How To Underwrite Commercial Loans
Table of Contents
- INTRODUCTION - Commercial real estate finance is not an endless subject. You can master it.
- THREE RATIOS - Most of commercial underwriting can be reduced to just three ratios.
- THE LOAN-TO-VALUE RATIO - Obviously the collateral needs to be worth more than loan amount.
- DEBT RATIOS - Don't you have to carefully compute the borrower's personal budget? Maybe not.
- DEBT SERVICE COVERAGE RATIO - This ratio is the Big Kahuna. You need to master it.
- LOAN CONSTANTS - It matters greatly what interest rate and amortization you use.
- HOW MANY DOLLARS CAN I GET? - This is the single most important lesson in this whole manual.
- OPERATING EXPENSE RATIO - Lenders are not going to let you fudge on the expenses.
- NET LEASE VERSUS FULL SERVICE LEASE - Not all commercial leases are the same.
- HOW TO PREPARE AN APARTMENT PRO FORMA - A Pro Forma Operating Statement is like a budget.
- SAMPLE APARTMENT PRO FORMA OPERATING STATEMENT - Here is what a real Pro Forma looks like.
- HOW TO PREPARE A COMMERCIAL OR INDUSTRIAL PRO FORMA - If the property is an office building or industrtial building, here's what to do.
- SAMPLE TRIPLE NET PRO FORMA OPERATING STATEMENT - Lots of buildings are leased where the tenant pays all of the expenses.
- SAMPLE PARTIAL NET PRO FORMA OPERATING STATEMENT - What do you do when some of the units are triple net and others are not?
- RESERVES FOR REPLACEMENT - You must set aside some money to replace things like the roof and the HVAC system.
- CAP RATES - What kind of return is the owner earning?
- NET-WORTH-TO-LOAN-SIZE RATIO - You can't borrow $100 million if you are only worth $10.
- TOXIC LIABILITY - Better not buy a property that is polluted.
- THE CONSTRUCTION LOAN PROCESS - How do you convince a bank to make a commercial construction loan?
- CONSTRUCTION COST BREAKDOWN - How does a bank figure out the total cost of a construction project?
- LOAN-TO-COST RATIO - The bank is not going to take ALL of the risk on constructing a project.
- SITE INSPECTIONS - Banks do a quick drive-by first.
- APPRAISERS - Who do banks use to appraise commercial properties.
- LOAN PROPOSALS - What is a Term Sheet?
- FHA 223(f) APARTMENT PROGRAM - The Federal government encourages the renovatnion of older apartment buildings.
- LOAN PLACEMENT MATRIX - Which kind of commercial lender makes which kinds of deals.
- DOCUMENTS TO GATHER ~ COMMERCIAL/INDUSTRIAL - Here's what you need to round up for an apartment deal.
- DOCUMENTS TO GATHER ~COMMERCIAL/INDUSTRIAL - Here's what you need to round up for a commercial-industrial deal.
- HOW TO PREPARE A PROPOASAL SUBMISSION PACKAGE - Here is what a commercial lender needs to see initially.
- GLOSSARY - There are lots of fancy terms in commercial real estate finance.
Updates to Underwriting Manual
- INTRODUCTION TO CUMULATIVE UPDATE OF UNDERWRITING MANUAL - Things change slightly ove the years.
- COMMERCIAL CONSTRUCTION LOANS - Here are more training articles on the construction loan process.
- THE PROFIT TEST - This test makes sure that the developer will actually make money constructing the project.
- LOAN-TO-VALUE RATIO - Commercial lenders reduce their loan-to-value ratios when they have soured on a property type.
- MEZZANINE LOANS - After the Great Recession, life companies, conduits, and banks let debt funds take the riskiest piece.
- THE LOAN-TO-COST RATIO - Banks require average developers to contribute lost of equity these days.