the leader of the Federal Housing Finance Agency (FHFA), the federal agency that regulates Fannie Mae and Freddie Mac. The new director of FHFA could hypothetically impose tighter restrictions on how much Fannie Mae and Freddie Mac can lend.

However, industry experts are positive about the nominee, Mark Calabria, who is currently an economic advisor to Vice President Mike Pence. “He absolutely understands the finance world for single-family and multifamily. He comes with great experience,” says Donovan.

Other leading capital sources, from banks to life insurance companies, remain active. Life companies continue to compete to make loans on the most desirable, class-A apartment properties, offering interest rates as low as 105 to 110 basis points over the yield on Treasury bonds for low-leverage loans. “They don’t seem to have any less capital available,” says Sansosti.

Conduits lenders and lenders that provide Federal Housing Administration loans also continue to be active.

Professional Commercial Mortgage Underwriters Hand Book

Professional Commercial Mortgage Underwriters Hand Book

Table of Contents

Page 3: About Winston Rowe & Associates

Page 3: Free Book “Commercial Real Estate Finance”

Page 4: Introduction to Underwriting Commercial Mortgages

Page 7: Chapter 1: Types of Commercial Mortgage Default

Page 9: Chapter 2: Market Analysis

Page 11: Chapter 3: Property Cash Flow Analysis

Page 19: Chapter 4: Expense Reimbursements

Page 22: Chapter 5: Insurance

Page 23: Chapter 6: Ground Rent

Page 26: Chapter 7: Underwritten Net Cash Flow

Page 27: Chapter 8: Replacement Reserves/Engineering Report

Page 28: Chapter 9: Environmental Related Expenses

Page 29: Chapter 10: Credit Metrics: Debt Service Coverage Ratio, Capitalization Rate, Debt Yield, and Loan to Value Ratio

Page 31: Chapter 11: Borrower Analysis

Page 32: Chapter 12: Equity

Page 34: Chapter 13: Management

Page 35: Chapter 14: Reputation/Credit

Page 36: Chapter 15: Loan Structure and Credit Enhancements

Page 37: Chapter 16: Recourse Carveouts

Page 38: Chapter 17: Amortization

Page 39: Chapter 18: Reserves and Escrows

Page 40: Chapter 19: Cash Management

Page 41: Chapter 20: Insurance

Page 42: Chapter 21: Collateral Evaluation


Appendix A – Risk Considerations for Each Type of Collateral

Appendix B – Basic Formulas and Calculations

Glossary of Terms

About Winston Rowe and Associates

Winston Rowe and Associates provides consulting and analysis services on a national basis in the areas of due diligence analysis for commercial real estate investing and financing.

Winston Rowe and Associates is not a lender, does not make loans of any type or credit decisions in connection with loans of any type.

Please review the business website link for company procedures, policies and work product description.

Contacted Information




How this Hand Book is Written

This hand book was developed to provide nonprofessional general advice for people interested in the general fundamentals of commercial mortgage underwriting.

This hand book is designed be read in any order.

Other Hand Books Winston Rowe and Associates has Published

  • Commercial Mortgage Consultants Hand Book

Book “Commercial Real Estate Finance”

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

It will enable you to make the right decisions when it comes to commercial properties. After you have read this book, you will be able to successfully choose a commercial property for your real estate business.

This book will help you to figure out everything that has to do with commercial properties. Also included with this book are different ideas on what you can do to make sure that you are getting the best financing possible. You will be able to truly enjoy the opportunities that come along with financing and with the different options that you have.

You will need to make sure that you can secure financing but it is not a cut and dry experience for everyone. The tips that are included with this book will give you the best chance at getting financing.

Introduction to Commercial Mortgages

Commercial mortgages provide the capital and liquidity for real estate owners to build and operate the properties in which we live, work, and shop; the properties that house the businesses, large and small, that fuel our nation’s economy. These loans are primarily made by banks and insurance companies.

In all cases the lenders, through their underwriters, assess the risks of the loans by analyzing the operations of the properties being financed. The properties have revenues – primarily rent collected from tenants – and expenses the costs of maintaining the properties – that generate the net cash flow required to service the contractual monthly principal and interest payments of the proposed loans.

This business aspect of commercial mortgage finance distinguishes it from single family home lending, where the mortgage payments are funded through the earnings of the borrower, unrelated to the real estate collateral securing the loans.

All loans have risk of default, and the underwriting process is designed to identify and enable lenders to mitigate those risks. A thorough underwriting process applies consistent standards across similar categories of properties and markets.

All commercial properties are unique due to their competitive positions within their markets and in the quality of their physical plants, tenancy and management, and the risk analyses must therefore be property specific. This handbook outlines a framework of underwriting principles and procedures that we believe results in generating lower credit risk loans, but the uniqueness of each property requires lenders to appropriately customize their underwriting to reflect the facts and circumstances of each proposed loan.

An underwriter’s adherence to this framework and a disclosure regime that emphasizes the manner in which the underwriter has done so would help both to increase the integrity of the underwriting process and to enable investors to independently evaluate the decisions made during the underwriting process so that they can formulate their own conclusions regarding those decisions.

Generally, commercial mortgages with the following attributes have a lower risk of default:

The value of the collateral is substantially higher than the loan amount to provide cushion in times of falling property values;

The borrower or sponsor has significant cash equity in the property and is incentivized to keep the loan current through its term and repay the loan at maturity;

The property is well managed by an experienced property manager;

The property is located in a desirable market that attracts high quality tenants, and the property can effectively compete for those tenants through its location, quality of its space, and amenities;

The property is fully leased by credit worthy tenants with leases that extend beyond the maturity of the proposed loan;

The property generates cash flow from its operations that exceeds the periodic interest and principal payments of the proposed loan (the “debt service”) by a sufficient margin to protect the lender from fluctuations in that cash flow due to unexpected economic and market events.

The loan is structured such that, depending on leverage, it either fully amortizes or has some level of amortization over its term, has reserves for re‐leasing and capital expenditures, and employs other forms of credit enhancements appropriate to mitigate certain risks.

Not every property is a trophy asset in a top tier market, and therefore not all commercial mortgages will reflect all the attributes of a low risk loan. There is inherent risk in commercial mortgage lending. The goal of Commercial Real Estate is to provide liquidity not just to trophy properties, but to all markets and properties while appropriately identifying and mitigating those risks.

Therefore, it is critically important that lenders conduct a thorough underwriting process that identifies the risks of a proposed loan, sizes and structures the loan in consideration of those risks, and clearly discloses the risks and structural enhancements to investors. Such transparency will enable investors to understand and price the risk of commercial mortgage pools and regain confidence in securitization vehicles.

Chapter 1: Types of Commercial Mortgage Default

The ultimate test of an underwriter’s conclusions and recommendations is the actual performance of a loan throughout its term and at maturity. An underwriter is challenged with determining a borrower’s capacity to make timely payments of debt service and the ultimate repayment of principal at the maturity date. Accordingly, in underwriting commercial mortgages an underwriter considers the various types of defaults in making the credit decision:

Term Default – The risk of default during the term of a loan, from loan origination through loan maturity, is deemed the “Term Risk” of the loan. Several key parameters are utilized in measuring Term Risk with the most common metric being debt service coverage ratio (described more fully in Section III below).

If property cash flows were evenly distributed over the loan term without volatility, assessing Term Risk would be simple. However, over time property cash flows often prove to be uneven due to lease turnover and variability of expenses. An underwriter therefore considers the impact of potential disruptions to the revenue stream, and requires a higher debt service coverage ratio and other structural credit enhancements, such as reserve funds, that will enable a loan to remain current during its term.

Maturity Default – The risk of default at the date when a loan is due is referred to as the “Maturity Risk” of the loan. Maturity Risk reflects the ability of a borrower to either obtain refinance proceeds sufficient to fully repay the matured loan or to sell the property and utilize sales proceeds to repay the loan. Common credit metrics used to assess Maturity Risk are debt constants, debt yield and loan‐to‐value ratio.

An underwriter considers the relationship between lease termination and loan maturity to assess how a new lender will view the quality of the property’s cash flow if the loan is to be refinanced at maturity. During periods when the availability of credit is scarce, interest rates are trending upward, and/or property values have fallen, there is risk that a loan can meet its debt service obligations up to maturity, but cannot meet its repayment obligation. An underwriter can mitigate such risk by lowering initial loan proceeds or requiring amortization of the loan during its term.

Technical Default – While term and maturity defaults are known as Monetary Defaults, defaults of a non‐monetary nature are referred to as Technical Defaults. The term Technical Default should not be interpreted as a minor default because some technical defaults can result in severe losses to the lender if not cured by the borrower within a reasonable period of time. For example, if a borrower neglects to adequately insure a property, as required by the terms of the mortgage, the property and loan may be exposed to material adverse consequences and risk of loss. In determining the likelihood of a technical default, an underwriter evaluates the borrower’s willingness and capacity to comply with the requirements of the loan agreements beyond payment terms.

Thorough underwriting designed to avoid default risk focuses on four key areas:

  • The economic strength and supply and demand dynamics for other properties in the market in which the collateral property operates;
  • The competitiveness of the collateral property in its market and its ability to generate cash flow to pay debt service during the term of the loan and be refinanced upon maturity;
  • The equity contribution and management expertise of the borrower/sponsor; and
  • The structure of the proposed loan to minimize and mitigate known

To promote high quality underwriting with greater transparency, Winston Rowe and Associates is offering the following principles‐based underwriting framework relating to each of these analyses, as well as common definitions and computations for the key metrics used by lenders.

Chapter 2: Market Analysis

The dynamics of the market in which the property operates provides the foundation for the likely performance of the collateral. A comprehensive market analysis includes an assessment of macro and local economic and demographic trends, supply and demand factors impacting the property, and the positioning of the property relative to competitors.

