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:

Borrowers

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

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.

Acceleration

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.

Amortization

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.

Appreciation

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.

Comparable

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.

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.

Equity

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.

Franchise

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.

Intangibles

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.

Maturity

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.

Mortgage

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.

Multifamily

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.

Owner-builder

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.

PFS

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.

PLP

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.

Principal

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.

Projections

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.

Refinancing

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).

UCC-1

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.

Underwriting

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

Contact Winston Rowe and Associates

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

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?

Nope.

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.

Contact Winston Rowe and Associates

 

 

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.

Goals

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.

KEY TAKEAWAYS

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:

VantageScore:

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.

PLUS:

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.

TransRisk:

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:

GlobeSt.com:

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:

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!).

BizJournals:

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.

NREI:

National Real Estate Investors (NREI) does a particularly great job of synthesizing major trends (and fun listicles) into articles with effective takeaways.

Curbed:

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.

cre.tech:

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

Conclusion

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

248-246-2243

https://www.winstonrowe.com

processing@winstonrowe.com

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

Overview

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.

Occupancy

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.

 

Conclusion

 

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

 

Adjoining

 

In actual contact with another object (i.e., attached). Same as “Contiguous”.

 

Agent

 

An individual/entity who transacts, represents, or manages business for another individual/entity. Permission is provided by the individual/entity being represented.

 

Assignee

 

Individual to whom a contract is assigned.

 

Assignment

 

The manner by which a contract is transferred from one individual to another individual.

 

Assignor

 

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.

 

Chattel

 

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.

 

Contiguous

 

Touching at some point or along a boundary

 

Contingency

 

A requirement in a contract that must occur before that contract can be finalized

 

 

 

 

Contract

 

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.

 

Covenants

 

Wording found in deeds that limits/restricts the use to which a property may be put (e.g., no bars).

 

Deed

 

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.

 

Default

 

Failure to fulfill a promise, discharge an obligation, or perform certain acts.

 

Delivery

 

Transfer something from one entity to another.

 

Ejectment

 

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.

 

Endorsement

 

Signing one’s name on the back of a check.

 

 

 

Escrow

 

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

 

Fiduciary

 

A person who represents another on financial/property matters.

 

Fixtures

 

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.

 

Incompetent

 

An individual who is unable to handle his own affairs by reason of some medical condition (e.g., insanity, Alzheimer’s).

 

Instrument

 

A written legal document created to secure the rights of the parties participating in the agreement.

 

Irrevocable

 

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.

 

 

 

 

 

Judgement

 

A formal decision issued by a court relating to the specific claims and rights of the parties to an act or suit.

 

Landlord

 

One who rents property to a tenant.

 

Lease

 

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).

 

Leasehold

 

The estate or interest a tenant has as stated in the tenant’s lease.

 

Lessee

 

An individual (i.e., tenant) to whom property is rented under a lease.

 

Lessor

 

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.

 

Listing

 

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%

 

 

 

 

Mandatory

 

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.

 

Minor

 

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.

 

Oblige

 

The person who will receive the outcome of an obligation.

 

Obligor

 

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.

 

Option

 

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.

Principal

 

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.

 

Realtor

 

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.

 

Rent

 

Compensation from tenant to landlord for the use of real estate.

 

Restriction

 

A restriction, often specified in the deed, on the use of property.

 

Revocation

 

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.

 

Situs

 

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.

 

Statute

 

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.

 

Subagent

 

An agent of an individual already acting as an agent of a principal.

Subletting

 

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.

 

Surrender

 

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.

 

Tort

 

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.

 

Valid

 

A binding situation that is authorized and enforceable by law.

 

 

Valuation

 

Estimated price, value, or worth. Also, the act of identifying a property’s worth via an appraisal.

 

Variance

 

Government authorization to use or develop a property in a manner which is not permitted by the applicable zoning regulations.

 

Violation

 

Act, condition, or deed that violates the permissible use of property.

 

Void

 

Something that is unenforceable.

 

Voidable

 

A situation which is capable of being unenforceable but is not so unless direct action is taken.

 

Waiver

 

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.

 

Zone

 

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.

IRS Section 179 Explained

IRS Section 179 Explained for 2018 Tax Year

What is Section 179?

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and or software purchased or financed during the tax year. That means if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income.

Who Qualifies for Section 179?

All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2018 should qualify for the Section 179 Deduction, assuming they spend less than $3,500,000.

What type of equipment qualifies for the Deduction?

This deduction is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2018, the equipment must be financed or purchased and put into service between January 1, 2018 and the end of the day on December 31, 2018.

 

What Landlords Need To Know About Selling A Tenant Occupied-Property

No Upfront Fee Commercial Real Estate Loans

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:

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.

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.

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.

Commercial Loan Interest Rates for Dummies

Commercial Loan Interest Rates for Dummies

We spend a lot of time talking about interest rates because they affect so much of our lives.  On a personal level, they govern the cost of our mortgage, our credit card bill and our car payment.  In business, they affect our ability to grow and expand, to invest in new equipment, and to purchase commercial real estate.

But how well do we really understand interest rates?  Where do they come from?  What do they mean, and how can we make smart financial decisions based on our expectations for future interest rates?

Those are questions we’d absolutely love to answer.

Rates From “the Fed”

An awful lot of talk around interest rates centers on “the Fed.” The Federal Reserve is the United States’ central banking system.  Broadly, its job is to make sure that our economy is healthy and as predictable as possible.

When it comes to interest rates, the federal funds rate is the granddaddy of them all.  Every other meaningful interest rate in this country, from your credit card APR to mortgages to SBA 504 loan rates, is either directly or indirectly linked back to the federal funds rate.

The fed funds rate is set, or more accurately targeted, by the Federal Open Market Committee.  They meet about every six weeks and release a target interest rate, often alongside their expected plans for future interest rate changes.

At its core, the fed funds rate is the percentage rate which big banks will lend money overnight to other big banks. To make their target rate a reality, they use a couple of mechanisms: buying and selling government securities (something that happens all the time), as well as changing the amount of money banks are required to hold in reserve (something that happens much less frequently).

For all intents and purposes, the target federal funds rate is the actual federal funds rate.

What’s a “normal” federal funds rate?  That depends.   In a healthy economy, it’s typically going to be between 2% and 5%. Currently, it’s just above 2%.  Its high mark was 20% in January of 1981.  Its low point was in December of 2008, when it hit 0.25%.

Prime Rate – The Basis for Variable-Rate Loans

The prime rate is, at its simplest, the interest rate that banks will give their very best corporate customers.  Each bank technically has its own prime rate, but when people talk about the prime rate, they’re most often referring to the WSJ prime rate.

This rate comes from The Wall Street Journal sending a survey to the 10 largest banks in the U.S., and asking them what rate they’d lend money to their most qualified corporate customers.

Now, while the prime rate is not linked in any official capacity to the fed rate, it’s almost always about 3% higher than the fed funds rate.

The prime rate is a very popular tool in managing variable-interest-rate loans.  Credit card debt is typically set at Prime + a fixed percentage.  For example, in November of 2018, the average credit card APR was 17.14%, while the WSJ prime rate was 5.25%, making the average credit card rate about Prime + 12%.

But it’s not just credit card rates that come from Prime. Many other variable-interest-rate products are set at Prime +, including SBA 7(a) loans.

What About LIBOR?

LIBOR is basically the international version of the federal funds rate.  It’s based on eurodollars, traded between banks on the London interbank market.

Just like prime rates, while there’s no official link between it and the federal funds rate, they tend to track each other very closely, with the exception of times when the Fed is taking exceptional actions, e.g., a financial crisis in the U.S. market.

Here’s a chart showing Prime, LIBOR and the fed funds rate from 1985 until 2018.  As you can see, with the exception of the financial crisis of 2008, they stayed essentially in sync.

LIBOR is used very similarly to prime rates, in that many variable-rate loan products are pegged at LIBOR + a specific number of percentage points.

SBA Peg and Max 504 Third-Party Interest Rates

Before we drill down into exactly how SBA interest rates are set, there are two more rates to be aware of.  Both of these are set directly by the Small Business Administration, on a quarterly basis.

The first is an SBA peg rate.  SBA 7(a) lenders have the options of tying the loans they issue to either Prime, LIBOR or the SBA peg rate, which also closely follows these indexes.

The Max 504 third-party rate is the maximum interest rate a SBA 504 private lender is allowed to charge for their portion of an SBA 504 loan.  This is typically set as a Prime+ rate, and as of September 2018, was set at Prime + 4%.

Every quarter, the SBA releases these numbers in a press release, and they’re either directly (in the case of the Max 504 rate) or indirectly (in the case of the peg rate) tied to other key rates like the Prime, Fed and LIBOR rates.

Swap Rates & Treasury Yields

We promise these are the last two rates we’ll discuss, but discuss them we must because they’re important for fixed-interest-rate commercial loans, like SBA 504 loans.

These rates are Treasury yields and swap rates. Functionally, they represent the same thing: rates at which large institutions are willing to lend money for a fixed time period, at a fixed interest rate.

Treasury yields are based on the amount the government pays to borrow money for a specific amount of time, say 5, 10, 20 or 30 years.

Swap rates are the rates at which institutional lenders are willing to exchange a variable interest rate for a fixed rate over a specific period.  Again, like Treasury yields, in intervals of 5, 10, 20 or 30 years.

Swap rates and Treasury yields tend to be closely linked to each other, and to the other key rates we’ve been discussing, as illustrated in this chart of five-year swap rates,

Treasury yields and the federal funds rate.

How Individual Loans Are Priced

The pricing of nearly all loans follows a pretty simple formula:

(Base Interest Rate) + (Interest Rate Spread) = Loan Interest Rate

The interest rate spread attempts to take into account how risky the loan is, along with other market forces like competition and the necessary profit margin for the lending institution to issue the loan.

SBA loans tend to have an advantage here.  The protections offered by the Small Business Administration to lenders lower the overall risk they take on. As a result, they tend to be at a lower rate than other types of loans that small businesses have access to.

