How to Qualify for a Commercial Re Loan
Liquidity requirements vary among commercial banks and commercial real estate lenders. Most require, at a minimum, six to nine months of liquidity shown on the commercial real estate investor’s personal financial statement. Liquidity is calculated by dividing the total cash on the commercial investor’s personal financial statement by the proposed monthly mortgage payment (debt service) for a new commercial real estate loan.
Conservative banks may require up to ten percent of the commercial real estate loan amount.
Commercial Loan Specs
When preparing to qualify for a commercial real estate loan, a potential commercial property investor will need to gather important details about the “specs” or parameters of the identified commercial real estate property asset class, such as the NOI (net operating income = gross income – operating expenses.)
The loan to value (LTV) will be calculated by the estimated value of the asset class divided by the proposed loan amount. Third, the commercial real estate lender will need to determine the property’s debt service coverage ratio (industry standard of 1.25) for determining the proposed commercial real estate loan amount. The commercial bank or lender will need to see 25 cents on the dollar ROI to cover their margin for risk.
A commercial real estate investor’s net worth is a key factor for most institutional banks lending on commercial real estate.
When presenting a preliminary loan package to a commercial real estate lender, you will need to prepare a one or two page executive summary of your commercial loan request. Include a pro forma of income and expenses that can be justified by a minimum of two or more years of historical operating statements. In addition, an investor will be required to provide two full years, plus the current year-to-date, operating history of the commercial real estate property.
If the targeting commercial investment has leases in place, a current rent roll will be required. We have included a rent roll form on our application page.
Photos of the commercial real estate property will be necessary, and we recommend the front, sides, back and street views.
A commercial real estate investor’s personal and business information will be required, especially for loans that require a full recourse (the borrower is financial responsible for the loan payments and repayment of the debt service.) As a commercial real estate investor, be prepared to provide a personal financial statement, a real estate owned schedule, and verification of liquidity by your CPA or real estate attorney, with supporting tax returns, both personal and business for the last two years.
Finally, a commercial investor’s executive summary should include a resume or business portfolio summary outlining previous real estate investments, ownership of business and entrepreneurial entities (LLC, INC., TRUSTS, REIT, etc.) stocks, bonds, and last but not least, property management and construction/development experience.
Letter of Interest
A commercial real estate lender or bank will issue an LOI (Letter of interest) which is an estimated loan quote of the terms and proposed interest rate based on the information a commercial real estate investor has provided and verified by the commercial underwriter.
A letter of interest will be valuable when negotiating a commercial real estate purchase agreement offer. This shows the commercial real estate seller that a borrower has been pre-approved for a loan amount and substantiates the credibility of the commercial investor.
Visit our application page and fill out the items discussed in this article to pre-qualify for your next commercial real estate purchase or commercial loan refinance or equity line of credit.