By tracking and projecting market trends, an underwriter can reasonably predict the commercial viability of a particular property over the long‐term ‐ including the term of the loan and beyond the anticipated refinance period. A thorough understanding of overall market conditions allows an underwriter to more accurately assess underwritten cash flow and projected performance, and form a current and future value opinion for the property.

Economic and demographic trends – Over the life of a loan, commercial real estate fundamentals (e.g., rents, vacancies and absorption) are correlated to broad trends of the economic cycle, including GDP growth, employment growth, business investment, disposable income and consumer sentiment, and changing market demographics.

Both economic and demographic trends influence the demand for space. On a local level, market‐specific economic conditions can have a profound impact on local commercial real estate fundamentals. Local market conditions tend to be sensitive to factors such as trends in population growth, major area employers, local job formation, household formation, median income and disposable income.

Hence, risk is reduced when the property operates in a robust market that generates space demand through increasing employment and other local attributes.

Supply and demand – Supply in a given market or submarket is determined by the current inventory of a particular property type or, more granularly, by a subtype of property within a given property type, plus new and planned development. Future supply can be assessed by reviewing local zoning and building codes as well as planned developments in the permitting or local building approval process. Population, economic diversity and growth drive demand for space for each type of property in the market. Market rents, vacancy rates, lease‐up times, leasing concessions and tenant improvement allowances are the quantifiable impact of supply and demand dynamics on property performance (that is, cash flow). Sales prices, capitalization rates and discount rates are the quantifiable results of supply and demand on property valuation. Risk is reduced in markets where demand meets or exceeds current and anticipated future supply.

Competitive set – Ultimately an underwriter assesses whether tenants want to be in the particular property collateralizing a proposed loan. Accordingly, beyond understanding the supply and demand trends in a particular market, an underwriter also assesses a property’s strengths and weaknesses relative to its competition. Comparative factors include location, size, property condition and age, parking ratios, ingress/egress, amenities, views, visual appeal and a host of other factors both quantifiable and non‐quantifiable. The underwriting process must consider future changes to the competitive set, such as additions to supply or renovation and upgrades to a competitive property, which will likely impact the subject property’s desirability and performance in terms of absorption, vacancy, and rental rates and concessions.

Chapter 3: Property Cash Flow Analysis


A collateral property’s current cash flow is the primary indicator as to whether a proposed loan’s periodic debt service will be paid, and a property with stable and increasing cash flow will maintain the value required for repayment at maturity. Accordingly, detailed analysis of all property revenue and expenses is essential to underwriting and risk mitigation. Most loans that are securitized (particularly fixed‐rate loans) are collateralized by stable properties; that is, properties that are fully or nearly fully leased to their market potential and have one or more years of operating history. As a result, an underwriter focuses on the property’s current cash flow characteristics.

For an income producing property, Net Operating Income is defined as total revenue fewer total expenses; it is the income generated by the property from its usual operations, excluding expenditures likely to be capitalized rather than expensed by the borrower.

Revenues generally include rental income from leases (or nightly room rates for hospitality property), contractual reimbursement of operating expenses, participation in tenant sales revenues (for certain retail properties) and other recurring revenue related to a property’s operations.

Expenses encompass costs associated with operating and maintaining the property, including management fees, franchise fees, utilities, routine maintenance, cleaning and landscaping, employee salaries, marketing, costs of goods sold (for hospitality property), insurance and real estate taxes.

Net Cash Flow is defined as Net Operating Income less the cost of capital improvements necessary to maintain the property in its current condition and, in the case of commercial property, the cost of re‐tenanting space upon lease expiration, which may include both leasing commissions and tenant improvements.

In order to accurately analyze property cash flow, the underwriter obtains, at a minimum, the following information from the borrower:

Operating Statements – prior three calendar years (if available) and most recent year‐ to‐date;

Operating Budget – current and future year operating budget; and

Current Rent Roll – should include the tenant name, leased area, lease commencement date, lease expiration date, current rent, contractual rent increases during the lease term, operating expense reimbursements, renewal options, termination options, current or future concessions, and other pertinent terms or conditions such as co‐ tenancy provisions. Co‐tenancy provisions are most often found in retail leases wherein the loss of a major tenant or combination of tenants creates additional rights to one or more remaining tenants.

These rights most frequently take the form of reduced rental payments, rental payments calculated as a percentage of gross sales, or other concessions that would adversely impact the property cash flow. Such rights continue until new tenants are procured by the landlord/borrower and open for business. The landlord’s inability to re‐tenant the property within a specified time frame may give other tenants additional rights, up to and including early lease termination.

The above information should be certified by the borrower or sponsor who would be legally or financially liable to the lender for the accuracy of the information. Certain summary information from the historical and recent operating statements and rent rolls are generally disclosed Winston Rowe and Associates due the due diligence and underwriting process.

Obtained historical rent rolls and operating statements for each property, and the Mortgage Loan Documents require the borrowers to provide such information on an ongoing basis. To further understand and verify the property cash flow, an underwriter obtains and reviews additional supporting information, which may include but is not limited to:

  • Tenant leases;
  • Management agreement;
  • Utility invoices;
  • Property tax invoices;
  • Insurance policies;
  • Service contracts;
  • Equipment leases;
  • Ground leases;
  • Historical occupancy schedule;
  • Borrower bank statements or collection reports;
  • Historical capital expenses and leasing costs; and
  • Reciprocal easement agreements, condominium agreements, PUD agreements and other documentation affecting property

Historical Net Operating Income

To understand a property’s cash generation ability, an underwriter first reviews net operating income during prior periods. Typically, the source for historical net operating income is financial statements prepared in accordance with generally accepted accounting principles (GAAP), which may or may not have been audited by a certified public accountant. The underwriter computes a Historical Net Operating Income, which is the actual net operating income the property has generated in previous years, excluding non‐recurring or extraordinary items or non‐property related items.

For example, if a prior year’s operating statement included significant investment income that was attributable to a borrower’s investments rather than the property’s operations, such income would be eliminated from revenue in computing Historical Net Operating Income.

Historical net operating income may be based on one or more prior 12-month periods, or from a partial year that has been annualized, if such annualization can be supported. In general, a property with one or more years of history of net operating income, especially if substantiated by audited financial statements, is considered less risky than a property with revenue and expenses that have not yet been fully determined or stabilized.

To the extent available, historical operating information for the past three years is generally disclosed in Commercial Real Estate offering documentation. Winston Rowe and Associates recommends the following fields be included in Annex A for the past three years: Effective Gross Income, Operating Expenses, Net Operating Income, Capital Expenses, Net Cash Flow and Occupancy Percentage.

Underwritten Net Operating Income

A critical component of arriving at a sustainable property cash flow is the underwriter’s determination of a property’s “Underwritten Net Operating Income,” also referred to as “Normalized Net Operating Income.” The Underwritten Net Operating Income is meant to reflect the stable and consistent net operating income of the property, eliminating any periodic anomalies.

For example, if fuel costs were particularly high in the current year, an underwriter might average the fuel costs over the prior three years to derive a more appropriate indicator of “normal” performance. Accordingly, an underwriter considers trends in property income and expenses and how these trends may be impacted by current and anticipated market conditions.

Underwritten Net Operating Income is derived based on facts regarding the market and the property rather than speculative projections regarding the property’s potential performance. In Commercial Real Estate lending, significant assumptions are documented and disclosed to investors.

The Underwritten Net Operating Income is generally based on a current rent roll and Historical Net Operating Income with certain adjustments made to revenue and expenses to reflect known facts and circumstances regarding the property’s current operations and market conditions which may include:

  • Contractual increases in rent over the next six months for leases in place;
  • Newly executed leases that may not have been in place during the previous period;
  • Leases that have expired during the previous period;
  • Leases that will expire in the next 12 months;
  • Contractual increases/decreases in operating expenses;
  • Real estate tax increases/decreases based on changes in assessed value or millage rate; and
  • Any new revenue or expense items calculated based on adjustments to other revenues and/or

The calculation of Underwritten Net Operating Income involves a detailed look at each property‐related revenue and expense item as described below.

The following areas are recommended by Winston Rowe and Associates to be included in Annex A to provide investors more detailed information regarding the underwriting assumptions: Revenues, Effective Gross Income, Operating Expenses, Replacement Reserves, Net Operating Income, Capital Expenses, Net Cash Flow and Occupancy Percentage.

Rental Income 

An underwriter analyzes each line of the property’s operating statement provided by the borrower. Perhaps the most important part of the analysis is assessing the sustainability of the property’s rental revenue, which typically begins with an understanding of “in‐place” rent, that is, the rent that the borrower is currently collecting from the property’s tenants based on lease obligations, without underwriting adjustments.

As an underwriter assesses revenue more fully, the details of the analysis vary by property type. For multi‐family properties, the analysis focuses on market trends and whether the collateral is achieving rents and occupancy levels consistent with market averages.

Location, access, parking, proximity to employment and retail centers, services and amenities are all considered in assessing the property’s ability to generate ongoing demand for tenants.

For hotels, an underwriter focuses on the various components of revenue – rooms, and food and beverages – as well as the property’s mix of business/leisure customers, flag (branding) and reservation system, and the management experience of the operator.

An analysis of senior housing reflects the level of care provided to the tenants, which ranges from meals to full medical staffs, and whether the revenue is private pay or based on reimbursements from Medicare and Medicaid.

For an office, retail or industrial property, the analysis focuses more on the terms of individual leases and the creditworthiness of the tenants. Leases are reviewed to understand base rent, concessions granted to the tenants as inducement to rent, reimbursements of the property’s operating expenses, and the terms of the leases and tenants’ options to renew.