What Makes Interest Rates Rise and Fall?

That’s a very big, complex question that economists could probably argue over for an eternity.  But let’s look at it through the simplified lens of monetary policy at the Federal Reserve. If you think of our economy as a car, the Federal Reserve tries to use interest rates as either a gas pedal or brake to keep us going close to the speed limit.

If the economy is going to slowly, like it was after the crash of 2008, the Fed might hit the gas pedal by lowering interest rates.  This makes it cheaper for businesses to borrow money, and encourages economic activity and investment.

If the economy is going too quickly, and headed toward a possible crash, the Fed might hit the brake pedal by raising interest rates.  As it gets more expensive for businesses to borrow money, things might slow down a bit to a more sustainable level.

The Advantages of Fixed-Interest-Rate Loans in a Rising-Rate Environment

We recognize we’re a bit biased here, but let us make the case for a fixed-interest-rate loan like the SBA 504.

Right now, our economy is doing well, and the Fed has indicated repeatedly that they’re in the process of raising rates.  Barring an economic event that’s unforeseen by Wall Street or the Fed, interest rates are going to be headed up from here.

That means that the sooner you get into a fixed-interest-rate loan product, the bigger your likely savings are to be.

If you get into an SBA 504 loan today, your interest rate is going to be fixed for at least the next five years, as, in all likelihood, rates rise.  With a variable-rate SBA 7(a) loan, as interest rates rise, so will your monthly payments.

The truth is, if you’re eligible for an SBA 504 loan, it’s often the better of the two.  SBA 504 loans are nearly always available at lower interest rates, and have longer-term fixed rates.

Here’s a table that compares average interest rates of SBA 7(a) loans of at least $1M, and a term of 20+ years, with average interest rates for the CDC portion of SBA 504 loans during the same time period.

Now, if you got an SBA 7(a) loan in 2016 at 5.25%, it would be likely resetting at 6.3% this year.  If you got an SBA 504 loan at 4.3% in the same year, that CDC portion of the loan would be fixed for the 20-year life of your loan.

Let’s look at it another way.  If you borrowed $1 million today, going with an SBA 504 loan instead of a 7(a) would save you about $937 per month in interest, or $11,244 per year.  If rates continue to rise as most people expect them to, that difference would only get more significant over time.

Loan Amount      Rate       Monthly Interest + Fees Annual Interest + Fees

SBA 7(a)               $1M       7.25%    $7,228   $86,737

SBA 504               $1M       5.75%    $6,291   $75,493

Savings:               $937      $11,244

Putting It to Use

Now that you understand the basics of interest rates and loan pricing, you can put that knowledge to use for your customers or your business.

If you’re a broker or business owner, and you agree with the Federal Reserve and Wall Street that interest rates are going up for the foreseeable future, protect your clients or yourself with a fixed-interest SBA 504 loan.

How To Apply for a Commercial Mortgage

How To Apply for a Commercial Mortgage

If you have never borrowed money for your business before, you may be in for a surprise. Whether you want to borrow working capital to expand your business or leverage equity in a commercial real estate venture, you will soon find out the commercial loan process is very different from the more common home mortgage process.

Commercial loans, unlike the vast majority of residential mortgages, are not ultimately backed by a governmental entity such as Fannie Mae.

Consequently, most commercial lenders are risk-averse; they charge higher interests’ rate than on a comparable home loan. Some lenders go a step further, scrutinizing the borrower’s business as well as the commercial property that will serve as collateral for the loan.

This means that the business borrower should have different expectations when applying for a loan against his commercial property than he would have for a loan secured by his or her primary residence.

Following is a list of questions the borrower should ask himself and the lender before applying for a commercial loan.

  1. How am I going to meet the loan repayment terms?

Typically, bank loans require the borrower to repay his or her entire business loan much earlier than its stated due date.

Banks do this by requiring most of their loans to include a balloon repayment. This means the borrower will pay interest and principal on his 30-year mortgage at the stated interest rate for the first few years (generally 3, 5 or 10 years) and then repay the entire balance in one balloon payment.

Many borrowers do not save enough in such a short time frame, so they must either re-qualify for their loan or refinance the loan at the end of the balloon term.

If the business happens to have any cash-flow problems in the years immediately preceding the balloon term, the lender may require a higher interest rate, or the borrower may not qualify for a loan at all.

If this happens, the borrower runs the risk of being turned down for financing altogether and the property may be in jeopardy of foreclosure.

A balloon loan has other risks as well. If the borrower’s business is in a “risky” industry at the time the balloon is due (think of the oil and gas bust in the 1980s or the telecom implosion of the 2000s), the lender may back out of all refinancing for the enterprise.

Alternatively, a lender simply may decide its loan portfolio has too many loans in a given industry, so he will deny future refinancing within that trade.

Non-bank lenders generally offer less stringent credit requirements for commercial loans. Some non-bank lenders will make long-term commercial loans without requiring the early balloon repayment. These loans, which may carry a slightly higher interest rate, work like a typical home loan.

They allow a steady repayment over twenty or thirty years. It is often worth paying a one- or two-point higher interest rate for a fixed-term loan in order to ensure the security of a long-term loan commitment.

  1. How much can or should I borrow?

Most bank loans prohibit second mortgages, so the borrower should go into the loan process intending to borrow enough to meet current business needs, or enough to sufficiently leverage real estate investments.

For a traditional acquisition loan in which the borrower is buying a new property, banks usually require a down payment of 20-25%. So, for a $600,000 acquisition, the borrower will need to come up with $120,000-$150,000 for the down payment.

Some non-traditional loans will allow the borrower to make a smaller down payment, maximizing the loan-to-value (LTV) at 85-90%. Such loans are generally not bank loans, but are offered by direct commercial lenders or pools of commercial investors.

If the customer wants to borrow the maximum amount possible, the interest rate on such loans may be a point or two higher than typical bank loans. Before deciding how much to borrow, potential borrowers should:

Evaluate how much cash they are likely to need

Analyze their ability to repay the loan as it is structured

Research has consistently shown that the number one reason behind the failures of most small businesses is the lack of adequate capital to meet cash-flow needs. Because of this it may actually be safer for a small business to leave a larger cushion against unforeseen events by borrowing more money at the slightly higher rate.

The amount of the loan requested has an effect on which commercial lenders will fund the loan. Small businesses borrowing less than $2,000,000 will visit a different pool of potential lenders than those seeking loans of over $5 million.

Small business loans are generally made by direct commercial lenders (easily located by internet searches) or by small local banks. Larger loans are generally made by regional banks, and very large loans are made by mega-banks or Wall Street lenders.

  1. How long will it take to get a commercial loan?

Borrowers generally start the loan process by contacting their bank. Unfortunately, it is difficult to secure business loans from most banks. Besides, bank loans:

Contain the most stringent requirements

Impose the most loan covenants

Take the longest time to secure the loan.

Bank loans go through several phases of review. First, they will look at your historical income statements, balance sheets and statements of cash flow. Then they will review 5 years of tax returns on the borrower and all owners who will guarantee the loan.

Generally, it takes several weeks before the borrower can get a verbal or written commitment letter from a bank. Even after the loan commitment, the bank’s credit committee may veto the loan. The business will then have to start the process over with a new lender.

If a firm has very good credit rating, a good relationship with its bank, a solid and confirmable history of earnings and profits, and is not in a hurry, a local bank will probably give them the lowest stated interest rate on the loan.

If you need to be pre-qualified quickly, you should shop for credit over the Internet or look at non-bank sources of funds first. Once you secure a commitment from a direct lender, then you may start a parallel process with your bank.

Some direct non-bank lenders can give you a verbal commitment in a few days, but keep in mind that you are only searching for “commercial” loans-offers from Internet companies may often be for residential property, so you will need to screen your searches.

Keep in mind the parameters of the terms you will accept: Will you take a balloon loan? What about a covenant or condition on the loan?

If you know that your profit and loss statements are not provable and solid, or you do not have a high credit score, applying at banks is generally a waste of time. Instead, go directly to non-bank commercial lenders.

  1. What kind of covenants and conditions are required?

Many borrowers are not aware that much more may be required than simply making regular monthly payments on time.

Many loans ask you to provide quarterly or annual income statements, balance sheets and tax returns. Some loans will require covenants-promises that your business will meet certain tests in the future.

They may require a certain positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria. During a downturn in your industry or the economy, your business may face temporary cash flow or profit shortages.

If your business falls short of the terms and conditions contained in the loan covenants, your bank may deem that your loan has entered into default.

Default triggers numerous penalties. It may require that you pay back the loan immediately. This can cause you to have to find another lender very quickly, or face foreclosure on the property.

Different lenders require different conditions, so ask the lender up front what conditions or covenants apply. Some non-bank loans charge a slightly higher interest rate but will waive all covenants and conditions except for timely repayment of the loan.

If you feel that your business cash flow is uncertain, you might want to consider these non-bank loans first.

If your business does not have its financial statements certified regularly by one of the larger CPA firms, you may opt for a slightly higher interest rate loan. This may relax the reporting process or not require future covenants.

Likewise, if losing your business or property to the bank is likely because of the financial test requirements, then find another lender.

Ask any real estate developer who has managed to stay in the business for 20-30 years about the risks inherent with traditional bank commercial property loans; he will name many other developers who lost all their assets during lean times in the industry.

  1. What kind of documentation will be required?

Traditional lenders require 3-5 years of financial statements, income tax returns, and other documentation. This may include:

Leases

Asset statements

Original corporate documents

Personal financial records of the business owners

Keep in mind that many small businesses do not have the level of income documentation some lenders require. If you ask ahead of time, it will save you numerous headaches from delays or rejected loan applications.

The documentation required and the timelines for approval are related-the more information required, the slower the loan approval and funding process.

  1. What if I want to sell the property?

If your business booms, you may want to repay the loan early or sell the property and move to a larger space. Commercial mortgages, unlike residential loans, usually have pre-payment penalties.

However, some lenders will allow the purchaser of the property to assume the mortgage by taking over the seller’s payments. An assumable loan is an excellent selling point, because it provides built-in financing for the buyer.

