Is this a thing in the commercial lending world?
depending on the type of property my understanding with commercial is that the loan is based on the income generated by the property, so if thats what the appraisal is based off then that would make sense I believe
@John Bradley depends on the type of property within commercial. It is normally based on the income generated by the property. Good luck!
Most banks will base the loan on what is called NOI, or net operating income. They want to be sure you can cover the debt. They usually look for an NOI about 125% to 135% of the debt. They take the income and back out expenses. That's NOI.
@John Bradley in my experience, lending based on ONLY the appraised value is not a thing in commercial.
Things to consider are:
Execution method: life company, CMBS, agency (best terms for stabilized multifamily), banks, debt fund
Product type: construction loan, bridge loan, permanent debt (balance sheet or securitized)
In general, lenders typically size their loans based on the below:
- LTV (loan to value): loan amount/appraised value; in most cases they are looking to be in the 60-75% range based on the asset class, product type, and execution method
DCSR (debt service coverage ratio): NOI/ debt service payment; typically 1.20 - 1.35 depending on execution method, product type, recourse/non recourse, and the loan terms
Debt Yield: NOI/ loan amount; typically 7 - 9% again depending on the lender, execution, product type, etc.
I hope this explanation helps. Like I mentioned, it l depends on the asset class, execution and product type, and how aggressive the lender is willing to get.
I just ran into a scenario where our DUS lender (delegated underwriter and servicer) for a Freddie Mac loan more or less [email protected]+&d up a $68 million loan on multifamily and drug the process out for 9 months. During that time, US treasuries went from 50bps to 130bps and drastically changed the quality of the deal in many ways. Despite closing anyways, we were pissed off. That same DUS lender is also a bank, and we are now working with them on another deal where they offered us crazy good terms in order to fix the relationship after their previously botched deal. 75% LTV, 30-yr AM, sub 3 rate, on an unstabilized mix use asset with a release provision NON RECOURSE AND ON BALANCE SHEET FOR 7 YEARS!!! The value of a relationship is often the most important factor in getting the best deal. Never pass up an opportunity to have a lender owe you a favor!
@Ethan Wagner the DSCR was 1.2 on the second deal btw, to add some relevancy to my rant as it relates to your actual post.
It depends on the asset that would secure the commercial loan, and whether or not we are talking portfolio lender or secondary market. I have a bunch of commercial portfolio loans on single family properties, as well as apartment complexes. DSCR and appraised value are typically used for SFR assets, and those plus NOI for commercial assets. They will still typically get an appraisal to establish the LTV number, but I also work with lenders who use desk valuations. Definitely get referrals to lenders from other investors you know and hit the phones to find some that best fit your needs.