On a property level, the percentage of space with expiring leases in each year – the rollover analysis identifies potential disruption to cash flow during the term of the loan.

The in‐place rental rates are compared to the rental rates achieved at comparable properties in the market to determine if the building is competitive and if rental revenues may rise as leases expire (although such higher rents would generally be excluded from Underwritten Net Operating Income unless the new lease contracts have already been executed).

An underwriter also assesses whether the in‐place rental rates exceed the rental rates achieved at comparable properties in the market.

Such a rental rate premium may result in the underwriter reducing the rental revenue when computing the Underwritten Net Operating Income if the underwriter is concerned that the premium is not sustainable.

If a property is not fully leased, an underwriter will typically withhold credit for future leasing, except in some instances in which a tenant has executed a lease but has yet to occupy its space. Other anticipated improvements in property performance are usually not factored into the underwritten cash flow.

However, anticipated deterioration in rental income or negative events (e.g., excessive lease rollover during the loan term in a property with above market leases, or deteriorating market conditions) are addressed by employing more conservative underwriting assumptions and/or through the utilization of structural enhancements such as reserves or letters of credit.

Repayment risk is mitigated by the creditworthiness of the tenants in combination with the lease terms, both key drivers of cash flow stability. Leases are contracts that typically cannot be terminated unless the tenant is in bankruptcy.

Hence, having high‐credit quality tenants on long‐term leases significantly enhances the stability of the property’s revenue over the term of the loan. In contrast, weak or insolvent tenants may not be able to meet their obligations and could trigger a lease default. Retail properties may further have co‐tenancy clauses where the performance of one weak tenant affects the lease terms of another (potentially healthier) tenant.

Typical adjustments that may be made to Historical or In‐Place rental revenue include:

  • Rent in place with contractual rent increases over the next six months;
  • Rent in place with index‐related rent increases over the next six months;
  • Rent for leases signed but tenants not yet in occupancy;
  • Rent for dark/bankrupt tenants excluded;
  • Mark‐to‐market based on prevailing market rents (including concessions);
  • Mark‐to‐market based on occupancy costs (retail properties);
  • Rent decreases due to co‐tenancy provisions; and
  • Adjustments for non‐recurring

An underwriter’s mark‐to‐market adjustments to rents and occupancy costs usually result in cash flow decreases and are only used to increase cash flow when facts and circumstances clearly support that conclusion.

Borrowers may execute leases for rental space in their own properties in order to increase contractual revenues and improve Net Operating Income.

These inter company leases, sometimes referred to as master or umbrella leases, provide for payments of rental income from one property owner-controlled entity to another, regardless of whether or not the space is occupied.

Future tenants may execute subleases with the master tenant, with any positive or negative difference in rental payments retained by the master tenant. Since master leases are not arm’s length contracts, they may not reflect prevailing market terms, and could artificially inflate the

Net Operating Income of a property. In a distressed situation, a borrower may withhold rental payments on a master lease.

The revenue from master leases are not included in an underwriter’s calculation of rental income unless the following are true: (a) the lease reflects market terms, (b) the master lease premises are either improved and ready for occupancy or have reserves set aside for tenant improvements, and (c) the master tenant is considered investment grade creditworthy, or has posted reserves to make rental payments.

The methodology used for determining underwritten rental income should be described in detail and disclosed to investors.

The offering documentation contains information regarding the amount of revenue used in the underwriting of the loan and any revenue from master leases or ground leases will be separately noted.


Even if the property appears to be stabilized, an underwriter confirms occupancy because only occupied space generates revenue. Seemingly straight‐forward, the occupancy rate may be computed in several ways, and impacts the likely cash flow to be generated and the risk of the proposed loan:

Physical Occupancy: The amount of space on a square footage or unit (multifamily, hotel) basis that is currently occupied by a tenant divided by the total square footage or total units available for lease. This calculation represents the total space at the property that is occupied by a tenant on a percentage basis. In commercial properties, a tenant must be open for business and paying rent to be considered as an occupied tenant.

Economic Occupancy: The total rent collected from the property divided by the total rent the property would achieve if it were 100% occupied. This calculation represents the total rent on a percentage basis that the property is achieving. If economic occupancy is less than physical occupancy, it could signal that the property is experiencing collection issues or achieving rents that are less than market rates. Conversely, if economic occupancy is greater than physical occupancy, the property may be benefitting from above market rents, which could negatively impact cash flow as leases expire and replacement lease contracts at lower rents are executed.

Leased Occupancy: The amount of space on a square footage or unit basis that is currently leased divided by the total square footage or total units. To be considered a leased space, a signed lease must be executed; however, the tenant does not need to be physically in its space to be considered a leased tenant. Leased occupancy is used to determine how much space is remaining to be leased.

In Commercial Real Estate lending, the methodology for computing occupancy should be documented and disclosed to investors. Annex A in the offering documentation should address current physical occupancy.  Historical occupancy information should be provided by the borrower and disclosed in Annex A.

Percentage Rent/Overages

Certain retail property leases provide for the collection of a percentage of the tenant’s sales (“percentage rent” or “overages”) in addition to or in lieu of base rent. Percentage rents are inherently more volatile than contractual base rents due to the variability of consumer demand for the tenant’s merchandise. Accordingly, an underwriter will typically evaluate percentage rent on a tenant‐by‐tenant basis.

Depending on the historical stability and trend of percentage rent collected by the borrower, and current market rental rates relative to the “rent” the tenant is paying (including base rent, percentage rent and reimbursements), an underwriter determines an appropriate amount of percentage rent to underwrite. Often the percentage rent is underwritten at a discount or excluded altogether from the underwriting analysis due to its volatility.

Acceptable methodologies for calculating underwritten percentage rent include:

  • Current year to date or trailing twelve-month sales results;
  • Previous year collections;
  • Previous year collections plus adjustments (inflation/changes in tenancy);
  • Previous year sales;
  • Previous year sales plus adjustments (decreases in sales/inflation/changes in tenancy).

Chapter 4: Expense Reimbursements

Many commercial leases, particularly for office, retail and industrial properties, require tenants to pay a portion of property operating expenses, which may include items such as utilities, repairs and maintenance, real estate taxes, insurance and in some cases management fees. The calculation of underwritten expense reimbursements can be complicated and may be presented in a number of different ways, including:

  • Previous year collections;
  • Previous year collections with adjustments (inflation/changes in tenancy);
  • Individual lease terms and previous year operating expenses; and
  • Individual lease terms and pro forma operating

Leases may specify certain percentage allocations for operating expense reimbursements, or may simply be based on a pro rata allocation. Often, tenants may only be required to pay for increases in expenses over those expenses incurred in a specific previous year (base year) or those expenses above a fixed amount.

Specific calculations of expense reimbursements, based on actual lease terms and supportable operating expenses (discussed below) are usually superior to simple estimates based on prior year actual expenses.

Effective Gross Income

To estimate total property revenue, an underwriter may also include other income from such sources as parking, laundry and other services, depending upon the type of and circumstances at the property. Other income is typically based on consistent historical collections over several periods, and may be adjusted to reflect actual or anticipated changes in occupancy or use of the property.

An underwriter often computes the gross potential rent of the property, that is, the maximum rental revenue that could be achieved if all the space were rented at market rates, and then deducts vacancy, below market rents, credit loss, and rental concessions to derive Effective ross Income. Effective Gross Income underwritten for the loan is recommended to be included in Annex A.

Operating Expenses

An underwriter also reviews trends in the operating expenses of the property. Such expenses include employee salaries, utilities, maintenance and repairs, marketing, insurance and real estate taxes. Hotels and senior housing have unique expense categories mirroring their revenue components.

Fluctuations in certain expenses during previous periods are either normalized to determine the average monthly expenses or analyzed to determine how changes in occupancy over time impact the variable component of the expenses.

In addition, underwritten operating expenses may reflect inflation adjustments, new operating contracts with service providers, changes in occupancy, changes in employee salaries, changes in utility rates, and efficiencies related to capital improvements. Underwritten operating expenses may be determined using alternative methodologies including:

  • Previous 12 months;
  • Previous 12 months with adjustments (inflation or changes in occupancy, etc.); and
  • Forward

Aggregate Underwritten Operating Expenses are recommended to be included in Annex A

Management Fees

Another expense is the fee paid to the property manager. When the property is owner‐ managed without a management agreement or when the property’s management company is an affiliate of the borrower, management fees are typically underwritten at market levels for that property type.

Generally, an underwriter assumes a minimum management fee, which can range from 3‐5% of Effective Gross Income.

For very large properties, the gross amount of underwritten management fees may be capped at a specific dollar amount. Underwritten management fees may be determined using various methodologies including:

  • Percentage of Effective Gross Income;
  • Percentage of Effective Gross Income excluding certain line items (types of expenses);
  • Cap at a maximum dollar amount per annum; and
  • Actual management

Real Estate Taxes

Real estate taxes are underwritten to current levels when it is determined that these taxes reflect a full assessment of the property.

If the property is not fully assessed or is benefitting from a tax abatement, underwritten taxes should be increased to reflect the market value and property tax rates within that jurisdiction unless the abatement is for an extended period of time past the loan maturity date, in which case taxes below full assessment can be used.

If the assessment is being appealed by the borrower, the underwriter only uses the lower assessed value if the appeal has been successfully concluded.

When the loan is financing a property acquisition, an underwriter also considers whether the sale will trigger a reassessment based on the sales price.