  1. What are the “hidden” or total costs of the loan?

The stated interest rate is often artificially low when one considers all the costs of a loan. Points, for example, are direct percentages of the loan that the lender deducts from your loan. If your interest rate is 9% with two points that means your real cost of the loan is 11%. The extra 2% comes right off the top into the lender’s pockets. Other costs may include:

Legal fees, Survey charges, Loan Application Fees, Appraisal charges

Every item that will be charged against your loan or that must be pre-paid.

For some loans, these charges can be tens of thousands of dollars. They often must be pre-paid before the loan will be approved or rejected. You will need to know whether you are likely to be approved before spending money just to qualify for a commercial loan.

Other questions to ask

Will my interest rate go up if U.S. interest rates go up in general?

Is a fixed-rate alternative available?

Can I get a discount for paying your mortgage faithfully and consistently over a period of time?

Some lenders allow for decreases in the interest rates over time if you pay the mortgage on time. But if you want to refinance and repay your mortgage early, the lender may penalize you and charge extra interest.

All of these details are important, and they can seem overwhelming.

Keep in mind how you expect your business to perform in the future and how you plan to repay the loan. Do not ignore worst-case scenarios.

You do not want to be so optimistic about the possibilities that you lose sight of the fact that the lender may take away your business or livelihood if you do not meet all the terms. Sometimes the lowest interest rates represent the riskiest loans.

The Best Lender

When considering a commercial mortgage, borrowers should seek out lenders who are willing to fund the loan under acceptable time constraints, keeping in mind their general creditworthiness. Borrowers should look at both bank and non-bank funding in order to get their needs met in a timely manner.

Asking questions and obtaining unbiased evaluations will reduce delay and frustration. Fortunately, new lenders have emerged to challenge banks on their traditional terms, so borrowers have more leverage now than ever before when seeking commercial loans.

US JOBS REPORT SEPTEMBER 2018

US JOBS REPORT SEPTEMBER 2018

Event- On a seasonally adjusted basis, total nonfarm employment rose by 201,000 in August, according to the US Bureau of Labor Statistics (BLS) in its monthly jobs report. Temporary help services employment rose by 0.3% in August, adding 10,000 jobs, and the temporary penetration rate remained at 2.04%. The national unemployment rate remained at 3.9%.

Background and Analysis- On a year-over-year (y/y) basis (August 2018 over August 2017), total nonfarm employment was up 1.6%, and monthly job gains have averaged approximately 194,000 over the past 12 months. Temporary help employment was up 2.9% y/y, with monthly job gains averaging approximately 7,100 over the past 12 months.

Of the 15 major industry groups, the three that most drove total nonfarm employment growth in August (on a seasonally adjusted basis) include professional services excluding temporary help (+43,000), healthcare and social assistance (+40,700), and construction (+23,000). There were four decliners. After two months of being in the top three, manufacturing declined by 3,000 jobs. The information and government industry groups, which have generally been the two weakest groups over the past year, were weak again this month with declines of 6,000 and 3,000 jobs, respectively. Retail trade, which has been quite volatile this year, was down this month by 5,900 jobs. On a year-over-year basis, natural resources/mining led all industry groups in terms of percentage growth in employment, with 8.1%, followed by construction and transportation/warehousing, with 4.3% and 3.3% growth, respectively.

BLS Revisions- The change in total nonfarm payroll employment for July was revised from +157,000 to +147,000 and the change for June was revised from +248,000 to +208,000. With these revisions, total nonfarm employment gains during the two-month period were 50,000 less than previously reported.

The change in temporary help services employment for July was revised from +27,900 to +10,900 and the change for June was revised from -7,500 to -6,500. With these revisions, temporary help employment growth was lower than previously reported by 16,000 jobs.

Staffing Industry Analysts’ Perspective- Despite the tightening labor market, companies were able to find 201,000 more employees to add last month, and average growth over the past three months has been a steady 185,000. In temporary help, downward revisions to June and July more than offset growth in August. Nevertheless, average growth in temporary help jobs over the past three months is 4,800 (which makes up 2.6% of the increase in total employment, greater than the current temporary penetration rate of 2.0%).

Average hourly earnings has garnered increasing attention as many have been wondering when the tightening labor market would finally yield higher wages. While we don’t want to make too much out of one month, data for the month was quite favorable, with growth of 0.4% in August, and 2.9% year-over-year (up from 2.7% in the prior month). It would make sense to see wage growth gain a bit of traction as it will become increasingly difficult for companies to find workers to meet the demand of an economy expected to remain strong into 2019 at least. The unemployment rate cannot get much lower, leaving additions to the labor force as the other source for new employees. (The labor force declined in August and the average gain over the past three months is only 79,000). As the pool of available new employees diminishes, companies will increasingly need to hire workers who already have jobs, which could accelerate movement from lower-wage service jobs in the leisure/hospitality and retail industry groups into industries such as manufacturing, construction, and natural resources/mining. Along with greater pay within industries, a mix shift from lower-wage to higher-wage industries could also contribute to average wage growth.

Real Estate 101 How Investing In Commercial Real Estate Works

Real Estate 101 How Investing In Commercial Real Estate Works

Commercial real estate is a broad term describing real property used to generate a profit. Examples of commercial real estate include office buildings, industrial property, medical centers, hotels, malls, farmland, apartment buildings, and warehouses.

Historically, investing in commercial real estate as an alternative asset has provided millions of investors with attractive risk-adjusted returns and portfolio diversification. But, many investors still don’t understand how commercial real estate works as an investment vehicle.

There are some key differences between commercial real estate investing and traditional investments such as stocks and bonds. Unlike stocks and bonds traded frequently on a secondary market, real estate is a scarce resource and holds intrinsic value as hard asset. Most often, stocks are purchased for their selling potential rather than their capacity as a source of income, hence the “buy low, sell high” heuristic of the stock market.

The investment strategy for commercial real estate is simple: there is inherent demand for real estate in a given area. Investors purchase the property and make money in two ways: first, by leasing the property and charging tenants rent in exchange for use of the property; and second by appreciation in the value of the property over time. Let’s examine these two aspects of the investment opportunities a little more closely: ​

Rental Income

Rental Property Commercial Real Estate Investment

Tenants differ across all types of commercial real estate investment properties. With different tenants comes different arrangements, property management needs, and lease agreements. Here are a few examples:

Office: Cubicles and parking decks. Example tenants would be a law firm or start-up company. The company pays the rent, and has lease terms often in the five-year to ten -year range.

Apartment Buildings: Multi-family apartment buildings typically have individuals or families as tenants. Leases can be short term or long term, but most are not for longer than a year, and some can even be month to month. This building can have more tenants and leases to manage, and more payments to account for each month.

Industrial: Warehouses and smokestacks. A typical tenant might be a manufacturing or distribution company. These properties aren’t generally located in areas that would be very desirable for a residential or retail property. Lease lengths are typically for five years or more.

Appreciation and Value Add

Appreciate Value Added Commercial Real Estate Investment

The second opportunity for potential returns from a commercial real estate investment comes from an increase in the property’s value over the period that the investor holds it. Properties can also lose value, and even the most disciplined, proven investment strategies can’t ensure gains due to outside economic forces that may arise.

In general, real estate is a unique and scarce asset class. More land can’t simply be “created.” In the middle of a major city, this scarcity is increased by demand. If demand increases for your property, or in the area right around your property, there’s a good chance that tenants will be willing to pay higher rent, and prospective buyers will be willing to pay a higher price than you paid originally to take it off your hands.

Appreciation through demand isn’t the only way the value of a property increases. Many investors take an active “value-add” approach to commercial real estate, making improvements to the property to increase its intrinsic value or its ability to earn income. One example of this would be updating cosmetic details or appliances of a multi-family apartment building. Updates such as these can allow the owner to charge higher rent for nicer apartments. Methods outside of improving the property might include rezoning an adjacent parcel of land, say from residential to multi-family, so that more apartments can be built. Any money spent to renovating a building can potentially boost the selling price of the building in the future.

Real World Example: Doug’s Apartment Building

Let’s look at a commercial real estate investment in action. Doug buys an old, 40-unit apartment building in Philadelphia for $5 million. He earns a rental income of $500,000 in year one after all of his expenses. As with all properties, some tenants leave each year. Doug renovates vacant apartments before releasing them out at higher rates to new tenants. Doug’s improvements increase the property’s rental income by $50,000 each year for five years, so by the end of year five the property earns $750,000 per year.

Commercial Real Estate Investment Example

Doug then decides to sell the apartment building for $16 million. The buyer was willing to pay a higher price than Doug did 5 years ago for two reasons: First, Doug renovated the apartments, which now bring in 50% more income than they did when he bought the building. Second, economic growth in Doug’s city increased property values as new renters and entertainment venues moved into the neighborhood. Nice job, Doug!

The Bottom Line

Unlike stocks, commercial real estate investments often provide stable cash flows in the form of rental income.

Commercial real estate is a hard asset that is also a scarce resource. It always has intrinsic value, and usually appreciates in value over time.

The value of commercial real estate is derived by the larger growth of the economy as a whole.

Historically, direct commercial real estate investment has been out of reach for the everyday investor. This is because investments in commercial real estate are typically dominated by institutional investors as projects require millions of dollars in capital and a deep reservoir of expertise for improving and operating a property.

Real Estate Finance and Investment

Real Estate Finance and Investment

That’s what people like about real estate: it moves slowly and is not that affected by the daily swings in the markets. Long-term trends can—and will—affect real estate positively or negatively, but despite raucous political and economic news, real estate just continues to offer a safe harbor for clients.

Real estate investment products can offer superior risk-adjusted returns. Lower volatility is another advantage. Given generally low, or even negative, correlations with stocks and bonds, real estate also can also provide diversification.

Market conditions for real estate are positive from a supply-and-demand standpoint; the fundamentals remain positive; and in many ways markets keep improving.

