Commercial Lending question....

8 Replies

Hey All,

I'm looking at a deal on a 6-unit building. When I contacted the agent about putting an offer on it, he said "...sure, just provide me proof of funds or a Pre-Qualification from a Commercial lender"

I had planned on using the lender I currently use for my other income properties. But they informed me they could only qualify for me for up to 4-units.

So this is my first experience trying to secure commercial funding for deal.

Is there anything I need to be aware of, or looking out for? 

How much different is it than residential lending?

I always thought that commercial lenders were primarily concerned with the property financials, as opposed to your personal financials ( ie; Fico, Debt ratio, etc). Is that correct?

Thanks in advance for your input, suggestions, and experiences.

~Russell

Hi @Russell Peden - Where's the property?  How much is the property and how much down money do you have?  The lender I use only cares about credit score and down money.  The rest of the financials are based on the property.  Message me if you want to talk further.

Pre-qualification lenders are not the norm on the commercial side. Since a commercial loan is primarily based on the property and it's financials a lender can't pre-qualify you for a loan. They need to see the rent roll, profit and loss, and historical financials to determine their interest. Yes, they'll look at your financials too, but that's to ensure your global cash flow/DTI is safe so that your personal guarantee mean something.

On a 6-unit, the loan process isn't all that different than say a 4-unit other than the focus is more on the property. The paperwork is a bit more involved as is the focus on variables such as vacancy rates, expense ratios, etc.

The big difference is really how the crunch the numbers to ensure the DSCR work compared to using DTI on the residential side. Banks vary, a lot sometimes, on how they underwrite a file and the numbers they want to see on their side. Their terms can have a big impact on this as well as a loan based on a 20 year amortization has a big impact on the DSCR compared to a 25/30 year amortization.

@Russell Peden

Primarily you are correct; the performance of the facility needs to show it is self-sustaining and that is the DSCR number.

You get the financials from the seller or his agent -- last years PnL and you can then calculate the GSI, expenses, NOI and the critical DSCR. Be sure to find a local (ie not national or state) bank that does Commercial Loans. They will have a portfolio of borrowers they service for themselves and actually NEED to grant loans.

@Darryl Dahlen I use the POF and PreQual letters when purchasing and would not accept an offer without both - - even a precondition to showing the units. The buyer sends the PnL along with the loan application and gets back a PreQualificiation letter specific to the property in question - - basically having gone through Underwriting. The seller that will not supply the PnL is hiding something and you know 1) this will not be easy or 2) you need to walk and find a seller that will.

It's a great tool to avoid lookie-loos.   The issue is the joe-doe big banks don't want Commercial loans per se.

I have done this by asking my commercial lender for a term sheet based on the basics of the property (asking price) and that is what I send to the agent as the "pre-qual" letter. Just keep in mind to get a traditional commercial lender to give you a loan you will need to show at least 2 year track record of owning multiunits with rental income on either your business or personal tax return. That was a stumbling block for me in the past since I only had 1 year of rental income...and owning SFRs are not seen as the same as multiunits (duplex or higher) by commercial lenders funny enough even if they are rental properties. But every lender is different so keep trying different ones. Also if the current owner has not kept meticulous income/expense records a commercial bank will also say no but you can use that issue to try to negotiate with the seller to possibly offer the property on seller financing or a land contract so that you can get the records cleaned up to then go to a commercial lender down the road to pay off the seller from a refinance.

Thanks everyone for the quick feedback!

As mentioned, this will be my first commercial loan and multi-family property. So some of the terminologies are a bit foreign. For example, what does DSCR, GSI mean? I think NOI means "Net Operating Income", right?

Also, here are the financials from the agent on the property;

Originally listed for $249,000

Now Reduced to $239,000!

Current Rents
Unit 1 $400-Studio
Unit 2 $465-1 Bed-Same tenant since 2010.
Unit 3 $475-1 Bed-Same tenant since 2013
Unit 4 $475- 1 Bed-Same tenant since 2006
Unit 5 $475- 1 Bed-Same tenant since 2006
Unit 6 Vacant- Rent Ready-1 Bed-Being advertised at $550

Building Features
New hallway carpet-2015
Vinyl windows installed in every unit over the last 10 years
All new tuck pointing done in the last 10 years
Roof was redone 10 years ago and touched up in the last 90 days

He also sent me 2013, 2014, and 2015 Schedule E's

TheAgent/ Management company that currently manages the property also manages several other buildings and properties on the street and near by, says the current rents are low, and could easily command:

Projected Rents
Unit 1 $395-Studio
Unit 2 $550-1 Bed
Unit 3 $550-1 Bed
Unit 4 $550- 1 Bed
Unit 5 $550- 1 Bed
Unit 6 $550- 1 Bed

GSI: Gross Scheduled Income (annualized)

  • sum of all rents for one month x 12 = GSI

NOI: net op income (basically the profit)

  • sum of all the monthly expenses x 12 = total expense
  • GSI - total Expenses = NOI

DSCR: Debt Service Coverage Ratio, or how well the NOI supports the mortgage

  • DSCR = NOI / annual mortgage payments

    @Russell Peden , when you see a dotted blue line under an abbreviation, that means if you hover over it, you will see what those letters stand for.


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