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Commercial Ratios & Analysis -- A Borrowers
Guide |
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COMMERCIAL MORTGAGE
LENDING RATIOS
Commercial Real Estate lending can be boiled down to the
results of three ratios:
- Loan-To-Value Ratio
(LTV)
- Personal Debt
Coverage Ratio (PDCR)
- Debt Service
Coverage Ratio (DSCR)
1. The “Loan-To-Value Ratio” (LTV) is defined
as follows: “Total Loan Balances (1st mtg+2nd mtg) /
Fair Market Value” (as determined by appraisal).
Commercial Investment
Properties are viewed more conservatively than
residential property. Many Lenders will require a
minimum of 25% to 35% of the purchase price to be paid
by the buyer. However, some lenders will loan up to 80%
of the purchase price to buyers based upon credit
worthiness and property analysis.
What a Lender will do is
subject to the quality of the buyer and property. If you
know what a lender's LTV requirements are, you can also
calculate the loan amount by multiplying the purchase
price by the LTV percentage.
Keep in mind that the
purchase price must also be supported by a property
appraisal. In the event that the property appraisal
shows a value less then the purchase price, the Lender
will use the lower of the two numbers to determine the
loan that will be made.
2. The “Personal Debt Coverage Ratio” (PDCR)
is the second ratio that Lenders use when underwriting a
Commercial Loan. The Personal Debt Ratio compares the
amount of bills that the borrower must pay each month to
the amount of monthly income he earns.
More precisely, the
Personal Debt Coverage Ratio is defined as: “Monthly
Personal Debt / Adjusted Gross Monthly Personal
Income”.
PDCR's are set by
property type and what a Lender perceives the risk to
be. Today, apartment properties are considered to be the
least risky category of investment lending. As such,
Lenders are more inclined to use smaller PDCR's when
evaluating a loan request. The higher the PDCR ratio,
the more conservative the Lender. Your
MortgageMac Account Executive
can assist you to understand the PDCR policies of each
of the major commercial lenders.
3. The “Debt Service Coverage Ratio” (DSCR)
evaluates the debt coverage of the property itself. The
Debt Service Coverage Ratio is defined as: “Net
Operating Income / Debt Service”.
“Net Operating Income” is
the income from a rental property after deducting for
real estate taxes, fire insurance, repairs, and all
other operating expenses.
“Debt Service” is the
mortgage payment on the property.
Most lenders insist that
this ratio “exceed 1.1”. A debt service coverage ratio
of “less than 1.0” would mean that the property did not
produce enough net rental income for the owner to make
the mortgage payments without supplementing the property
from his personal budget.
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.
Tenant Analysis
A thorough analysis of the current tenant (s) will be
conducted. Lenders will evaluate the financial strength
of the tenant (s), how many years are left on the current
lease (s), and other relevant information regarding the
tenant (s).
Credit Worthiness
In many cases the personal credit of principals will be
evaluated. For corporations, business performance and
credit ratings will also be evaluated.
INITIATING YOUR
COMMERCIAL LOAN PROCESS
To initiate your commercial lending application process,
the following information is required by most
financial institutions and your
MortgageMac Account Executive can assist
you in preparing this information:
- Property overview
- Copy of
Purchase/Sale Agreement (unless a refinance)
- Background summary
on tenants including how many units operated
- Borrower’s
background summary or resume
- Current personal
financial statement of principal borrower (s)
including real estate with all schedules
- Last two years
personal federal tax returns from the principal
borrower (s) – including all schedules
- Last two years’
corporate tax returns if self-employed or own more
than 25% of corporation, and year-to-date Profit and
Loss statement
- Any relevant 1031
information you have
LOAN PROCESSING
The bulk of the energy
spent "processing" a loan is merely an attempt to verify
the numbers that
go into the numerator and denominator of these ratios.
- Loan-To-Value Ratio
(LTV)
- Personal Debt
Coverage Ratio (PDCR)
- Debt Service
Coverage Ratio (DSCR)
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