Growth in the U.S. economy is strong, slow and steady, putting up solid quarterly GDP numbers. Unemployment is at historic lows and consumer spending continues to rise. Those factors are very positive for real estate overall, specifically for industrial, multifamily and office.

Supply-and-demand metrics remain key. New supply is historically low, yet people who aren’t in the industry may look around many cities and say, “There are a ton of construction cranes on the skyline and people are building all over the place.” The fact remains that deliveries of new properties are way below historical averages, in all property types. Demand far outpaces supply.

The U.S. Federal Reserve has already increased interest rates four times. Real estate has been largely unaffected. The industry is more impacted by labor and building materials’ costs. Those have ticked up but not necessarily because of inflation, and building continues.

New property development profitability projections remain in the mid-20s. If that ever falls below 20 or 15 percent, it could turn off development. Nothing near that level looms, even a few years out.

However, if inflation does continue to creep up (in conjunction with growing GDP, which is happening now), it could bode well for real estate: rents often rise as demand for space persists. With inflation hedges built in, real estate also can provide steady income potential, in different market climates.

Tenants—in apartments, industrial, offices or retail—are absorbing what new supply is being delivered. In retail, little new supply is being delivered by nature of what is happening, namely the e-commerce revolution; but in the industrial sector, properties cannot be built fast enough to meet mounting demand.

4 Types of Multifamily Financing: Rates, Terms & Qualifications Winston Rowe and Associates

4 Types of Multifamily Financing: Rates, Terms & Qualifications Winston Rowe and Associates

Multifamily financing is a mortgage used for the purchase or refinancing of smaller multifamily properties that have two to four units and large apartment buildings that have five or more units. Multifamily loans are a good tool for both first-time real estate investors and seasoned professionals. Rates are generally between 4.5 percent and 12 percent with terms up to 35 years.

  1. Conventional Mortgage for Multifamily Properties

Conventional mortgages for buying a multifamily home are permanent “conforming” loans offered by traditional banks and lending institutions. These mortgages have terms of 15 to 30 years and can finance multifamily properties between two and four units but can’t finance apartment buildings with five or more units. Conventional mortgages are conforming because they typically adhere to Fannie Mae’s required qualifications and maximum loan amounts. However, they aren’t backed by the federal government.

Conventional mortgages for multifamily homes are right for investors who want a long loan term. They’re right for investors who purchase a multifamily property that has already been rehabbed. They’re also right for investors who already have a banking relationship with a financial institution that offers multifamily loans.

Multifamily Conventional Mortgage Loan Amounts

Conventional multifamily loan amount and down payment are:

Two-unit property: $533,800 to $800,755

Three-unit property: $645,300 to $967,950

Four-unit property: $801,950 to $1,202,925

LTV: Up to 80 percent

Down payment: 20 percent or more

Keep in mind that these maximum loan amounts are regional and higher cost areas like Hawaii have higher maximum loan limits. An investor’s typical down payment with a conventional multifamily loan is 20 percent or more of the property’s purchase price. This is fairly standard when compared to more traditional residential property loans.

Conventional multifamily mortgage costs are generally:

Rates: 4.5 percent to 6.5 percent

Loan origination fees: 0 percent to 3 percent

Closing costs: 2 percent to 5 percent

The rates found on a conventional mortgage can be either fixed or variable. Fixed rates are fully amortized throughout the loan’s term while variable rates typically reset after a seven- to 10-year period. Variable interest rates are based on the six-month stated Intercontinental Exchange London Interbank offered rate (LIBOR), and there is usually a cap equal to the starting interest rate plus 5 percent to 6 percent.

You might also be charged a minimum $500 appraisal fee as well as an application fee that’s typically around $100 to $200. The application fee will sometimes cover the appraisal. Loan origination fees and closing costs are typically taken directly out of the loan.

Conventional multifamily mortgage terms are generally:

Term: 15 to 30 years

Funding time: 30 to 45 days

Conventional Multifamily Mortgage Loan Requirements

Conventional multifamily loan qualifications are generally:

Units: 2 to 4

Credit score: 680 or more (check your credit score for free here)

DSCR: 1.25 or higher, which is the amount of cash flow available to cover debt payments

Cash reserves: 6 to 12 months

If you have a property with five or more units, you’ll want to look into government-backed multifamily loans and multifamily portfolio loans. Further, conventional mortgages typically don’t finance a rehab or renovation project. Therefore, the second qualification you need to mind is that all multifamily properties have to be in good condition prior to financing.

  1. Government-backed Multifamily Financing

Government-backed multifamily financing is multifamily loans sponsored by Fannie Mae and Freddie Mac as well as the Federal Housing Administration (FHA). There are more than five government-backed multifamily financing options, which can either finance properties with two to four units or properties with five or more units.

Government-backed multifamily loans are right for investors who want to live in one of the units and rent out the other units. Investors who only have a small down payment can also benefit from government-backed multifamily loans. They’re also right for larger investors who want to purchase a five or more unit property with an FHA multifamily loan.

Government-backed loan amount and down payments are generally:

Two-unit property: $533,800 to $800,755

Three-unit property: $645,300 to $967,950

Four-unit property: $801,950 to $1,202,925

LTV: Up to 80 percent

Down payment: 3.5 percent or more

Government-backed loans have the following loan amounts:

Fannie Mae: $750,000 to $3 million or more

Freddie Mac: $1 million to $6 million or more

The FHA offers multifamily loans for properties with five or more units. The minimum loan amount is $1 million and there is no maximum amount. However, the FHA 223(f) apartment loan can finance up to 87 percent of a property’s LTV, meaning that the down payment would only be 13 percent or more of the purchase price.

Government-backed multifamily loan rates include:

Rate: 5 percent to 7 percent or higher

Loan origination fees: 0 percent to 1 percent

Closing costs: 2 percent to 5 percent

Prepayment penalty: 1 percent

These costs are usually taken directly out of the loan and aren’t considered out-of-pocket costs. Fannie Mae and Freddie Mac multifamily loans with longer terms have fixed rates that are fully amortized and shorter-term loans can have fixed or variable rates. FHA rates are fixed over the entire term. Fixed rates are typically amortized over the term of the loan while variable interest rates adjust after three to 10 years based on the current six-month LIBOR rate.

In contrast, FHA 223(f) loan costs are generally:

Loan origination fees: 0 percent to 3 percent

Closing costs: 2 percent to 5 percent

FHA inspection fee: 1 percent or more

Mortgage insurance premium: 1 percent

Legal fees: $10,000 or more

Government-backed Multifamily Financing Terms

The terms for government-backed multifamily loans are:

Term: 5 to 35 years

Funding time: 60 to 180 days

Both Fannie Mae and Freddie Mac multifamily loans have terms between five and 35 years. The time to approval and funding with these multifamily loans can be 60 to 90 days. For FHA-backed multifamily loans, the term can be as long as 35 years. Because there are more regulations and guidelines with FHA loans, the time to approval and funding is longer at 60 to 180 days.

Government-backed Multifamily Mortgage Loan Requirements

The qualifications for government-backed multifamily loans are:

Units: 2 or more

Credit score: 650 to 680 or higher (check your credit score for free here),

DSCR: 1.25 or higher, which is the amount of cash flow available to cover debt payments

Occupancy: 85 percent to 90 percent or more

Liquidity: At least 9 months

Occupancy: At least 3 months

FHA multifamily loan qualifications are:

Units: 5 or more

Credit score: 650 or higher (check your credit score for free here),

DSCR: 1.15 or higher

Occupancy: 95 percent or higher

Liquidity: At least 9 months

Occupancy: At least 6 months

Fannie Mae and Freddie Mac’s multifamily financing options together can fund the purchase of a multifamily property between two and five units or more. Just remember that the conforming loans can finance properties between two and four units while the nonconforming multifamily loans can finance properties of five or more units.

Where to Find Government-backed Multifamily Financing

The Fannie Mae, Freddie Mac and FHA multifamily financing options are originated and offered by government-approved mortgage lenders. For example, the Commercial Real Estate Finance Company of America offers all government-backed multifamily loan options.

  1. Portfolio Loan for Multifamily Properties

A portfolio loan for multifamily properties is a nonconforming loan used to purchase a multifamily property between two and five or more units. Portfolio loans for multifamily properties are permanent mortgages with terms between three and 30 years.

These types of multifamily loans are right for investors who need more flexible multifamily loan requirements. They’re also right for investors who want to finance multiple properties at once because they can finance four to 10 properties simultaneously.

Multifamily portfolio loan amount and down payment are generally:

Minimum loan amount: $100,000 or more

Maximum loan amount: Depends on the lender

LTV: Up to 97 percent

Down payment: 3 percent or more

Portfolio loans for multifamily financing aren’t required to meet Fannie Mae or the other government organization’s requirements for maximum loan amounts and down payments. This means that portfolio loans are more flexible than conforming multifamily loans.

Portfolio multifamily loan rates are generally:

Rates: 5 to 6 percent or higher

Loan origination fees: 0 percent to 3 percent

Closing costs: 2 percent to five percent

Prepayment penalty: 1 percent

These costs are taken directly out of the loan and their interest rates can be either fixed or variable. Like the other multifamily loans, variable interest rates are typically fixed for five to 10 years before adjusting every six months based on the six-month LIBOR rate.

Terms for multifamily portfolio loans are generally:

Term: 3 to 30 years

Funding time: 30 to 45 days

The most common types of portfolio loans for multifamily financing will often have a term of 15 to 30 years. The usual time to approval and funding is between 30 to 45 days.

Portfolio multifamily loan qualifications are generally:

Units: 2 to 5 or more

Credit score: 600 or higher (check your credit score for free here),

DSCR: 1.25 or higher

Occupancy Rate: 90 percent or higher

Liquidity: 9 months or more

Occupancy: 3 months or more

  1. Short-term Multifamily Financing

Short-term multifamily financing is a non-permanent multifamily loan option with terms that range from six to 36 months. These loans include both hard money loans and bridge loans with monthly payments that are usually interest-only.