Similarly, the underwriter may consider an increase in real estate taxes that may be triggered by a foreclosure or other property transfer related to the financing. Underwritten real estate taxes may be determined using alternative methodologies including:

  • Previous 12 months;
  • Previous 12 months with adjustments (inflation);
  • Including/excluding tax abatements;
  • Current tax bills; and
  • Pro forma assessment and millage

Chapter 5: Insurance

During the past few years, there has been additional focus on insurance coverage, particularly the types of events and conditions that are covered by the policies, and the related costs of the various policies (see additional information relating to insurance in Section V). In addition to standard coverage for hazards, liability and business interruption, coverage for terrorism is often required for collateral securing Commercial Real Estate loans.

Additionally, if the collateral is in a seismic or flood zone, or a region with a history of windstorms, an underwriter will typically require insurance covering damage from such events. An underwriter is also increasingly focused on the management of mold, termites, and other circumstances that may deteriorate the property’s condition. Underwritten insurance expense may be determined using various methodologies including:

  • Previous year;
  • Previous year with adjustments (inflation); and Revised insurance

Chapter 6: Ground Rent

A mortgage loan may be secured by a borrower’s fee interest in the land and improvements, or a leasehold interest whereby the improvements are owned by the borrower, but use of the land is pursuant to a ground lease between the borrower, as ground lessee, and the land owner, as ground lessor.

In a typical ground lease, the ground lessee has full use of the property during the term of the lease, after which the right to use the land reverts back to the ground lessor. Since improvements on the leased land (including buildings, fixtures, paving and landscaping) cannot be removed, the use and ownership of the improvements will also revert to the ground lessor at the end of the ground lease term.

Therefore, it is important to confirm that any mortgage debt secured by a leasehold property will be fully repaid prior to the final maturity of the ground lease.

Mortgages secured by properties subject to ground leases are considered riskier than those secured by fee simple interests because there is a third-party entity with a financial stake in the real estate; the building owner has additional performance thresholds as detailed in the ground lease.

Therefore, important considerations in underwriting a property subject to a ground lease include the following:

Term – An underwriter compares the term of the ground lease to the term of the proposed loan and considers risk mitigates such as amortization to avoid repayment risk at the loan’s maturity. Lenders often require that the term of the ground lease (including options) exceed the amortization period by a “buffer” period of 10‐20 years.

Extension Options – An underwriter researches whether the borrower (the ground lessee) has options to extend the ground lease including the conditions and terms associated with such an extension. The impact of ground lease extension terms on the property’s cash flow may impact the borrower’s ability to refinance the loan at maturity.

Changes in rental payments – Since many ground leases terms are very long (50‐99 years), they often provide for increases in rent during their term. The increases in rent may be based on a fixed amount, based on inflation (CPI or other indices), based on an updated appraised value of the land, or based on the cash flow generated by the improvements. An underwriter analyzes future changes in ground rent, and the impact of such changes on the property’s ability to continue to service the proposed debt.

Subordination – An underwriter determines whether the ground lease will be subordinate or superior to the mortgage loan. In a subordinated ground lease, the lender’s lien on the property will take precedence over the ground lessor’s interest; after a mortgage loan foreclosure, the ground lease will be cancelled and the lender will own the land and improvements. In an unsubordinated ground lease, the mortgage lender will foreclose on the property subject to the ground lease, and would continue to make ground rent payments after the foreclosure.

Other important considerations include the lender’s right to receive notices of, and cure, ground lease defaults, use of insurance proceeds, financing of the ground lessor’s interest and assumable of the ground lease.

A ground lease may affect a property’s value and its ability to generate cash flow to pay debt service on a mortgage loan.

capitalization rate (“Cap Rate”) used to value the property may be increased to reflect theadded risk and complication of the ground lease. Ground rent can be incorporated into property cash flow analysis in several ways; including but not limited to:

  • Treating ground rent as an operating expense, a common approach when the ground lease is subordinate to the mortgage loan;
  • Treating ground rent as a senior lien on the property by excluding the ground rent from the calculation of Net Operating Income and Net Cash Flow and instead adding the ground rent to mortgage debt service when calculating Debt Service Coverage

Regardless of the terms of the ground lease itself, an underwriter may require a reserve for ground rent payments so any monetary defaults in a ground lease can be cured. Loan documents should give the lender, and therefore the servicer and investors, clear and specific notice and cure provisions relative to any unsubordinated ground lease.

Chapter 7: Underwritten Net Cash Flow

Underwritten Net Cash Flow is Underwritten Net Operating Income less an allowance for ongoing capital expenses, including the cost of maintaining the property in its current condition and the cost of keeping existing tenants or attracting new tenants.

Underwritten Net Cash Flow is an estimate of the cash available to make principal and interest payments on a proposed commercial mortgage, and is typically the numerator in the debt service coverage ratio.

Leasing Costs

While the expense of marketing to prospective tenants is treated as an ordinary operating expense, tenant improvements and leasing commissions are not considered part of Net Operating Income but are deducted to derive net cash flow.

Tenant improvements are the costs for retrofitting a certain area of the building for a tenant in an office, industrial or retail property, and include such items as painting, carpeting, space partitioning, carpentry, light fixtures, restroom renovations, and other interior finishes.

Tenant improvements are generally provided by the borrower as an inducement (or concession) to a prospective tenant to secure a lease.

There is generally an inverse relationship between the cost of tenant improvement allowances provided to a tenant and the strength of the market (i.e., the greater the demand for space, the lower the tenant improvement allowance provided by the landlord). The borrower may also have to pay a leasing commission to the broker of the leasing transaction.

An underwriter will typically calculate all costs estimated to lease vacant and re‐lease expiring space for office, retail and industrial properties based on the anticipated lease rollover schedule over the term of the loan.

The cost of re‐leasing space adds risk to commercial mortgages secured by properties with anticipated significant lease expirations during the term of the loan. To mitigate that risk, an underwriter may require that the borrower contribute excess cash flow from the property or the borrower’s own funds to a reserve fund for tenant improvements and leasing commissions at closing and/or monthly over the loan term. The greater of the normalized re‐tenanting expense amount or the required annual contribution is deducted from Underwritten Net Operating Income to calculate Underwritten Net Cash Flow.

Leasing costs are included in Capital Expenses and generally disclosed in Annex A of the offering documentation for both historical performance and underwritten assumptions

Chapter 8: Replacement Reserves/Engineering Report

Capital expenditures are costs incurred to maintain the collateral’s physical condition and its competitiveness in the market. An underwriter engages an engineering firm to inspect the property and identify items requiring immediate repair (typically within 12 months) and items requiring attention over the loan term (the engineer’s evaluation period is typically equal to the loan term plus two years).

An underwriter typically requires that a portion of the loan proceeds be set aside in a reserve account at closing to cover the engineer’s estimated cost of immediate repairs.

The borrower is provided a time frame to complete these repairs (typically 6 to 12 months). The funds in the reserve account are then released to the borrower upon the lender’s/servicer’s satisfaction that the identified repairs have been completed.

An underwriter also often requires the borrower to set aside up‐front loan proceeds or make monthly payments into a replacement reserve account in an amount at least equal to the needed reserves estimated by the engineer (average amount estimated over the engineer evaluation period). The borrower may draw upon these replacement reserves to complete capital repairs over the term of the loan.

An underwriter will typically underwrite an estimate for ongoing capital expenditures based on the greater of the firm’s minimum guideline for the property type in question or the engineer’s estimate. Like leasing costs, this estimated annual amount is deducted from Underwritten Net Operating Income to calculate Underwritten Net Cash Flow.

Replacement Reserves underwritten in the calculation of Underwritten Net Cash Flow are generally disclosed in the offering documentation in Annex A. In addition, Annex A should include the amount of any upfront and ongoing reserve requirements for Leasing Costs, Replacement Reserves and any other required escrows.

Chapter 9: Environmental Related Expenses

Due to federal regulations extending environmental liability to all owners in a property’s chain of title, an environmental issue at the property will significantly limit the lender’s ability to foreclose on the property in the event of default. Accordingly, the underwriter also engages a qualified environmental engineer to prepare a Phase I environmental assessment (as defined by the American Society of Testing Materials [ATSM]) of the property to identify areas of environmental concern. If issues of environmental concern are identified by the Phase I consultant, an underwriter may:

  • require additional investigation in the form of a Phase II assessment (also as defined by the ATSM;
  • require that the issues identified be remediated prior to or subsequent to loan closing (the underwriter generally requires the establishment at closing of an environmental escrow to cover the costs of any post‐closing remediation);
  • require that the borrower implement an operations and maintenance (O&M) program (in the case of properties with manageable asbestos or lead‐based paint);
  • implement an environmental insurance policy; or
  • withdraw or reduce the amount of the proposed

The cost of environmental remediation is typically reserved at closing; any ongoing monitoring or remediation cost is deducted from Underwritten Net Operating Income to derive Underwritten Net Cash Flow.

The offering documentation should detail the amount of any upfront or ongoing reserves required for environmental remediation.

Chapter 10: Credit Metrics: Debt Service Coverage Ratio, Capitalization Rate, Debt Yield, and Loan to Value Ratio

The Debt Service Coverage Ratio (DSCR) measures how much cash flow the property is generating to fund the proposed loan’s debt service that is, the monthly payments of interest and principal. The DSCR is calculated by dividing the Underwritten Net Cash Flow by the annual contractual debt service. A DSCR of 1.0x implies that the property generates just enough cash flow to service the debt. A higher DSCR means the property is generating more cash than needed to cover debt service and therefore less risk of payment default, so the higher the DSCR the more Term Risk is mitigated. The appropriate Debt Service Coverage Ratio varies by property type and the expected volatility of cash flow.

