Net worth equal or greater to loan amount ?

Question

Brian Burke · Answer

That is pretty common in the commercial lending space. But it does vary from lender to lender. Some might require some percentage of the loan amount and other lenders might not have any specific requirement. You could try shopping around, you could find the answer you are looking for.

One way around this requirement is to bring on a partner that has a strong balance sheet. Most lenders can combine the net worth when there are multiple guarantors, so if your net worth is half of the loan amount and so is your partner’s, you cover the requirement.

How you compensate a balance sheet partner is up to you and that partner. Just like lending requirements vary from lender to lender, a potential partner’s expectations is an individual decision.  Maybe it’s half of the profits (better not be!) or maybe it’s more like 5% or 10%.  It just depends on how much risk they are taking on, what the guarantees look like, whether they are also contributing cash or services or knowledge, etc.

Joel Owens · Answer

It depends on the asset type,location, and deal size.

A life insurance company for instance typically can have much better rates but requires minimum 35% down plus net worth 1.5 to 2 times loan balance. With some lenders once you acquire so many properties with them and become a preferred vendor their standard criteria doesn't apply as much.

As Brian mentioned if net worth is lower you could have a partner, one of the passive investors on a syndicate deal you are doing, or someone not involved at all to come in and (kiss the note). The percentage is negotiable. If you have to give away the farm just to do a deal then it's generally not worth the effort as you are putting in all the work and getting very little to none of the upside. Has to work for all parties where there isn't resentment.

Jon Holdman · Answer

When I was pursuing a commercial loan last year I found this to be a pretty common requirement.

Account Closed · Answer

For investment loans, lenders prefer the borrower to be an accredited investor but this may not be a hard term requirement. If the property cash flows well, your income and credit is stable, and your down payment is substantial then there's a deal to be had. The exit strategy is also considered.

Rich Hupper · Answer

To piggy back on this discussion a bit. I have some commercial property that produces rental income. No mortgage on it, however would like to mortgage it in the future. It is owned by an irrevocable trust where I am the trustee. What should I be directing my accountant to do so a bank would give me a loan in the future? I currently have two years of tax returns.

Do people generally show income for irrevocable trusts?

Jon Mauro · Answer

I have worked in CRE lending for quite some time and have worked with various types of lenders. I have never heard of any hard or soft rule which dictates a 1:1 ratio of loan to net worth. I am sure there are some lenders who might use that as a guideline, but I just have personally never run into that. Further, most lenders recognize that liquidity matters way more than net worth as net worth can be inflated and is often illiquid, especially for real estate developers. The bank of course loves to see a high net worth but it is one of many considerations. The bank wants to know if you WILL support the property just as much as they want to know if you CAN support it. In short, they are judging your character as much as your balance sheet. Above all this comes the merit of the property itself and your ability to delivery on the strategy.

Michele B. · Answer

There are lenders that do not require that it you have a LLC or an S- COrp.  If you personally are getting the commercial loan then it is an issue.

Any other questions please tag me and I will answer.

Net worth equal or greater to loan amount ?

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