Short-term multifamily financing loans are right for investors that want to season, renovate or increase the occupancy a multifamily property in order to meet the stricter requirements of a permanent multifamily loan. Furthermore, some investors use these non-permanent options to buy a property and wait until they meet the personal qualifications before refinancing.

Short-term multifamily loan amounts and down payments are generally:

Minimum loan amount: $100,000 percent

Maximum loan amount: Varies by lender

LTV: Up to 90 percent

LTC: Up to 75 percent

Down payment: 10 percent or more

The LTV ratio is based on a multifamily property’s current fair market value and is used to finance properties in good condition. The loan-to-cost (LTC) ratio, on the other hand, is based on the combined costs of purchasing and renovating a multifamily property and is used for properties in poor condition. This means that an investor should expect to cover 10 percent or more of a property’s purchase price or 25 percent or more of a property’s purchase price plus renovation costs.

Rates on short-term multifamily loans are generally:

Hard money loan rates: 7.5 to 12 percent or more

Bridge loan rates: 5 to 12 percent or more

Loan origination fees: 1 percent to 3 percent

Exit fee: 1 percent

Extension fee: 1 percent

Prepayment penalty: 1 percent

These costs are typically taken out of the loan and don’t come out-of-pocket. The interest rates found on short-term multifamily financing options vary widely depending on the type of loan and the lender.

Short term multifamily financing terms are typically:

Term: 6 to 36 months

Funding time: 10 to 45 days

The terms of a non-permanent multifamily financing option are short and typically between six to 36 months. This means that investors will typically either have to flip the property or refinance with a permanent multifamily loan at the end of the term.

However, the time to approval and funding is also short, making it advantageous for investors who need to compete with all-cash buyers. For hard money loans, the typical time to funding is between 10 to 15 days. For bridge loans, the time to funding is between 15 to 45 days.

The qualifications of short-term multifamily financing are generally:

Units: 2 to 5 or more

Credit score: 550 or higher (check your credit score for free here),

Experience: 2 or 3 past rehab projects or multifamily experience

Subordinated debt: None

Typically bridge loan qualifications are:

Units: 2 to 5 or more

Credit score: 640 or higher (check your credit score for free here),

Experience: 2 or 3 past rehab projects or multifamily experience

Subordinated debt: None

Interest reserve: Required for properties below 1.05 debt-service coverage ratio (DSCR)

Where to Find Short Term Multifamily Financing

Hard money lenders like Patch of Land offer 12- to 24-month short-term financing options for two- to four-unit buildings, condominiums, town homes and multifamily apartments. You can borrow up to 85 percent LTV with a max of $3 million. Interest rates start at 8 percent and their application can take minutes.

How Multifamily Financing Works

Multifamily mortgages can finance two types of properties. The first is a residential investment property with two to four units. The second is an apartment building with five or more units. This distinction between the types is important because the number of units dictates the types of multifamily financing options.

 

For example, conventional mortgages can only finance residential income properties between two to four units. Government-sponsored loans and short-term financing options, on the other hand, can finance both residential income properties as well as apartment buildings with five or more units.

Permanent Multifamily Financing Options

Permanent multifamily mortgages have repayment terms of five to 35 years and have a loan-to-value ratio (LTV) of up to 87 percent. Interest rates range between 4 percent to 6 percent and rates can be fixed or variable. Permanent multifamily mortgages are the most common type of multifamily financing and account for 93 percent of outstanding multifamily loans.

Although permanent loans are generally long term, there are some shorter options. For example, government agencies offer loans that have terms between five to 10 years.

These multi-family loans are right for:

Investors who intend to pay off a multifamily loan within 10 years

Investors who need lower payments at the start of the loan

Investors who want an adjustable rate loan

Investors who want to renovate a multifamily property during a five to 10 year period

On the other hand, long-term permanent multifamily loans have terms between 10 to 35 years. Monthly payments are typically amortized during the entire term. What’s more, interest rates are typically fixed.

Long-term permanent multifamily financing options are right for the following investors:

Temporary Multifamily Financing Options

Temporary (short-term) multifamily loans, such as hard money loans, are mortgages with terms between six and 36 months. Monthly payments are typically interest-only with fixed rates between 4 percent to 12 percent or more. Temporary multifamily financing options are used to purchase, renovate, season or sell a multifamily property before refinancing to a permanent mortgage at a later date.

Theses temporary multifamily loans are right for:

Investors who need to season a multifamily property

Investors who need to increase the occupancy rate of a multifamily property

Investors who may want to renovate a multifamily property

Investors who don’t meet the stricter qualifications of a permanent multifamily loan

Investors who need to compete with all-cash buyers

Overall, investors of multifamily properties should be willing to be active in the management of the property. They should have at least nine months cash reserves not only to cover monthly loan payments through vacancy periods but also to cover unforeseen repairs as needed.

 

Apartment Building Loans No Upfront Fees Winston Rowe & Associates

Apartment Building Loans No Upfront Fees Winston Rowe & Associates

Real Estate Investing

Winston Rowe & Associates a national no upfront fee apartment loan and financing firm. With direct access to the most aggressive investor sources in the world, they can structure a customized financing solution for clients, with the best terms possible.

Winston Rowe & Associates Capital Deployment Objectives:

No upfront or advance fees
Loan amounts starting from $1,000,000 to $500,000,000
Private or hard money funds available for a quick close
Debt coverage ratios (DSCR) from 1.20 and up
All property types considered
Construction, Bridge, or Permanent Financing
Adjustable Loans, Fixed Loans, or Interest Only Loans
Loan to cost increased with mezzanine financing
Loan to value increased with mezzanine financing

At Winston Rowe & Associates, their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity for your commercial real estate loans. Recognizing that people and relationships drive this business, they are staffed with some of the industry’s most committed professionals.

How To Purchase An Apartment Complex

How To Purchase An Apartment Complex

Buying an apartment complex is a long, sometimes complicated, process. It’s important for you to gather as much information as you can before you make the decision to buy. Applying for a mortgage to finance an apartment complex is not at all similar to applying for a home mortgage. Apartment complexes with four or more units are commercial properties, and loans for them have different underwriting rules.

Types of Properties:

Decide if you want to purchase a residential apartment complex of a mixed-use building. A mixed-use building has a combination of office and residential units, but at least 80% of the space has to be residential. The complex has to have a grade of C+ or higher. This means you can’t rent the units daily or weekly, and the units can’t be single-occupancy, as in a rooming house or motel.

Gather information about the building you would like to buy. You may not be able to get a loan if the building will require excessive maintenance, or if the complex has not had 90% occupancy for the three months immediately preceding your loan application.

Background:

Talk to local real estate agents. Get their advice about the location you have in mind. Inquire about the possibilities of future zoning changes or any public works projects that may impact an income producing property. If there are plans for a regional airport to be built a few miles away in the next few years, for example, you might find it difficult to rent out your residential units. Don’t assume that everything will remain static; look at the past history of the location and try to imagine any major changes that could be likely to take place in the future.

Professional Expertise:

Have the building inspected by a professional who has experience inspecting commercial buildings. Make sure the inspection covers every aspect; don’t settle for a standard inspection, which may not include trouble spots, such as a wet basement. Pay extra money if you have to for a thorough inspection that goes above and beyond what is required by mortgage lenders. If the inspection reveals serious flaws, don’t make an offer, or reduce your offer amount by the amount it would cost to make the necessary repairs.

Supporting Documentation:

Assemble the documents you will need for the loan application. Your real estate agent will be able to assist you in this. Most lenders require the following documents, but your lending institution may require more:

The ensuing is a list of supporting documents that are required to process and underwrite (due diligence) your commercial loan request. Additional documents will be required.

Financial Supporting Documents:

The last three (3) years corporate tax returns

The last three (3) years business tax returns

Name and address of corporate bank

Business Profit & Loss 3 Years, For Seller or Buyer

Most recent copy of business bank statement

Personal financial statement for all guarantors

Use of Proceeds In An Excel Format For Cash Out Refinance

Property Supporting Documents:

Schedule of tenants leases

Copies of Tenant Leases

Schedule of Units with Square Foot Per Unit

Schedule of 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

Most Recent Appraisal

Copy of the First Page of the Insurance Binder for Refinance

List of All Litigation Past and Present

Guarantor Supporting Documents:

4506 T executed

Tri merge credit report

Government issued photo ID copy – front and back

Personal Financial Statement

Articles of Incorporation

Commercial Real Estate Investing Loans

Commercial Real Estate Investing Loans

Becoming a real estate investor is a smart way to generate a steady passive income stream. Nonetheless, it does take a certain amount of cash to get started in real estate investing. Real estate investing can be a hedge against market volatility when stocks take a tumble, and there are many other perks associated with owning an income property. When you don’t have a huge bankroll, taking out loans for investment properties may be the only way to seal the deal.

Loans for investment properties can take several forms. Choosing the wrong type of loan can impact the success of your real estate investment, so it’s crucial that a real estate investor understands how the various alternatives work before approaching a lender.

In this article, we break down the 6 most common types of loans for investment properties to help you, the real estate investor, determine which option works best for your investment.

Conventional Mortgage Loans for Investment Properties

In real estate investing, taking a conventional mortgage loan is the most common investment property financing option among property investors. If you already own a home that is your primary residence, then you’re probably familiar with conventional mortgage loans. A conventional mortgage is simply a loan that private entities like banks or mortgage brokers offer for real estate investment purposes. It conforms to guidelines set by Fannie Mae or Freddie Mac and it’s not backed by the federal government.

The process of obtaining conventional mortgage loans for investment properties varies from one state to another, but there are some standard requirements for the real estate investor to qualify. For example, property investors should expect lenders to require 20% of the income property’s purchase price as down payment. This large down payment means property investors are less likely to default and tend to have a more secure financial standing.

Furthermore, your personal credit score and credit history will determine your approval for conventional mortgage loans for investment properties and what kind of interest rate applies to the mortgage. 620 is typically the minimum credit score to obtain a conventional mortgage loan, and 740 is the minimum score for a good interest rate. Another obligation is that property investors must be able to afford their existing mortgage (if they have one) and the monthly loan payments on the income property. Therefore, most lenders of conventional mortgage loans for investment properties expect the real estate investor to have at least six months of cash set aside to cover these payments.