The Loan to Value Ratio (LTV) is computed by dividing the proposed loan balance by the value of the property. A lower LTV presents less risk to the proposed mortgage lender because in the event the value of the property declines it might still have sufficient collateral value to be able to repay the remaining balance of the loan. Commercial Real Estate underwriters engage an appraiser to prepare a third‐party valuation of the property. These valuations are governed by the Uniform Standards of Professional Appraisal Practice (USPAP) and, if the lender is a bank, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

Appraisal methodology typically employs three approaches to value. The income approach is based on the property’s net operating income and cash flow. The sales comparison approach is based on the sale prices of comparable properties, and the cost approach is based on the amount required to replace the property (including the value of the land) adjusted for depreciation.

In support of the valuation, the appraiser provides information relating to the attributes of the property and the market in which it competes, including comparable sales and rental rates.

Depending on economic and market conditions, the appraiser generally places most weight on the income approach when reconciling the final value.

An underwriter typically computes the LTV based on the final value concluded by the appraiser. LTV is both an indicator of the borrower’s ability to repay the loan at maturity as well as an indicator of loss severity in the event of default.

The Capitalization Rate (or Cap Rate) is the ratio between the Net Operating Income of a property and its value. Stabilized properties are often valued by dividing Net Operating Income by prevailing market Cap Rates; this valuation approach is used by appraisers as part of the income approach to value as discussed above.

Debt yield is calculated by dividing the Underwritten Net Operating Income or Net Cash Flow by the proposed loan amount. Higher debt yields simply less risk.

A property with a $1 million Underwritten Net Operating Income and a $10 million loan balance would have a debt yield of 10%. In this example, as long as property could sell at a capitalization rate of less than 10%, the proceeds generated from the sale of the property would be sufficient to repay the loan. When the debt yield is reported, it should be clear whether the calculation is based on Net Operating Income (NOI Debt Yield) or on Net Cash Flow (NCF Debt Yield).

In Commercial Real Estate lending, the issuer should disclose to investors which metrics were used to assess the creditworthiness of each commercial mortgage as well as how those metrics were calculated (i.e., the derivation of the numerator and denominator of each ratio). CREFC recommends disclosing Debt Yield and DSCR in Annex A using both Net Operating Income and Net Cash Flow calculations.

Chapter 11: Borrower Analysis

Commercial mortgages can be recourse or non‐recourse (typical of mortgages included in pools securing Commercial Real Estate issuances).

Recourse loans are considered less risky than non‐recourse loans. In a recourse loan, all of the borrower’s assets and income (that is, in addition to the mortgaged property) may be relied upon by the lender to support the periodic loan payments of principal and interest as well as to repay any remaining principal balance upon refinance or maturity.

Under a non‐recourse loan, the lender may only rely on the income produced by the property and the value of the property for periodic payments and principal balance repayment.


Furthermore, Commercial Real Estate borrowers are typically Single Purpose Entities (“SPEs”) with the property being the only asset of the entity. Therefore, there are no other assets or income sources to be relied upon by the lender in the event of default. (See Section V for further discussion of SPE and non‐recourse loans, including recourse provisions previously known as “bad boy” carveouts.)


Despite the non‐recourse status and SPE status of the borrower, the borrowing entity is ultimately owned by individuals or entities that are known as the “Sponsor/s.”


The actions of the Sponsor/s and their financial wherewithal can have a direct impact on the preservation and enhancement of the value of the property.


To fully understand the risks associated with a loan, the evaluation of the Sponsor focuses on the Sponsor’s equity in the transaction, the Sponsor/s’ capability to manage the property and the reputation and integrity of the individuals making financial and asset decisions.

















Chapter 12: Equity


The equity a sponsor has in a transaction is simply the value of the property less the amount of debt encumbering that property. The more cash equity, the more the sponsor has “skin in the game” and the incentive to prevent the default of the loan and possible loss of that equity. Moreover, greater equity protects the lender from market downturns that result in lower property values.


While simplistic in calculation, a lender needs to evaluate not only the amount of equity, but the source and quality of that equity.  Cash investment in a property, either at acquisition or through periodic improvements, clearly demonstrates the Sponsor’s commitment to the collateral for the loan.


A borrower with less cash equity may treat the real estate investment as merely an option to own the property if values increase, rather than having a true commitment to owning and operating the property as an ongoing business. Such a borrower is not as likely to maintain the property and ensure that the debt is repaid, and is thus considered of higher risk.


Even a large cash equity investment in the borrowing entity requires further analysis. The source of that cash must be considered, as well as whether the purchase of the property was based on a sound economic decision or a tax strategy, and whether the cash investment was sourced not from the borrower but from additional mezzanine debt masquerading as equity.


While not a leverage technique per se, some sponsors will syndicate the equity in a real estate investment. Through this capital‐raising activity, the sponsor will have a limited amount of its own money invested, and instead acts as an asset manager for disparate investors.


Each of those investors has made an economic decision to invest and may have leveraged their own equity. In a type of syndication known as Tenants in Common and Delaware Statutory Trusts, the investors may have made tax‐motivated decisions and may not be interested in or capable of making further capital investments in the property if its performance deteriorates.


Such syndicated transactions, when there is no single interested party with skin in the game and good property management expertise, present higher risk for a lender.


Sometimes the equity is derived from an appreciation in the appraised value of the property over time rather than a recent cash infusion. Either through improving market conditions or specific efforts of the borrower to reposition and improve the marketing and management of the property (often referred to as “sweat equity”), the borrower has equity to lose and is therefore motivated to keep the loan performing.





However, protecting implied, or sweat, equity is not as strong a motivation as preserving an actual cash investment in the property. Therefore, loans in which borrowers maintain a significant cash investment are considered less risky than those in which the borrower has already recovered its initial invested equity.


In periods of rising property values, the refinancing of a prior mortgage may provide the borrower with cash proceeds in an amount greater than the existing mortgage. If these excess proceeds reduce the borrower’s cash equity, or in some cases are greater than the equity previously invested in the property, the motivation of the borrower to avoid default is diminished and the loan is considered more-risky.



































Chapter 13: Management


The borrower is responsible for either managing the property directly or hiring a qualified property manager. Additionally, the borrower has the responsibility to make capital decisions for the property such as renovations, expansions and major repairs, as well as deciding how and when to refinance.


Therefore, a lender must be comfortable with the sponsor’s financial position and operating experience, particularly relating to the property type being financed and the market in which the property operates.


Understanding the asset management and property management agreements is critical, with a full review of the budgeting process, prior financial performance, competitive positioning, and leasing track record.































Chapter 14: Reputation/Credit


One of the more difficult aspects of credit underwriting is trying to discern the character of the individuals who will be making decisions on behalf of the borrower. Evaluating character has some objective elements, but is ultimately a subjective assessment.


The critical question for an underwriter is how the borrower will behave if the collateral’s performance deteriorates or payments on the loan cannot be made for some reason. In evaluating character, the underwriter considers the sponsor’s prior behavior including late payments, credit disputes or judgments and major litigation.


Other matters of public record include bankruptcy filings and foreclosure actions against other properties with which a sponsor may have been associated. To further reduce risk, an underwriter also complies with required searches relating to money laundering activities and terrorism using the Office of Foreign Assets Control (OFAC) database.


Obtaining third‐party credit reports on the sponsor and significant equity stakeholders and checking credit references and prior lending relationships can expose potential problems. Sponsor distress can also be revealed by non‐payment of taxes or a history of mechanic liens.


If red flags appear, the underwriter then interprets the facts and circumstances to understand the borrower’s intent and the potential risk involved in lending to that borrower. No loan structure or equity can be relied upon to effectively cure a problem loan when the borrower has no motivation or intent to work with the lender.





















Chapter 15: Loan Structure and Credit Enhancements


Special Purpose Entities (SPE’s)


Loans to be securitized require certain protections not only of the lender, but also of the trust into which the loans will be deposited and to the investors in that trust.


One form of protection is preventing entities related to the borrower from using the properties securing the loans or the cash flow from those properties for purposes other than the repayment of the loans in the trust.


Accordingly, an SPE’s organizational documents should include multiple covenants designed to keep the SPE and the real estate it owns legally and financially separated from the parent entity, enabling the SPE to be bankruptcy‐remote from the parent.


In forming the SPE, the inclusion of one or more independent directors who must vote on bankruptcy or other major matters is intended to provide added protection to the entity’s bankruptcy‐remote risk profile.



























Chapter 16: Recourse Carveouts


The non‐recourse nature of commercial mortgage loans originated for Commercial Real Estate allows borrower’s counsel to provide a legal opinion on the bankruptcy‐remoteness of the SPE structure. To reduce the risk associated with a non‐recourse loan, an underwriter seeks limited recourse carveouts (previously referred to as “bad boy” carveouts) for fraud, gross negligence, bankruptcy filings, property waste, transfer violations, misappropriation of funds, environmental losses and other misconduct that could potentially trigger recourse to a sponsor without calling into question the SPE structure. These carveouts should come from a credit‐ worthy parent entity or an individual with direct responsibility for property operations.

Chapter 17: Amortization


The inclusion of amortization in a commercial mortgage loan lowers refinancing risk at loan maturity. In the event that interest rates increase or the value of the collateral decreases over the term of the loan, the reduced loan balance at maturity increases the probability that the borrower will achieve an adequate refinancing debt yield and debt service coverage and be able to repay the loan.


The shorter the amortization period, the more the loan balance will be reduced during the loan term.


In determining an appropriate amortization period for a specific loan, the underwriter considers the volatility of the property type, the remaining economic life of the asset, LTV and the duration of the tenancy. Loans with partial or full-term interest only periods are inherently riskier than loans where amortization begins with the first payment.


Amortization is standard disclosure in Annex A of the offering documentation.



























