Commercial Lending Questions

[Michael Moikeha]

I know that commercial lending works different that residential mortgages, but my question is more about what these lending institutions are looking at when they are making their decisions.

1. When crunching the numbers, do they put any weight on the numbers for your projected NOI after planned rent increases and expense cuts?

2. What range do they look for in your DSCR?

3. In a new LLC, what do they look at for leverage?

4. What am I missing? :-)

Thanks for the help!

[Michael Seeker]

Hey @Michael Moikeha , here are some high-level answers to your questions:

1. When crunching the numbers, do they put any weight on the numbers for your projected NOI after planned rent increases and expense cuts?

Not really unless you have a track record of these types of impacts. If this is your first purchase or if you're just starting out, commercial lenders will typically look at the raw numbers. Expenses are just estimates and you don't necessarily need to present the current owner's numbers for a loan app. I typically estimate these and I've seen banks use 35-40% of income as a quick calculation.

2. What range do they look for in your DSCR?

Typically 1.2 or better. Again, if it's your first loan and first rental property they may want to see this higher.

3. In a new LLC, what do they look at for leverage?

Personal guarantee.

4. What am I missing? :-)

Commercial lending is not as cut and dry as residential. It is very dependent on the particular bank you're speaking with and the timing. I've closed a loan with a commercial lender only to have them pass on a better loan a couple months later because they were slowing down on residential lending.

If you've got a good deal and don't have a go-to bank for a commercial loan you may want to find a mortgage broker. This is how I connected with a bank that I now interact with on a regular basis.

I'd also recommend picking up Commercial Mortgages 101 by Reinhold - it was such a great read and really set me down the path of commercial loans instead of strictly looking for residential loans.