Getting a Commercial Loan

To expedite your loan request for apartment or commercial properties, you need to have the following information available. This information will be invaluable for the lender so they can give you the best possible loan quote. Please understand that the information that you will be gathering, although somewhat laborious, is very important for lender's pre-review. This information will also be needed to proceed with the formal loan so all is not in vain.

Proposed Loan Overview
1.	Property type:   Apartment, office building, retail, etc. ____________________
2.	Property address: _______________________________________________
3.	Reason for loan:   Refinance: __________   Purchase: _________
4.	Requested loan amount: ______________________
5.	Your Estimate of property value: ______________
Brief Property Description
6.	Year built: ____________
7.	Unit mix (singles, one bedroom, etc.) or type of office space: _____________________________________________________________
8.	Number of stories: ______________________
9.	Frame/stucco/block wall construction: ________________________________
10.	Amenities (pool, spa, rec.room, parking facilities and number of spaces) _____________________________________________________________
For Refinance
11.	Date acquired: __________________
12.	Existing Lenders' Name: ________________________________________
13.	Loan balance and due date: ______________________________________ (Special note:  Some loans, primarily Fixed Rate loans, have prepayment provisions.  Review the Note to verify there is none, as a prepayment cost could represent 1% or more of the loan amount)
14.	Subordinate Loans (same as above): _________________________________ _____________________________________________________________
For Purchase
15.	Proposed purchase price: _______________________
16.	Estimated loan terms (down payment, seller carry back, etc.): _____________________________________________________________
17.	Estimated closing date: ____________________________________________
Borrower Information
18.	Borrowing entity (Individual, Trust, Partnership, Corporation): _____________________________________________________________
19.	Borrower's credit (good, etc.): ______________________________________
Projected Income / Expense Information
20.	Provide a current and complete rent roll (list all units or spaces, tenants name, size, date occupied, rent or lease expiration, utilities paid, concessions): _____________________________________________________________
21.	Provide Year to Date Income and Expense statement.
22.	Provide past two to three years Income and Expense statements.   Can be from your Schedule E's, K-1's.   If unavailable, reconstruct the information a separate form (please understand that information you provide will be needed for the formal loan application, so ensure that the data is accurate).   You may use the attached forms as a guide if desired.

If needed, be ready to explain the income stream.   Break out the Gross Potential Income (as if 100% occupied) from other income such as security deposits, late fees, laundry income, etc.   Some of the income you receive can be used for the loan and some may not be used.   However your lender will need this information.

Be ready to explain any vacancy or rent loss and / or rental concessions that may be given to prospective tenants.   If you are aware of the vacancy rate in your area, you may want to provide that information to your lender.   Most lenders have a good idea where projects should operate, but you may know specific details that will help you and your lender.

Once you have the income / expense data, be ready to explain major variances:

A.      Large change in the income from year to year.

B.      Large changes in expenses from year to year (such as capital improvements; roof replacements, exterior painting, etc.).  One time capital expenditures for roof replacements should be called a Reserve or Replacement item.  The lender can deduct this amount from their analysis as it is not considered a yearly expense.

All lenders will require the above information as well as some photos of the project.  Please understand that accurate information is very important especially during the initial stage of the loan evaluation process.  The better the data, the better the loan quote.

Firm Commitment:  An actual document that once signed by all parties is a contract or obligation (it has teeth that can bit)

Conditional Commitment:  Subject to certain requirements and unless all parties agree or comply to requirements (Example: Must not exceed 75% loan to value) the loan may never be funded.

Letter of Interest:   (LOI) or Loan Quote:   A form that articulates the proposed term and condition of the loan, loan fees and cost associated to obtaining the loan (The strength of this document is minimal and is not binding to any party, it is just a reasonable expectation of the anticipated loan terms).

Loan to Value (LTV):   Most lenders quote a maximum loan that their specific company can provide.   However, your property may not achieve that maximum.

Gross Potential Income:  Lender will determine the Gross Potential Income as if the property is 100% occupied.

Income from other Sources:  Lenders will determine if there is any income from other sources that can also be used for the income stream.

Vacancy / Collection Loss:   Lenders will determine the vacancy and collection loss of your project as compared to the market.   In most cases, a minimum of 5% will be used regardless if your project operates at less than 5% for vacancy or collection.

Effective Gross Income:   Gross Potential Income, plus other income, minus Vacancy / Collection loss.

Stabilized Expenses:   Amount determined by your lender as stabilized over a long period of time.

Reserves for Replacement:   An amount determined by the lender and used to establish Stabilized Operating Expenses.  The amount covers roof, appliance, flooring, hot water units, air conditioning units, exterior of building etc., replacement.   Example: The amount calculated estimates the cost to replace your roof, say $5,000, and you have a ten year life, therefore $500 per year will be allocated as an expense.   Typically, total Reserves for Replacement for all categories can range from a low of $150 per unit per year to $250 per unit per year.  Your lender will state their reserve replacement policy requirements.

Net Operating Income (NOI):  Effective Gross Income minus Stabilized Expenses and Reserves, prior to debt service.

Debt Service Coverage Ratio (DSCR):   All income producing property loans are evaluated in the same manner.   Example; lenders will indicate they require a 1:25 :1 Ratio of income to debt service (payment).   The lender is saying that they will allow you to use 75% of your Net Operating Income to pay Debt.   The term that should be used is "cushion factor or error" instead of DSCR.   The lender does not want you to use all of your Net Income to pay on the loan.

DSCR's will range from a low of 1:10:1 (90% of the Net Operating Income) to 1:35:1 (65% of the Net Operating Income) to make your loan payment.   You must also find out the interest rate that they are using to apply in their calculations for your loan.   Some lenders will use the start rate (if you are obtaining an Adjustable Rate Loan) for their calculation and other lenders will use a higher interest rate (other than your start rate) in their calculations.   This will have an effect on the loan amount your property will qualify.

Underwriting:  This is a combination of disciplines that a lender will employ to determine your loan qualifications.   This Underwriter will take into consideration the purpose of the loan request, determine your creditworthiness, evaluate the value of the project, age, condition, etc., and Net Operating Income and mix them together to Underwrite your loan.   Generally speaking, this person truly makes the decision of the loan amount you will receive.

Income & Expense Worksheet

If you are purchasing a building, the following can help you determine the net cash flow of a property.   This list is only a guide, depending on your location and the age of the building, operating expenses will vary from one property to another.

Income

When buying a building, ask the owners if they have made any rent concessions.   For example, an owner may include paid utilities or free rent when renting a vacancy.   Read each and every rental agreement.   Also request an Estopple Certificate to be completed and signed by every tenant in the building.   An Estopple Certificate is a questionnaire a tenant completes, stating the terms agreed upon with the owners when they rented the apartment or commercial space.   Then go back to the rental agreements and see if everything matches up.   This could save you lots problems.

Commercial Loan Closing Cost Worksheet

The following will aid you in comparing loan closing costs for financing a commercial property, such as an apartment building, office building or a mixed use property.   Closing costs do vary from one lender to another.   You will also need a quote from an escrow company and title insurance company to complete this process.

Estimated Cost Breakdown

With a loan application, most lenders will require from you a "NON REFUNDABLE" loan application fee.   The loan application fee should be payable to the lender.   Most application fees are used to pay for appraisal fees, processing fee, underwriting fees and loan document fees.   Ask your loan office to provide, in writing what costs the application fee will cover.   Note: A word of warning, before you write a check for the application fee, know whom you are borrowing from, get references.