Chapter 18: Reserves and Escrows


A commercial property tends to be a capital‐intensive asset that periodically requires new capital to maintain and improve the property’s physical quality and to lease space to new tenants. Reserve funds are used to set aside such capital when the loan is originated and periodically during the loan’s term.


Additionally, to protect the lender’s collateral throughout the life of the loan, the underwriter may require the borrower to escrow funds for property taxes and insurance, similar to single‐family lending.


Annex A should disclose the amount of any upfront and ongoing reserve requirements for Leasing Costs, Replacement Reserves and any other required escrows.
































Chapter 19: Cash Management


The primary source of commercial mortgage debt service payments is the rental revenue collected from tenants. Accordingly, to mitigate risk, an underwriter often employs various cash management techniques to control that cash. In the “soft lockbox” approach, cash revenues are deposited into a lender established account that is controlled by the borrower or, alternatively, periodically swept by the lender from a borrower-controlled account.


A more risk averse approach is the “hard lockbox” that requires the tenants to directly send rental payments to a lender-controlled account. Underwriters also structure loans with a “springing lockbox” under which certain events, such as falling below a debt coverage threshold or a monetary default, will trigger a more stringent cash management system. If the threshold is default, the effectiveness of a springing lockbox in mitigating risk is weakened.


The application of proceeds in the lockbox can also be used to mitigate risk. Typically, property revenues are applied to property operating expenses, debt service and required reserves; the excess, if any, is remitted to the borrower. However, after certain trigger events or borrower defaults, the lender may require that excess cash be retained as additional collateral for the loan.


Annex A should disclose if a lockbox is required and the type of such lockbox.
























Chapter 20: Insurance


Insurance products utilized to protect the property collateralizing a commercial mortgage cover a wide range of potential perils, including but not limited to:


  • Title insurance (typically covering at least the full first mortgage amount);
  • Property and casualty insurance (typically requiring full replacement cost value of the property);
  • Boiler and machinery;
  • General liability (based on type of property); and
  • Business interruption


On a case by case basis, depending on the location and attributes of the property, an underwriter may also require flood, earthquake, wind, environmental, law and ordinance, and terrorism insurance.


The appropriate amount of coverage is as critical to mitigating risk as the type of coverage, and a loan underwriter works with the insurance underwriter and other advisors to determine adequacy of coverage for each loan.


Other forms of credit enhancement


In addition to the more standard risk mitigation tools previously described, an underwriter may use other forms of credit enhancement to mitigate specific risks associated with a particular transaction. These include letters of credit issued by creditworthy institutions, partial and full sponsor guaranties including principal and interest guarantees, performance and completion guarantees, and hyper‐amortization whereby all excess cash flow after interest and principal is satisfied is used to reduce the loan balance.


Annex A should disclose the amount of any letters of credit which are additional collateral for the Mortgage Loan.













Chapter 21: Collateral Evaluation


As previously discussed, the majority of commercial mortgage loans, particularly those intended for securitization, are non‐recourse. Therefore, the lender must rely primarily on the property itself for repayment of the loan. As part of the loan underwriting, the underwriter or his designee physically inspects the collateral property.


The objectives of the site inspection include:


  • Determining any physical risks or benefits of the property, in terms of access, visibility, physical condition and market competitiveness;
  • Verifying the physical occupancy of tenants on the rent roll;
  • Interviewing tenants to determine any potential issues affecting the marketability of the property to current or future tenants;
  • Meeting with management and maintenance personnel to assess the quality of management;
  • Identifying competitive properties and their relative strengths and weaknesses;
  • Observing adjacent land uses or developments that may affect the property’s operations or become a source of future competition; and
  • Analyzing the overall market to determine demand generators and other external issues that impact the


A site inspection includes photographs of the property, the competitive properties and the surrounding area.




Commercial mortgage loans securitized through Commercial Real Estate do not lend themselves to the development of universally applicable objective criteria that would be indicative of having lower credit risk as envisioned under the Dodd‐Frank Wall Street Reform and Consumer Protection Act or otherwise. This is because these non‐recourse loans are collateralized by the income streams from an incredibly diverse array of commercial property types that cannot be meaningfully categorized in a way that would allow for the practical application of such objective “low credit risk” criteria. This heterogeneity, however – coupled with the fact the typical 30‐80 Commercial Real Estate loan pool that is a fraction of the size of other ABL loan pools – allows both Commercial Real Estate loan underwriters and investors to carefully examine the facts and circumstances for each proposed loan in a Commercial Real Estate loan pool, an extensive examination that could not be meaningfully performed in other ABL asset classes.

For this reason, the underwriting framework outlined above consists of underwriting principles and procedures characteristic of a thorough underwriting process, and a disclosure regime that focuses on the manner in which that underwriting process was performed.


Appendix A – Risk Considerations for Each Type of Collateral


The following key factors are considered by an underwriter in the analysis of properties that will collateralize a proposed commercial mortgage loan:


Office Properties


  • Location – accessibility to public transportation, especially in Central Business District (“CBD”) markets; for the suburban sector, accessibility to major roads and highways, other suburban office parks, hospitals, area hotels, restaurants, banks, and


  • Employment growth – current and historical trends in employment in the surrounding submarkets, including a review of the types of industries entering or vacating the


  • Occupancy – a comparison of the building’s occupancy and occupancy trends with those of its competitors, trends in office absorption, rental structure, and tenant profile.


  • Tenant roster (rent roll) – the composition and credit quality of the national, regional, and local tenants in the


  • Credit versus non‐credit tenants – creditworthiness of tenants and impact on ability to meet lease


  • In place lease rates versus market lease rates – below market rents incentivize tenants to remain at the property and provide a buffer for the property in the event rents in the market


  • Amount of subleasing and sublease rates – market versus sublease terms and impact on renewals and sublease


  • Management capabilities – management’s strength and strategy in tenant selection, lease negotiations, and relationships with


  • Competition – supply and demand dynamics in the market and the potential for revenue erosion due to future


  • Parking – adequate parking to meet zoning requirements and tenants’




  • Structure and design – the building’s exterior and interior design, configuration, aesthetic appeal, and its adaptability to support present and future electrical and technological
  • Floorplate – the size of floorplates (or floor area) and their ability to accommodate tenant needs and flexible workspace design


Retail Properties


  • Location, visibility and elevation signage – the center’s accessibility, proximity to major roads and residential developments, its signage, first floor vs. second floor entry, adequacy of turning lanes for shoppers, and other qualitative factors that help to differentiate the property among its competitors and draw


  • Layout and design features – the physical appearance of the center, including any layout and design features that date the center, diminish its appeal to shoppers, or result in functional obsolescence over the loan


  • Occupancy – the center’s historical and current occupancy trends and the potential impact on future


  • Demographic trends – evaluation of the trends in the trade area’s population growth, income patterns, and disposable


  • Trade area – an analysis of the primary trade area, how the trade area has changed over time, its effect on the center’s capture rate, and the identification of the capture rate in the secondary and tertiary trade


  • Sales – trends in sales for anchor tenants and major tenants, and overall sales trends at the


  • Tenant mix – strength of tenants at the center and their deterrent effect on future competition in the market and whether or not the center can support re‐tenanting or any changes in tenant


  • In place lease rates versus market lease rates – below market rents incentivize tenants to remain at the property and provide a buffer for the property in the event rents in the market


  • Management – management’s operating history and competitive strategy, as evidenced by its experience with tenant selection, lease negotiations, and overall relationships with tenants; and its use of promotion, innovation, and marketing to enhance or maintain the center’s



  • Competition – the supply and demand dynamics in the market and the potential for revenue erosion due to future competition. The presence of competitive and complementary retail formats in the surrounding area and the availability of land for future


  • Occupancy costs – the impact of occupancy costs (the sum of base rent, percentage rent, and expense reimbursement divided by sales) on anchors and in‐line


  • Co‐tenancy or go‐dark clauses – any go‐dark clauses (allow for termination if an anchor tenant closes) and other special co‐tenancy agreements that may influence occupancy over the term of the


  • Shadow anchors – the role shadow anchors (the anchor tenant owns its store) play in drawing tenants to a center. Co‐tenancy clauses of the in‐line tenants with the shadow anchor, especially in those cases where the shadow anchor accounts for 25% to 30% of center’s sales, are analyzed to determine the impact on cash flow viability.


  • Tenant bankruptcy – bankruptcies among retailers is a concern in assessing retail properties since this development significantly heightens the vacancy potential at a center. In bankruptcy situations, the analysis will focus on the tenant’s viability at the specific center and whether the tenant has affirmed its lease in the bankruptcy court. If a decision has not been made, then the tenant’s sales at the center are compared with the total chain sales, since it is likely that a retailer will close the marginal stores as part of a reorganization plan. In addition, the tenant’s current rental rate is evaluated against the market rents for similar

























Industrial Properties


  • Location – access to interstate highways and major road
  • Occupancy – the building’s historical occupancy is assessed within the context of its current competitive environment, its rent structure, tenant profile, and current and future market
  • Tenant roster (rent roll) – evaluation of the composition of national, regional and local tenants at the
  • In place lease rates versus market lease rates – below market rents incentivize tenants to remain at the property and provide a buffer for the property in the event rents in the market
  • Management – management’s strength and strategy in tenant selection, lease negotiations, and relationships with
  • Competition – supply and demand dynamics in the market and the potential for income erosion due to future
  • Lease structure – the impact on cash flow of lease outs and other abatement clauses, as well as the percentage of space that is leased by the owner or its affiliates.
  • Parking – parking adequacy to meet zoning requirements and tenants’ needs, especially for flex space facilities that have a large component of office
  • Loading docks and turning radii – the adequacy of loading docks, number and depth of bays, and the adequacy of turning radii for truck loading and unloading are evaluated in relation to the likelihood of functional obsolescence at the
  • Structure and design – the structure and design, electrical supply and floor load capacity should be adequate and adaptable to meet tenants’
  • Space/ceiling heights – design should accommodate high‐volume receiving and delivery of bulk goods and fork lift usage, with sufficient truck‐high and drive‐in loading docks to service single or multi‐tenant



  • Special purpose facilities – build‐to‐suit and special‐use facilities are analyzed to determine their adaptability to other uses and users in the event of the tenant’s default or lease expiration before the loan
  • Additional environmental risks – industrial properties by definition often involve industrial processes that can include the use, production and/or storage of toxic and

/or explosive materials. An underwriter evaluates the nature of such processes, the ability of the tenant to manage those processes effectively, and the financial capacity of the tenant and borrower to deal with any unexpected adverse impacts.


































