Understanding Commercial Loan Due Diligence & Underwriting

[Winston Rowe]

WINSTON ROWE & ASSOCIATES WEBSITE

Winston Rowe & Associates is a no upfront fee commercial real estate advisory and due diligence firm specializes in the financing of commercial real estate transactions.

For more information about Winston Rowe & Associates and their commercial loan programs, they can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com

They have prepared this article to provide a general overview of the due diligence and requirements for commercial real estate.

Commercial loan financing is underwritten on a case by case basis, with every loan application as unique and evaluated on its own merits with an approach and methodology considering worst case scenarios.

The Application:

All commercial loans begin with some sort of an application that the prospective borrower must complete. It’s critical that borrowers do not misrepresent any material facts pursuant to the proposed transaction. This will only result in your loan request being declined down the road when the loan file enters the due diligence phase.

Common misrepresentations made by applicants are; questionable appraisals, source of down payments, personal credit scores, environmental issues, prior offers or letters of interest, use of proceeds, monies invested to date and bankruptcies.

If your honest and upfront about the negative issues concerning your proposed transaction. Most professionals in the commercial lending business will work with you in providing the best options available.

Debt Service Coverage Ratio (DSCR):

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. Using a DCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment.

Typically they will determine the DCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income.

The higher the DCR ratio is the more conservative the lender. Most lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of income generated). Anything less then a 1:1 ratio will result in a negative cash flow situation raising the risk of the loan for the lender. DCR'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 DCR's when evaluating a loan request. Make sure that you are familiar with a lender's DCR policy prior to spending money on an application.

Ask them to give you a preliminary review of the investment property that you want to purchase. Information is free, mistakes are not.

Loan to Value:

Unlike residential lending, commercial investment properties are viewed more conservatively.

Most 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.

Some commercial mortgage lenders will require more than 20% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property. Loan to value is the percentage calculation of the loan amount divided by purchase price.

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 an appraisal. In the event that the 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.

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.

As with all lending, business and personal credit plays an important role. As business professionals we are all taught to shop for the best deal in the marketplace,

This is not true when applying for business credit. If you submit your loan request to too many potential lenders in a short period of time (less than a year), you will be deemed a high risk and most likely have your loan request declined or be forced to pay very high interest rates. This creates a high risk profile because most bank fraud is done through the shot gun approach.

If this may be an issue for you, let your prospective lender know upfront and provide them with all past offers for financing that you received with a letter of explanation. Lenders are business people like you and will review the reasons for rejecting valid and invalid offers for financing.

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.

Report Costs:

Every commercial real estate transaction requires reports which include; appraisals, environmental, certified financials, property inspection and engineering just to name a few.

Reporting costs are not generally part of the loan amount, so expect to pay for these in advance to the funding of your commercial loan.

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.

Winston Rowe & Associates provides no upfront fee commercial loans in the ensuing states.

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine,  Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia,   Washington, Washington DC, West Virginia, Wisconsin, Wyoming