Commercial Loans

Commercial Loans - Commercial Financing is underwritten on a case by case basis. Every loan application is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages.

Financial Analysis
A key component in making an underwriting evaluation is the debt coverage ratio (DCR). The DCR is defined as the monthly debt compared to the net monthly income of the investment property in question.

Loan to Value
Most commercial lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either a bank or mortgage company.

Credit Worthiness
For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations, business performance and credit ratings will be evaluated with a proven track record.

Property Analysis
Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the mortgage payment(s). For the sake of simplicity, let us assume that there is only one mortgage on the property:
$500,000 First Mortgage
11% Interest, 30 years amortized
Annual Payment (Debt Service) = $57,139

Then:
DSCR = Net Operating Income (NOI) = $65,000
Total Debt Service $57,139
DSCR = 1.14

Commercial loans are for the most part a little harder to get than a residential loan.

Because higher loan amounts are often associated with Commercial Loans, some commercial lenders may require two appraisals from different certified appraisers if the loan amount exceeds a threshold limit. Certain lenders also require the service of their own approved appraisers.

Commercial properties are those other than a single family residence, 2-family, 3-family, or 4-family home. Properties that are 5 units or more, eventhough all units are of residential purposes, are considered commercial properties and require commercial financing. "Mixed-use" properties, those with a commercial unit and one or more residential units on the second/third floor, are also financed with commercial loans.

Appraising a commercial property is often more costly than appraising a residence of equal size

Another name for the Debt Coverage Ratio in the context of commercial mortgages is theDebt Service Coverage or Debt Service Coverage Ratio

The most important ratio to understand when making income property loans is the debt service coverage ratio. It equals Net Operating Income (NOI) divided by Total Debt Service.