Hotel Properties


  • Supply and demand dynamics – the factors that drive demand for the hotel. The available supply within the sector and the impact of current and future supply are key determinants in assumptions used for adjusting each hotel’s occupancy and Average Daily Rate (“ADR”).
  • Competitive strength – the strength of the franchise, the property’s historical performance, and the hotel’s ability to compete within its market and sector and possibly penetrate other
  • Economic growth and cycles – the national, regional, and local economic trends and how they affect the hotel’s demand. The local area employment trends compared with the broader economy. The interrelationship of office construction and hotel room
  • Demand generators and market segmentation– the historical market mix between business and leisure and how it has evolved over time. Changes in typical usage patterns and trends indicated by those
  • Management/franchise agreements – agreements with third parties or affiliates and the duration of those agreements, including termination
  • Facilities – the age, configuration, and other property aesthetics. The adequacy of the services and facilities to meet the users’ needs, especially for hotels that target special users such as convention and conference
  • Seasonality – the seasonal nature of the business. Hotels that suffer from large fluctuations in reservations due to seasonal trends will be expected to fund a reserve to ensure cash flow stability during the off
  • Location – adequate access and visibility to interstate highways, and major road networks. Proximity to office developments are key considerations for the limited service and extended stay
  • Parking – adequate parking to meet zoning requirements and travelers’


Multifamily Properties


  • Economic growth – the strength of the area’s economy, its dependence on any single industry, and the overall impact on income patterns and job
  • Demographic trends – the area’s population growth, changes in the average household size, and the composition of the entry‐level
  • Amenities – the competitiveness of the property’s amenities within the market. If they are not competitive, do the rental rates compensate for their absence?
  • Competition – the property’s ability to withstand both temporary and protracted supply and demand
  • Occupancy – the building’s historical occupancy within the context of its current competitive environment, its rent structure, tenant profile, and current and future market
  • Asking rents versus market rents – below market rents incentivize tenants to remain at the property and provide a buffer for the property in the event rents in the market
  • Management – management strength, maintenance staff and overall responsiveness to tenants’
  • Location and access – access to schools, shopping centers, interstate highways, recreation facilities, business parks, and major networks are key convenience factors for
  • Curb appeal – the appearance of the property and its visual appeal to attract potential
  • Ingress/Egress – the ease or complexity of entering and exiting the property can impact interest in the
  • Visibility – signage, maintenance of the grounds and overall curb
  • Parking – minimum of two spaces per unit, with higher requirements to meet the ratio of two‐ and three‐bedroom units within the
  • Available land for future development – the impact of possible new development on the current rent levels and building
  • Home affordability – a comparison of rental rates and prices for first time homebuyers in the area is paramount, as renters typically seek to become homeowners whenever










Health Care Facilities


  • Economic analysis – the strength of the state’s economy and its effect on Medicaid reimbursement rates, reimbursement/payment history and the overall regulatory climate.
  • Reimbursement rates – the impact of managed care capitation programs, state and federal reimbursement policy, waiver rules, and other regulatory
  • Management – the strength, experience, philosophy and operating history of management within the specific elder care
  • Location – the stability of the facility in its locale, especially in rural markets, where the operator’s strength and ability to draw residents from a broader geographic area may be important to the facility’s
  • Facility layout and physical attraction – the ability of the layout to foster socialization and easy access to service providers. Are there specialized facilities that support aging in place? Does the facility offer a continuum of care with a variety of specialized services? The overall maintenance of the facilities, grounds, and curb appeal are
  • Competition – the facility’s services and amenities’ competitiveness with the area’s other operators, and whether the subject can withstand excess capacity at another facility. In addition, are there any Certificate of Need (“CON”) moratoriums in the state (especially for nursing homes)? If it is not located in a CON state, do other limitations to new supply exist?
  • Payor Mix – the breakdown between private pay and government pay to determine the exposure to reimbursement
  • Consolidation – the impact of smaller facilities being acquired by larger

Self‐Storage Properties


  • Location – the property’s accessibility from residential
  • Competition – proximity of competing
  • Security – the fencing around the perimeter of the property and a gate limiting access to the
  • Climate control – percentage of climate-controlled
  • Ancillary services – boxes and packing materials, truck rentals and outdoor storage for boats and recreational
  • Management – availability of 24‐hour on‐site management
  • Nearby undeveloped land – self‐storage is one of the least expensive commercial property types to develop. Undeveloped land nearby could be a potential site for new
































Appendix B – Basic Formulas and Calculations


When utilizing an approach and methodology for initial transaction qualification.


There are Four initial calculations that every professional underwriter should utilize to a determine income property’s investment quality.


They are the ensuing:


  • Gross Rent Multiplier


  • Net Operating Income


  • Capitalization Rate


  • Debt Service Ratio





























Gross Rent Multiplier (GRM)


The gross rent multiplier is a simple method by which you can estimate the market value of a commercial income property. The advantage is, this is very easy to calculate and the GRM can serve as an extremely useful precursor to a serious property analysis, before you decide to spend money on an appraisal.


To Calculate the GRM:


Gross Rent Multiplier = Market Value / Annual Gross Scheduled Income


Transposing this equation:


Market Value = Gross Rent Multiplier X Annual Gross Scheduled Income


Net Operating Income (NOI)


Net Operating Income is a property’s income after being reduced by vacancy and credit loss and all operating expenses. The NOI represents a property’s profitability before consideration of taxes, financing, or recovery of capital.


To Calculate the NOI:


Net Operating Income = Gross Operating Income Less Operating Expenses


Capitalization Rate (Cap Rate)


The capitalization rate is the rate at which you discount future income to determine its present value. The cap rate is used to express the relationship between a property’s value and its net operating income (NOI) for the coming year.


To Calculate the Capitalization Rate (Cap Rate):


Capitalization Rate = Net Operating Income / Value


Transpose this formula to solve for the ensuing variables.


Value = Net Operating Income / Capitalization Rate


Net Operating Income = Value X Capitalization Rate





Debt Service Ratio (DSR)


Debt service ratio is the ratio between the property’s net operating income (NOI) for the year and the annual debt service (ADS).  Potential mortgage lenders look carefully at the DSR and its future projections, basically they want to know if the property can generate enough income to pay the mortgage in addition to cash reserves and a profit.


To calculate the Debt Service Ratio (DSR):


Debt Service = Annual Net Operating Income (NOI) / Annual Debt Service



































Glossary of Terms




In actual contact with another object (i.e., attached). Same as “Contiguous”.




An individual/entity who transacts, represents, or manages business for another individual/entity. Permission is provided by the individual/entity being represented.




Individual to whom a contract is assigned.




The manner by which a contract is transferred from one individual to another individual.




An individual who transfers a contract to another individual


Build Out


The construction or improvements of the interior of a space, including flooring, walls, finished plumbing, electrical work, etc.


Building Permit


Written government permission to develop, renovate, or repair a building.


Cancellation Clause


A provision in a contract (e.g., lease) that confers the ability of one in the lease to terminate the party’s obligations. The grounds and ability to cancel are usually specified in the lease.


Capital Improvement


Any major physical development or redevelopment to a property that extends the life of the property. Examples include upgrading the elevators, replacement of the roof, and renovations of the lobby.



Capitalization Rate (Cap Rate)


The value given to the property when the Net Operating Income (NOI) is divided by the current market value or sales price. A cap rate can be used as a rough indicator of how quickly an investment will pay for itself. The higher the cap rate, the better. Example: A property has an NOI of $100,000, and the price is $1,000,000. The cap rate would be 10% ($100,000/$1,000,000 = 10%). Based on this calculation, you would see a return in 10 years.


Certificate of Occupancy (CO)


The government issues this official form, which states that the building is legally ready to be occupied.




Household goods, including personal property such as lamps, desks, and chairs.


Common Area Maintenance (CAM)


This is the amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, escalators, sidewalks, skyways, parking areas, insurance, property taxes, etc. Most often, this does not include any capital improvements that are made to the property.


Commissions Split


An agreed upon division of commissions earned between a sales agent and sponsoring broker, or between the selling broker and listing broker. Example: The seller of a $1,500,000 building paid a $75,000 commission at closing. The commission split was 50/50 between the listing and selling brokers. Each broker then split the fee received with the sales agent responsible for the sale, in accordance with each firm’s commission split schedule.




Touching at some point or along a boundary




A requirement in a contract that must occur before that contract can be finalized







A legal agreement between entities that requires each to conduct (or refrain from conducting) certain activities. This document provides each party with a right that is enforceable under our judicial system.




Wording found in deeds that limits/restricts the use to which a property may be put (e.g., no bars).




A signed, written instrument that conveys title to real property.


Deed Restriction


An imposed restriction in a deed that limits the use of the property. For example, a restriction could prohibit the sale of alcoholic beverages.




Failure to fulfill a promise, discharge an obligation, or perform certain acts.




Transfer something from one entity to another.




