DSCR Calculation...including your living expenses?

Question

I searched but didn't find much on this topic. As some background, I have been speaking with a commercial lender for 6 weeks (which is ridiculous) and waiting for feedback from underwriting on my global cash flow so I can get a commercial loan on one property. I am currently rehabbing this property using hard money. The property is vacant but will be occupied come June (student rental).

They told me today that they project ones living expenses and add that into debt service of all of the rental properties to determine your global cash flow. They also told me they look at tax returns and do not subtract back out any write offs used like depreciation. So if your Schedule E shows a loss, they take that as your rentals PnL.

To qualify for a commercial property, my understanding was:

Rental Income

(Operating Expenses)

_____________

NOI

NOI/P&I = DSCR

Adding in someones "projected living expenses", what on earth does that have to do with the commercial property and whether the income can service the debt? This seemed cuckoo for cocoa puffs to me but wanted to get some feedback from the BP community. The irony is that if I went to a conventional lender, I'm a slam dunk to qualify without any problems. I think I ran into someone who doesn't know what they're doing but I'll hang up and listen now.

Ken Jernigan · Answer

Again, most lenders use global because you can take the cash flow from the property and use it however. So they want to know you have sufficient cushion to meet other obligations as well as the proposed debt. You do need to show other sources of income than the subject property, such as spouse's employment, other income properties, investments, etc.

There are stated income lenders who are more lenient, but LTVs are low and rates are high.

Don Konipol · Answer

@Peter T.

All good answers by above posters.  Most commercial loans do not have to meet certain criteria like residential loans do ( to be sold to Fannie Mae), so every lender is free to establish his own criteria.  The spectrum ranges from loans where the only criteria is the subject property and the ability of the property to service the debt, to loans where the borrower’s personal financial health is the main driver.  Most loans fall somewhere in between.  You may wNt to try an asset based lender for less paper work, less detailed verifications, less personal information, and quicker turnaround.  I’m sure you can guess that there is a cost for this, an interest rate premium, with more points.

Ronald Rohde · Answer

Its logical to the bank, if you don't have strong history as a Landlord, this is essentially a personal loan.

Peter Tverdov · Answer

Are living expenses only calculated if they're lending based on your global cash flow? If I was getting a commercial loan for a subject property and didn't want to base it off my global, they would still account for my projected expenses?

It still doesn't make sense though. Because on a conventional loan, they're only calculating your debt (car payment, mortgage, credit card debt, alimony, etc) On a commercial loan they're going to increase what your monthly debt actually is based on a guesstimate and call it "projected expenses"? Seems odd to me.

That would mean most people would need to find a commercial property with an actual DSCR of 1.5-1.6 to purchase and then when the bank adds in phantom debt it would get chiseled down to 1.2-1.25 to qualify.

Ken Jernigan · Answer

Yes living expenses are used to calculate global DTI. The reason being you control the cash, not the bank. However, most lenders add back non cash and discretionary expenses. On larger projects, some lenders require maintenance reserves. If you need more info, you can PM me.

DSCR Calculation...including your living expenses?

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