As we said, these requirements differ from state to state. So, make sure to check other requirements for obtaining conventional mortgage loans for investment properties in your local real estate market.

Hard Money Loans for Investment Properties

You can obtain hard money loans from professional individuals or companies that lend money specifically for real estate investing purposes. The best thing about these types of loans for investment properties is that they are faster to secure than conventional mortgage loans. Moreover, hard money lenders don’t look at the real estate investor’s credit score – instead, they evaluate the value of the income property you’re planning on buying to decide whether or not to grant you the loan.

Although this is one of the common types of loans for investment properties in real estate, it does come with a list of formalities, documentation, and guarantees. Another thing to keep in mind before approaching hard money lenders is that these are short-term (up to only 36 months!) and they come with higher interest rates (up to 10% higher than conventional mortgages).

As a result, these loans for investment properties are not suitable for any type of income property. Hard money loans are a good financing option for property investors who aim to buy cheap investment properties, renovate them, and quickly sell them for a profit and pay off the loan in due time (the fix-and-flip strategy). On the other hand, you won’t possibly be able to pay off a hard money loan on a long-term residential investment property in only 3 years.

Savvy property investors evaluate the profitability and after repair value (ARV) of the targeted income property before considering these types of loans for investment properties to ensure they don’t end up in a financial bind.

Private Money Loans for Investment Properties

Private money lenders are not professionals like hard money lenders. Instead, they are individuals who have extra money and want a good return on investment for their money. Private money lenders can be within your personal network (family, friends, neighbors, co-workers, etc.) or even other property investors and people you’ve met through your real estate investing career.

These loans for investment properties are great for property investors who were turned down by banks. They come with fewer formalities thanks to the close relationship between the real estate investor and the lender. Moreover, they don’t involve strict conditions, interest rates are typically lower, and the length of the loan is flexible and negotiable.

Before approaching private money lenders, a real estate investor should keep in mind that these loans for investment properties are secured by a promissory note or the existing mortgage on the income property. Thus, if property investors don’t pay off the loan in due time, private money lenders can foreclose the investment property.

Fix-and-Flip Loans for Investment Properties

While investing in long-term investment properties has its perks, it also comes with certain headaches. Thus, some property investors find flipping a more attractive alternative because it allows them to receive profits in a lump sum after selling the investment property rather than collecting rent checks each month. If this is your preferred investment strategy, a fix-and-flip loan is a more appropriate financing option.

These loans for investment properties are short-term loans that allow a real estate investor to renovate the investment property and put it back on the market as quickly as possible. Basically, fix-and-flip loans are hard money loans – thus, they’re secured by the investment property. Hard money lenders specialize in these types of loans for investment properties, but certain real estate crowdfunding platforms offer them as well.

Just like hard money loans, the upside of this financing option is that they’re easier to qualify for and obtain compared to conventional mortgage loans. While lenders still consider things like credit score and income, the primary focus is on the income property’s profitability. Thus, the ARV also determines if property investors can apply for fix-and-flip loans for investment properties.

On the other hand, the downside of using fix-and-flip loans is that it won’t come cheap. Depending on the lender, interest rates for these kinds of loans for investment properties can go as high as 18% and your timeframe for paying it back may be short – it’s not uncommon to have terms lasting less than a year! Closing costs may also be higher compared to the conventional financing option.

Home Equity Loans for Investment Properties

Drawing on your home equity is a great financing option for a long-term income property or a flip. Home equity loans for investment properties are a type of debt that allows homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowner’s equity and the property’s current market value. In most cases, it’s possible for a real estate investor to borrow up to 80% of the home’s equity value!

Using home equity loans for investment properties has its pros and cons, depending on the type of loan you choose. The lender will run a credit check and appraisal on your home to determine your creditworthiness. This financing option provides an easy source of cash and obtaining the loan is quite simple. Moreover, interest paid on home equity loans is tax deductible.

Home equity loans for investment properties are essentially a second mortgage, but they have higher interest rates than the first mortgage. As with any mortgage, if the real estate investor doesn’t pay off the loan, the lender gets to repossess the investment property and sell it to satisfy the remaining debt. Plus, if property investors default, lenders get to keep all the money earned on the initial mortgage and the home-equity loan.

Thus, home equity loans for investment properties are a good choice for responsible property investors. If you know exactly how much you need to borrow and have a steady, reliable source of income to repay the loan, this financing option is a sensible alternative.

Commercial Investment Property Loans

If you’re into commercial real estate investing, then the above-mentioned types of loans for investment properties are not suitable for you as they are residential investment property loans. You need another financing option – a commercial investment property loan!

The main difference is that to obtain these loans for investment properties, property investors need to have a solid business plan coupled with a good credit score. Lenders are concerned with the benefits and necessary work needed to improve the investment property in order to see cash flow.

There are different types of commercial investment property loans, each with specific terms and qualifications that make them suitable for certain types of commercial properties. For example, commercial hard money loans are short-term loans to purchase and renovate an owner-occupied commercial property. When going for these types of loans for investment properties, a commercial real estate investor should expect to cover a down payment of around 15% – 35% of the purchase price. This financing option typically lasts for 1 – 3 years with 8% – 13% interest rates.

Bottom Line

Finding the money to enjoy the perks of real estate investing doesn’t have to be an obstacle if you know where to look. As you’re comparing the different loans for investment properties, keep in mind that the best option depends on your personal financial standing, the type of income property you want to buy, and your goals as a real estate investor.

Investing In Single Family Rental Homes

Investing In Single Family Rental Homes 

If you’re a newcomer to single-family rental investing, one way to think about it is like an inflation-adjusting bond with an equity kicker.

The rental income fewer operating expenses generates current distributions — like the coupon on a bond — and rents can be adjusted annually, providing inflation protection.

Finally, the equity “kicker” comes in the form of building wealth as your tenant pays down your mortgage for you while the property can grow in value over time. It’s entirely possible to get a nice double-digit overall return on your equity over an extended holding period.

Purchasing and owning a single-family rental home is simpler than you might imagine.

Here are five tips to get you started:

1. Know your investing criteria first

With any investment, be it stocks, bonds or real estate, you need to know what your objectives are.

If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield.

An example of this may be a more expensive investment property in a good school district.

You’re going to get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk.

Often, lower-priced homes will be riskier, but you may get higher yields and potentially higher long-term returns.

2. Don’t limit your investment property search to where you live

Consider this: If you lived in Atlanta, you wouldn’t buy Coca-Cola stock simply be
cause its headquarters are local.

The same principle applies to real estate investing. If your primary residence, income property, and job are all located in the same area, you have a lot of concentrated risk and are more vulnerable to the swings of the local economy.

Diversification is just one reason to expand your investment property search. Another is access: If you live in an expensive urban or coastal area with relatively high home prices — the San Francisco Bay Area, for instance — finding an income property that’s cash-flow positive is going to be challenging, to say the least.

You won’t be able to find a great income property for $100,000 in Seattle, Denver, or Oakland, Calif., but you can if you focus on the Midwest, South, and Southeast.

3. Separate investing from operations

One of the appeals of investing in single-family rental homes is you can hire strong local property management firms to handle day-to-day management tasks of rent collection, repairs and maintenance, and leasing.

Over the past several years, property managers have adopted new technologies and business processes to manage homes more effectively for owners.

While some people do choose to self-manage, hiring a property manager can save you a lot of time and potentially money in the long run.

While property management companies typically charge between 7% and 8% of the rent, they manage properties for a living and can work to ensure the property is leased, in good condition, and the tenants are happy.

Additionally, using a local property manager effectively allows you to buy properties outside of where you live, as self-managing is difficult if the property is not nearby.

4. Real estate investing is a marathon, not a sprint

You might be familiar with the house-flipping reality TV shows in which a person buys a home, fixes it up, and sells quickly for a profit.

While that can be an effective way to make a one-time profit, it’s the exact opposite of how you should approach single-family rental home investing, which is about building long-term wealth. Instead, treat it like a nest egg.

In addition, don’t be overly influenced or reactive to short-term fluctuations in your rental property portfolio.

You may own a home for a few months and have to deal with a tenant moving out unexpectedly, but the next tenant might reside there for several years before you have another vacancy.

Look at this investment over a multi-year horizon and consider your overall outlays and inflows over that long time span.

If you buy a decent house in a decent area, the returns tend to be quite attractive over time and can add a nice counterbalance to other types of investments.

5. Take advantage of the tools and resources available to you

The single-family rental home industry currently totals $3 trillion, with 1 million homes trading hands among investors every year.

The investment opportunities are ripe, and never has it been less complicated for investors to buy and own homes outside their geographic location.

Oil & Gas Financing

Oil & Gas Financing

Winston Rowe & Associates specializes in oil and gas industry accounts receivable financing and asset-based lending. We are proud to support this growing industry and have specialists available and ready to answer your questions. They are eager to factor your company’s outstanding invoices, so that you can focus your energy toward more positive things such as payroll and new contracts.

As an experienced factoring company, Winston Rowe & Associates understands that the oil and gas industry is very busy, so we make this process as simple as possible. All you have to do is send us any outstanding invoices you are awaiting payment for, and we make sure you receive those funds the same day.

A few benefits of factoring with Winston Rowe & Associates:

  • Competitive pricing that is usually 50% lower than competitors
  • No monthly minimums
  • No long-term contracts
  • Professional and comprehensive accounts receivable finance and asset-based lending, including credit reviews and collection assistance upon request

US Growth Kicks Into High Gear For 2018

Real Estate Investing 2018

In the face of persistent fears that the world could be facing a trade war and a synchronized slowdown, the U.S. economy enters June with a good deal of momentum.

Friday’s data provided convincing evidence that domestic growth remains intact even if other developed economies are slowing. A better-than-expected nonfarm payrolls report coupled with a convincing uptick in manufacturing and construction activity showed that the second half approaches with a tail wind blowing.

