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Commercial loan underwriting guidelines come down to cash flow ( DCR), loan to value (LTV), credit worthiness and property analysis. Although the process to evaluate a potential commercial mortgage is basically the same from one bank the next, their various appetite for both risk and minimum rates of return are what separates one bank from the next.

Underwriting Commercial Loan Cash Flow

Cash flow is paramount to underwriting commercial loans. Within the industry the cashflow analysis is refereed to as the Debt Coverage Ratio ( DCR). For both owner occupied and investment transactions underwriters normally want to see ratio’s above a 1.20. In other words, for every $1 of mortgage debt the property or business has to have $1.20 of net income to meet the mortgage payments.

Debt coverage ratio minimums vary from one lender to the next, property type and occupancy (investment or owner occ). “Riskier” property types such as hotels or car washes will be required to have higher cash flow levels, ie DCR at or above 1.3.

Credit Worthiness

The borrowers personal and business credit worthiness is also important and will be heavily scrutinized. Personal credit scores have become a bigger issues as the acceptance of the three bureau have become widespread. D & B’s as well as other measures are normally used to asses the creditworthiness of businesses that are involved.

Property Analysis Commercial Underwriting
Fair market rent and fair market value is heavily measured. Condition, age, appearance, town population, market trends as well as other more property type specifics are examined.

Commercial Underwriting – Loan to Value

Loan to value is simply the value of the subject property vs the loan amount. I.e if the property is worth $2,000,000 and the loan amount is $1,500,000 the LTV is 75%. This is a huge issue within commercial loan underwriting and a big separator between lending institutions. Some lenders will get very aggressive with this while other will be very conservative.

The property type has a major influence on loan to values that are offered on commercial loans. For example restaurant loans will normally be capped at 65% while more general purpose properties such as retail will be limited to 75%.

Commercial underwriters will give more leeway to buildings that are owner occupied vs. investment properties. Loan to value on purchase can go as high as 90% on owner occupants vs 75% on investments, for example.

Author: Jeff Rauth
Article Source: EzineArticles.com
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There are still viable options for restaurant financing in the market today. Borrowers however should realize and accept that the choices have become more limited, than they where just 6 months ago. For example, most conventional and or conduit type loans for restaurants are now gone.

Instead, borrowers should be focused on portfolio lenders, i.e. banks or lenders that hold the debt on their balance sheet. This is the opposite of what we have seen in the last decade as most restaurant lenders packaged and sold their loans off onto the secondary market and thus rid themselves of the loan in exchange for a split.

Portfolio lenders can be difficult to find though. And they don’t really advertise themselves as such. Borrowers should be prepared to call many banks to find sources that are set up as portfolio lenders and that are willing to consider a special purpose property like a restaurant. Many banks are shying away from this building type. We’re occasional are asked why.

The reason boils down to the difficulty in recollecting the bank’s capital in case of borrower default. When a borrower defaults on a loan, the bank has to go through the foreclosure process, than they have to sell the property on the open market to recoup their capital. Because the building itself was designed as a restaurant it cannot adequately be used for anything other than a restaurant – thus limiting their pool of potential buyers, making it harder to sell.

As far as terms, restaurant loans are almost all now quarterly adjustable. However rates are very strong due to Prime being as low as it is (currently at 4%). We are seeing most restaurant loans in the 6%’s now. Via government sponsored loan programs borrowers can still expect 85% financing on purchases and up to 85% on refinance transactions.

Author: Jeff Rauth
Article Source: EzineArticles.com
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