Action to regain possession or real property. This is a last-ditch effort that is used when there is no relationship between landlord and tenant.


Eminent Domain


The government’s right to condemn and acquire property for public use. The government must provide the owner fair compensation.




Signing one’s name on the back of a check.






A written agreement among parties, requiring that certain property/funds be placed with a third party. The object in escrow is released to a designated entity upon completion of some specific occurrence.


Estoppel Certificate


A legal instrument executed by the one taking out the mortgage (i.e., mortgagor). The owner of a property may require an individual leasing a property to sign an estoppel certificate, which verifies the major points (e.g., base rent, lease commencement and expiration) existing lease between the landlord and tenant.


Eviction (Actual)


Physical removal of a tenant either by law or force.


Eviction (Constructive)


The landlord or his agents disturb the tenant, rendering the leased space unfit for the tenant’s previous use.


Eviction (Proceeding)


A legal proceeding by the landlord to remove a tenant


Exclusive Agency


An agreement in which one broker has exclusive rights to represent the owner or tenant. If another broker is used, both the original and actual broker are entitled to leasing commissions.


Full Service Lease

See Gross Lease




A person who represents another on financial/property matters.




Personal property so attached the land or building (e.g., improvements) it is considered part of the real property.



Grace Period


Additional time allowed to complete an action (e.g., make a payment) before a default or violation occurs.


Gross Lease


A lease of property whereby the landlord (i.e., lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, and maintenance, among others.


Hard Money Loan


An asset-based loan in which a borrower receives funds that are secured by the value of a piece of real estate and often at a higher interest rate than a traditional commercial property loan. They are used for acquisitions, turnaround situations, foreclosures and bankruptcies.


Holdover Tenant


A tenant who remains in possession of leased property after the lease term expiration.




An individual who is unable to handle his own affairs by reason of some medical condition (e.g., insanity, Alzheimer’s).




A written legal document created to secure the rights of the parties participating in the agreement.




Incapable of being altered, changed, or recalled.


Joint Tenancy


Ownership of real property by two or more individuals, each of whom has an undivided interest with the right of survivorship.








A formal decision issued by a court relating to the specific claims and rights of the parties to an act or suit.




One who rents property to a tenant.




A contract whereby the landlord grants the tenant the right to occupy defined space for a set period at a specific price (i.e., rent).




The estate or interest a tenant has as stated in the tenant’s lease.




An individual (i.e., tenant) to whom property is rented under a lease.




An individual (i.e. landlord) who rents property to a tenant via a lease.


Letter of Intent


An informal, usually non-binding, agreement among parties indicating their serious desire to move forward with negotiations.




An employment contract between principal and agent that authorizes the agent (such as a broker) to perform services for the principal and his property.


Loss Factor


What percentage of the gross area of a space is lost due to walls, elevator, etc. Rule of thumb in Manhattan is approximately 15%







A requirement that must be conformed to as specified in any written document.


Market Price


The actual selling or leasing price of a property.


Market Value


The expected price that a property should bring if exposed for lease in the open market for a reasonable period of time and with market savvy landlords and tenants.


Meeting of the Minds


When all individuals to a contract agree to the substance and terms of that contract.




A person under a legal age, usually under 18 years old.


Multiple Listing


An arrangement among Real Estate Board of Exchange Members, whereby each broker presents the broker’s listings to the attention of the other members so that if a lease results, the commission is divided between the broker bringing the listing and the broker making the lease.


Net Lease


Also called triple net lease. The lessee pays not only a fixed rental charge but also expenses on the rented property, including maintenance. Example: Super Saver Markets enters into a triple-net lease. They are to pay for all the taxes, utilities, insurance, repairs, janitorial services, and license fees; any debt service and the landlord’s income taxes are the responsibility of the landlord.


Non-Disturbance Agreement


The tenant signs this to prevent himself from being evicted if the property owner does not pay its mortgage to the bank.






Notary Public


A public officer who is authorized to witness and verify certain documents (e.g., contracts, deeds, mortgages). Also, an affidavit may be sworn before this public officer.




The person who will receive the outcome of an obligation.




An individual who has engaged to perform an obligation to another person (i.e., oblige).


Open Listing


A listing given to any broker without liability to compensate any broker except the one who first secures a buyer who is ready, willing, and able to meet the terms of the listing, or secures the acceptance by the landlord of a satisfactory offer; the lease of the property automatically terminates the listing.




A right given to purchase or lease a property upon specified terms within a specified time. If the right is not exercised, the option holder is not subject to liability for damages. If the holder of the option exercises it, the grantor of option must perform the option’s requirements.


Percentage Lease


A lease of property in which the rent is based upon the percentage of the sales volume made on the specific premises. There is usually a clause for a minimum rent as well.


Personal Property


Any property which is not real property. Examples include furniture, clothing, and artwork.


Power of Attorney


A written instrument duly signed and executed by an individual which authorizes an agent to act on his behalf to the extent indicated in the document.



The employer (e.g., landlord) of an agent or broker. This is the agent’s or broker’s client.

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Quiet Enjoyment


The right of a landlord or tenant to use the property without disturbances.


Real Estate Board


An organization whose members consist primarily of real estate professionals such as brokers.


Real Estate Syndicate


When partners (either with or without unlimited liability) form a partnership to participate in a real estate venture.


Real Property


Land and any capital improvements (e.g., buildings) erected on the property.




A coined word which may only be used by an active member of a local real estate board, affiliated with the National Association of Real Estate Boards.




Compensation from tenant to landlord for the use of real estate.




A restriction, often specified in the deed, on the use of property.




An act of rescinding power previously authorized.


Rule of Thumb


A common or ubiquitous benchmark. For example, it is often assumed that each worker in an office will need approximately 250 square feet of space.




The location of a property.



Specific Performance


When a court requires a defendant to carry out the terms of an agreement or contract.


Square Feet


The usual method by which rental space is defined. It is the area of that space, calculated by taking length times width. For example, a room 30 feet by 60 feet has an area of 1,800 square feet.




A law established by an act of legislature.


Statute of Frauds


State law (founded on ancient English law) which requires that contracts must be reduced to written form if it is to be enforced by law.


Statute of Limitations


A law barring all right of redress after a certain period of time from the moment when a cause of action first arises.




An agent of an individual already acting as an agent of a principal.



The leasing of space from one tenant to another tenant.


Subscribing Witness


The witness to the execution of an instrument who has written his name as proof of seeing such execution.




The cancellation of a lease by mutual consent of the tenant and the landlord.


Tenancy at Will


A license to occupy or use lands and buildings at the will of the landlord.


Tenancy by the Entirety


An estate which exists only between husband and wife. Each has equal right of enjoyment and possession during their joint lives, and each has the right of survivorship.


Tenant Improvements


Work done on the interior of a space, can be paid for by landlord, tenant, or some combination of both, depending on the terms of the lease.


Tenancy in Common


Ownership of property by two or more individuals, each of whom has an undivided interest, without the right of survivorship.


Tenants at Sufferance


An individual who comes to possess land via lawful title and keeps it in perpetuity without any title.


Tie-in Arrangement


A contract where one transaction depends upon another transaction.




A wrongful act or violation of a legal right for which a civil action will lie.


Triple Net Lease


A lease requiring tenants to pay all utilities, insurance, taxes, and maintenance costs. Example: Super Saver Markets enters into a triple-net lease. They are to pay for all the taxes, utilities, insurance, repairs, janitorial services, and license fees; any debt service and the landlord’s income taxes are the responsibility of the landlord.


Urban Property


Property in a city or a high-density area.




A binding situation that is authorized and enforceable by law.





Estimated price, value, or worth. Also, the act of identifying a property’s worth via an appraisal.




Government authorization to use or develop a property in a manner which is not permitted by the applicable zoning regulations.




Act, condition, or deed that violates the permissible use of property.




Something that is unenforceable.




A situation which is capable of being unenforceable but is not so unless direct action is taken.




The intentional relinquishment or abandonment of a specific claim, privilege, or right.


Work Letter


An amount of money that a landlord agrees to spend on the construction of the interior of a space per the lease, usually negotiated.




An area, delineated by a governmental authority, which is authorized for and limited to specific uses.


Zoning Ordinance


A law by a local governmental authority (e.g., city or county) that sets the parameters for which the property may be put to use.

Freddie Mac Rental Income Calculations

The changes are primarily aimed at determining the stability of that income, especially when it is short term and does not involve a lease.  The changes apply to loans with settlement dates on or after February 9, 2018.

Commercial loans used to purchase or refinance the subject property, or a non-subject property, which was not owned in the prior calendar year requires considering net rental income only up to a limit of 30 percent of the total of that net rental income plus all other stable monthly income used to qualify the borrower.

The exception would be a borrower who has a documented history of investment property management experience of at least one year.

The change is to provide support to sustainable and successful homeownership by requiring a reasonable limitation upon the reliance on a newer type of income stream.

To use rental income in refinancing a 1- to 4-unit investment property, a 2-to 4-unit primary residence, or a non-subject investment property, the following conditions must be met.

Short term rental income from a source where a lease is not utilized must have a two-year history documented on IRS Schedule E and the property must have been used for the purposes of producing rental income for that period of time.

Long term rental income can be verified through either a current signed and executed lease with an original term of one year or through income reported on Schedule E.

Sellers may also determine that rental income is stable without a lease when it is evident the income is not short-term, based on the documentation provided.

Changes to rental income requirements reflect changes in the rental market such as short-term rental income and are intended to support the determination of stability, calculation of rental income, and a reasonable expectation that rental income will continue.

The Freddie Mac Bulletin (#2017-12) also includes technical changes to rental income calculations, clarifications of some self-employed income revisions made last year.