“The fundamentals all look very solid right now,” said Gus Faucher, chief economist at PNC. “You’ve got job growth and wage gains that are supporting consumer spending, and tax cuts as well. There’s a little bit of a drag from higher energy prices, but the positives far outweigh that. Business incentives are in good shape.”

The day started off with the payrolls report showing a gain of 223,000 in May, well above market expectations of 188,000, and the unemployment rate hitting an 18-year low of 3.8 percent.

Then, the ISM manufacturing index registered a 58.7 reading — representing the percentage of businesses that report expanding conditions — that also topped Wall Street estimates. Finally, the construction spending report showed a monthly gain of 1.8 percent, a full point higher than expectations.

Put together, the data helped fuel expectations that first-quarter growth of 2.2 percent will be the low-water point of 2018.

“May’s rebound in jobs together with yesterday’s report of solid income growth and the rise in consumer confidence points to the economy functioning very well,” the National Retail Federation’s chief economist, Jack Kleinhenz, said in a statement. “Solid fundamentals in the job market are encouraging for retail spending, as employment gains generate additional income for consumers and consequently increase spending.”

The most recent slate of widely followed barometers could see economists ratchet up growth expectations.

Already, the Atlanta Fed’s GDPNow tracker sees the second quarter rising by 4.8 percent. While the measure also was strongly optimistic on the first quarter as well, at one point estimating 5.4 percent growth, other gauges are positive as well.

Andrew Hunter, U.S. economist at Capital Economics, said the ISM number alone is consistent with GDP growth of better than 4 percent, though he thinks the second quarter will be in the 3 percent to 3.5 percent range.

“With global growth set to hold up fairly well in the near term, this suggests that manufacturing activity should continue to expand at a solid pace,” Hunter said in a note. “That said, if the Trump administration continues to pursue protectionist policies and provoke retaliation from other countries, the export-focused manufacturing sector would be most exposed.”

Indeed, there are a spate of headwinds still out there, and trade continues to top the list.

The White House’s decision this week to forge ahead with steel and aluminum tariffs stoked fears that the administration could be its own worst enemy on the road to 3 percent-plus growth. While the tariffs themselves are expected to have minimal economic impact on their own, fears remain that they could spark retaliatory measures and, ultimately, an all-out trade war.

Exports make up just 12.4 percent of the U.S. economy, but S&P 500 companies generate about 43 percent of their sales internationally. That’s why markets tend to recoil every time the administration saber rattles about tariffs.

Still, manufacturers remain largely upbeat.

Respondents to the ISM survey released Friday relayed mostly positive sentiments. One typical statement, from an unidentified transportation equipment firm, said, “We are currently overselling our forecast and don’t see an end to the upswing in business,” while noting that “we are very concerned” about the tariff situation and “are focusing on alternatives to Chinese sourcing.”

Others noted price pressures, while an index that tracks order backlogs hit its highest level since April 2004. The pricing index also registered its highest since April 2011, as firms noted that inflationary pressures are building heading into the second half.

That’s consistent with news out of the trucking industry, which is reporting a shortage of drivers amid huge demand for delivery vehicles.

While inflation could prompt more aggressive action in the form of Federal Reserve interest rate hikes, PNC’s Faucher sees an economy resilient enough to withstand that and other headwinds.

“The tight labor market is going to lead businesses to invest in capital that makes their workers more productive. Then you’ve got stronger government spending with the increase in discretionary spending caps,” he said. “I think we’ll see growth better than 3 percent in the final three quarters of the year.”

The United States economy is growing at a record pace not seen since the 1950’s

Real Estate Investing

The U.S. economy is expanding at a 4.8 percent annualized rate in the second quarter, the Federal Reserve’s GDPNow forecast model showed on Friday.

The forecast has been climbing higher following the release of a series of good economic data. On May 25, the measure foresaw four percent GDP growth.

This rose to 4.7 percent Thursday and ticked even higher on Friday following the better than expected jobs report for May.

The Fed forecasts a big boost in private sector fixed investment, which includes capital investment in machinery, land, buildings, vehicles, and technology.

Earlier, the Fed saw this growing at 4.6 percent. But following the release Friday of a construction spending report from the U.S. Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, this was upgraded to 5.4 percent growth.

Consumer spending is expected to grow at a 4.6 percent rate, up from 3.4 percent prior to the Friday data releases.

5 Key Factors To Qualify For A Commercial Loan

Real Estate Investing

Financing is the lifeblood of small business, and the more you know about what lenders are looking for from borrowers, the better your chances of securing financing when you need it.

Let’s consider five factors that can have considerable impact on your chances of getting the right financing at the right time.

1. Credit Scores

You credit score is often the most important factor when it comes to qualifying for a small business loan.

Borrowers with good credit scores have a wider range of choices, with terms more favorable to long-term success.

To qualify for the best financing for your business, strong personal credit scores are generally a must, but did you know that your small business has a business credit score as well? Building up your business credit score will help legitimize your business in the eyes of banks and lenders, simplify your taxes, and open doors to trusting relationships with vendors and suppliers.

2. Cash Flow

Cash flow is defined as the total amount of money coming into and going out of your business. Lenders are not only interested in how much money you’re making, they also want to see (a) how you reinvest it back into your business, and (b) if you’re able to maintain cash reserves for a rainy day, versus spending it as soon as it comes in.

When applying for a commercial loan, banks usually want to see documentation for at least three months’ worth of your operating expenses. These should include any and all loan payments. If you’re new to business, prepare to show all of the statements you have available, because the more information you can share, the better the likelihood of getting a loan.

3. Time in Business

Traditional lenders keep a close eye on these numbers, and place a high value on the length of time your business has been up and running. It differs according to lender, but the minimum sweet spot for both traditional and alternative lending is usually around a year. Some alternative lenders require as little as six months, but less stringent requirements usually come at a cost—you’ll want to make sure you’re able to repay the loan quickly, otherwise the higher interest rates may hurt your business’ cash flow.

4. Collateral

Collateral can include deposits on a merchant processing or business bank account (a good option for new business owners), home equity, and business-owned equipment. Collateral is a strong motivator for paying your bills on time, but think long and hard before considering it an option. If you can’t repay the loan, the bank will take your assets to make up for its loss.

5. Social Media

Social media can be an excellent tool for reaching customers and establishing a brand, but the role it can play in obtaining financing isn’t always as obvious.

Although many banks have yet to consider social media a factor for the financial success of your business, a number of credit unions and alternative lenders like Kabbage and LendUp are looking to social media to see how favorably a business is viewed online, whether it’s trusted by its customers, and the extent to which it’s considered an authority by both customers and peers.

Commercial Construction Loans

Get a Commercial Construction Loan Quote Today

A commercial construction loan is a sum of money that is lent to a company that plans to construct a building and a business on a given site. Many companies that build strip malls, residential apartments and condos, and mixed-use buildings need to obtain a commercial construction loan to fund the construction – which can often be a lengthy process.

These loans can often be risky for banks and difficult to obtain. Yet, if you understand the risks involved and the application process, you shouldn’t encounter any major surprises.

  1. What is a Commercial Construction Loan?

Commercial construction loans are generally loans that are submitted through a local bank, insurance company or finance institution that specializes in such loans. These institutions generally have a solid grasp of the local markets and can analyze a company’s financial situation as well as the value of the land. The land value can be difficult to analyze because there are generally no businesses on the land prior to the loan. Thus, the bank needs to look at other factors to determine if the investment is sound.

The bank might analyze other businesses in the area as well as the profits and losses for those businesses. Usually, the bank will look at other businesses in the loan applicant’s category of work to determine the likelihood of profitability.

  1. Who needs a Commercial Construction Loan?

Any commercial company that needs to borrow money to build on a site that does not have a current structure will need to seek out a commercial construction loan. This loan may cover costs that include cost of the land, cost of building supplies and cost of construction.

Generally, commercial companies that do not qualify for an investment real estate loan will seek out a commercial construction loan.

The commercial construction loan process can differ significantly from the investment real estate loan process because the bank does not have any previous information to take into account when making the decision. The bank needs to make a decision regarding the loan based on something called the real estate pro forma, which is simply a projection of the expected income of the business. This is similar to a business plan, yet the real estate pro forma estimates how much revenue the property can attract.

A commercial loan has added risks for the bank providing the loan. Many factors can affect the repayment of the loan, such as added construction costs, delays and unforeseen issues in the business. The business may not see a profit in several years because of these factors.

Therefore, the bank must look at all angles of the process. The bank might look into the company’s contractor, building team and business team before making a decision. The past, present and future conditions of the business’s market will definitely be analyzed before a decision can be made.

  1. How to Obtain a Commercial Construction Loan

The process to obtain a commercial construction loan can be lengthy but efficient. The first step is for the company to fill out and submit a loan through a bank that offers commercial construction loans. Various bank executives will look at the loan and go over the application. The bank will then internally give a yes or no answer. The bank manager may then look over other factors to determine the risks of the loan and the stability of the company’s market. If the loan looks good, the bank manager will approve the initial application.

The bank’s underwriter will then set the terms of the loan in writing. These are simply preliminary terms that the company can look over to ensure the terms meet with the company’s expectations. The company applying for the loan reviews the bank terms. If everything looks good, the company can then sign the terms and approve the loan on its end. This is not a binding contract, yet it sets the stage for the full deal.

The bank underwriter draws up the full and official loan agreement with terms to submit to the company. The company looks over the final agreement and signs it. This contract is the binding contract.

Once both parties have signed the contract, the agreement terms begin. The loan administrator funds the loan to the terms and agreements. Construction can finally begin, and the company can begin making payments as agreed upon in the contract.

  1. Commercial Construction Loan Terms

Generally, there are two types of commercial construction loan terms: Short-term financing and long-term financing.

Short-term financing is available to a company before a certain point in a project. It can be up until the project is finished or up until the project has reached a certain point. This is generally a point in the project before the construction is complete and before the building is “open for business.” A short-term loan can be available for merely part of the project as well.

Long-term financing is available to companies that want to begin repaying the loan after the project is finished. This can either be once units begin renting within the structure or once the project has reached a maturation date agreed upon by the bank and the company in the original agreement.

A less common type of construction loan is the mini perm loan. This type of loan is a combination of short-term and long-term financing and can assist a company in refinancing and create an operating history.

  1. Commercial Construction Loan Requirements

Since construction loans can be very risky for banks, the terms may be much stricter than most commercial loans. Some of the requirements needed to secure the loan include asking the company to contribute a minimum percentage of the costs for construction (often 20 to 30 percent of the total cost).

The bank may also need other information, like copies of the company’s tax returns and other financial documents. Companies should also plan to submit lists of current real estate holdings and the financial information for these holdings. The bank may also ask for a copy of the company’s pro forma or business plan for the construction project.

A company is more likely to be approved if a guarantor is included in the project. Like other loans, the company also needs to submit forms that include the projected costs of the project. The bank may ask to see specific plans, including engineering plans. Often, banks will contact the contractor of the project to assess the scope of the project.

Gross Rent Multiplier

Gross Rent Multiplier

Suppose you want to buy an apartment building or obtain a commercial loan on a multifamily property.  You can quickly compute the value of any multifamily property, if you know that property’s Gross Scheduled Rent and the correct Gross Rent Multiplier for that area.  The Gross Rent Multiplier is a number, usually between 3 and 11, by which  you multiply the Gross (Annual Scheduled) Rents to obtain a rough estimate of the value of an apartment building.  Expressed algebraically:

Value of an Apartment Building = Gross (Annual Scheduled) Rents x Gross Rent Multiplier

Example #1:

You’re in a car with your commercial broker, and the two of you are driving around a good rental area in your city, looking for an apartment building to buy.  You come to a decent looking building that is for sale.  Your commercial broker looks up the Gross (Annual Scheduled) Rents and tells you that they are $263,000 per year.  “What’s the going Gross Rent Multiplier for this area?” you ask him.  Around seven,” he replies.  You multiply $263,000 by 7 to compute a market value of $1,841,000.  “What’s the seller asking?” you ask your broker.  He replies, “$2,670,000.”  “Ha-ha,” you laugh.  The seller is on drugs if he thinks that he is going to get that much.”  You find another nice building.  “What are the Gross Rents of this property?” you ask.  “$301,000,” replies your commercial broker.   You multiply $301,000 times 7 to arrive at a market value of $2,107,000.  ‘What’s the seller asking?”  “$1,995,000.”  “This looks like a decent value.  Let’s get out and walk around,” you reply with interest.

Example #2:

You’re a commercial mortgage broker.  A borrower calls you looking for a $3 million multifamily loan.  He owes $2,850,000 on the property, and the loan is ballooning.  “What’s the building worth?” you ask the borrower.  “$4.25 million,” he replies defensively.  Instinctually your radar flashes a warning.  “He’s lying,” you think to yourself.  “What are the gross rents on the building?” you ask the borrower.  “$473,000,” he replies guardedly.  You’ve lived in Las Vegas your entire life, and there’s a ton of vacant land surrounding the outskirts of the city.  The Gross Rent Multiplier in Las Vegas has never exceed 5.5.  Five point five times $473,000 equals just $2,600,000.  Just $2.6 million?  Heck, the borrower owes $2.85 million.  This deal is a loser.  “Who has turned you down on this deal already?” you ask.  “Boston Nation, Pebble Stream Capital, and San Diego Apartment Express.” he replies, naming the three most aggressive multifamily lenders in the market.  “Can you bring a load of cash to the closing table?” you ask.  “No,” he admits.  “Do you own some other property that we can refinance?” “No, just my house, and its has an 80% LTV loan on it.”   “I’m sorry, Mr. Borrower, but I can’t help you.  You need to do a short sale.”  By understanding and knowing the Gross Rent Multiplier, you just saved yourself six weeks of wasted work.

 

Debt Ratio and Commercial Loans

The Debt Ratio is used in commercial mortgage underwriting to make sure the borrower is not overloaded with personal debt.

Example:  

First Careless Bank makes a $400,000 loan to John Loser to purchase a 6-unit apartment building in the neighborhood.  John puts down $100,000 – money that he was given by his aging grandmother to help him get started in the real estate investing business.

The bank doesn’t bother to check out John’s personal financial condition, which is dismal.

John makes just $38,000 a year as a delivery driver for a small chain of flower shops.  He has over $32,000 in credit card debt, a $16,000 car loan, and over $175,000 in student loans.  John dropped out of college with less than a year left to get his degree in nursing.  At first all goes well with the investment.  His net income from the property is $4,000 per month, and his new mortgage payment is just $3,100.   The extra $900 per month in positive cash flow helps him barely keep up with his bills.  Then one of the tenants loses his job and stops paying rent.  When John moves to evict him, the tenant gets angry, rips up the apartment, and then disappears in the middle of the night.  John has no choice but to take the money he had earmarked for repairs and use it to repair the vandalized apartment unit.  Completely out of cash, John can’t afford a painter to cover up some recent graffiti or to repair a huge new crack in the parking lot.  With the apartment building showing some wear and tear, he has trouble finding a new tenant.  Five weeks go by before a new tenant moves in, and the highest rent that the new tenant is willing to pay is $150 less per month than the prior tenant.   Now John is really in trouble because if he doesn’t catch up on this car payments, the bank is going to “pop” the car.  Once again he uses the money earmarked for repairs to pay his personal bills.  Even more necessary repairs go unmade, and in frustration, two more tenants give notice.  The downward spiral continues until the bank forecloses on a run-down, half-empty apartment building with horrible tenants.  This all happened because John was up to his eyeballs in personal debt when he applied for the mortgage to buy the six-plex, and he had to use the money budgeted for repairs to cover his personal bills.

The Top Debt Ratio:

The Top Debt Ratio is used to make sure that the borrower is not trying to make payments on a personal residence that is too much house for him.  It is defined as follows:

Top Debt Ratio = First and Second Mortgage Payments / Gross Income

Experience has repeatedly shown that whenever a borrower spends more than 25% to 28% of his gross income on his housing expense, he is seriously overextended.  This being said, there are, of course, times when an underwriter needs to use some common sense.  One is where the borrower has recently graduated with a desirable college degree, and his income in the future is very likely to increase.  For example, suppose a young woman graduates from Berkeley with a degree in computer science.  She is working at her first programming job, and now she wants to buy herself a starter condo in Silicon Valley.   Even though the condo is only 800 square feet, because of the location, its still very expensive – $450,000.  If her Top Debt Ratio is 29%, her loan probably should still be approved, especially if she is not burdened with a lot of personal debt.

The Bottom Debt Ratio:

The Top Debt Ratio is used to make sure that the borrower is not trying to make payments on a personal residence that is too much house for him.  It is defined as follows:

Bottom Debt Ratio = (Mortgage Payments + Personal Debt Payments)  / Gross Income

Experience has repeatedly shown that whenever a borrower spends more than 33% to 36% of his gross income on his housing payments and personal debt payments, he is seriously overextended.  Here personal debt payments include credit card payments, personal loan payments, car payments, and student loan payments.  It does not include income taxes or utility payments.

Reality:

In real life, commercial real estate lenders almost never calculate the personal debt ratios of a commercial mortgage borrower.  The overwhelming consensus is that if the borrower is wealthy enough to own commercial-investment property and he has good credit, his personal finances are almost certainly in order.  While most commercial lenders will gather a financial statement and two years’ tax returns on each borrower, few Loan Committees spend more than 30 to 45 seconds flipping throughout them.

Hypothecations: Loans Against Mortgages Receivable

Hypothecation

Suppose a wealthy commercial real estate investor owns a commercial building free and clear. A potential buyer makes a good offer on the commercial building, subject to his obtaining a new commercial mortgage loan at 7% from his bank for 75% of the purchase price. The wealthy commercial property owner accepts the offer.

Unfortunately, the commercial lending world is in turmoil right now. Banks are afraid to make new commercial loans for more than around 62% loan-to-value. The bank turns down our borrower’s 75% LTV commercial loan application, and the deal looks like it is going to fall apart.

Then the commercial real estate broker has an idea. He convinces the wealthy owner to carry back a commercial loan for 75% of the purchase price at 7% interest. After all, the wealthy investor owns the commercial building free and clear. The buyer puts down 25% of the purchase price in cash, and the deal closes.

Now let’s scroll forward four years. The stock market has tanked, and the wealthy investor is not so wealthy anymore. He has lost 70% of his stock investments, and now he desperately needs cash to fix up an empty office building that he owns.

He takes his $750,000 first mortgage note that he owns to a number of commercial mortgage companies that specialize in discounting commercial notes. (By the way, if you ever want to sell a commercial note at a discount, please call me,George Blackburne, at 574-360-2486.)

Because his commercial loan has a 27-year remaining term and the note rate is only 7%, he learns that he will have to discount it by close to 28 points in order to sell it. He would have to give up over $200,000 if he tried to sell his note at a discount; and he really only needs the money for about 18 months. He is going to use the money to pay for the tenant improvements on his vacant office building. Once the new tenants move in, he’ll be able to easily refinance the building and pull out lots of dough.

The investor therefore calls his clever commercial real estate broker, and the broker tells him to just hypothecate his first mortgage note. A hypothecation is a loan secured by a mortgage receivable. It’s a loan secured by a loan. In this case, the investor will be pledging his $750,000 first mortgage note as security for a new hypothecation loan of $500,000.

The advantage of hypothecation loan, compared to selling a mortgage receivable at a discount, is that the investor won’t have to discount his perfectly performing first mortgage note by over $200,000. He’ll just pay a modest 3 point loan fee on the new, smaller $500,000 loan. The interest rate on the hypothecation, typically around 12%, is admittedly higher than what a bank would charge for a new commercial loan, but banks are not really lending right now. In addition, our investor really only needs to borrow the money for about 18 months, until his new tenants move into his vacant office building and he refinances the building. It’s far better to pay 12% on $500,000 for 18 months than to suffer a $200,000+ discount if he tries to sell his commercial loan.