What Makes a Commercial Property “Financeable” Isn’t Always What Makes Good

Question

One thing I’ve noticed working on the lending side of commercial real estate is that investors and lenders can look at the exact same property and initially focus on very different things.

An investor may see:

• Below-market rents
• Opportunity to increase NOI
• Additional land for expansion
• Deferred maintenance they can fix inexpensively
• A strong location with future upside

A lender has to ask:

• What is the property producing today?
• How sustainable is the NOI?
• What does the DSCR look like at the proposed loan amount?
• How concentrated is the income among tenants?
• What happens if the largest tenant leaves?
• Is occupancy stable?
• Are there environmental, property-condition, or insurance concerns?
• Does the borrower have enough liquidity if the business plan takes longer than expected?

Neither perspective is necessarily wrong.

In fact, I think some of the strongest deals are the ones where you can answer both sets of questions.

Something I encourage investors to do before getting under contract is look at the property through the lender’s eyes—not because financing should dictate whether you buy it, but because it can expose risks in the deal that aren't always obvious from the initial cash-flow analysis.

For the experienced CRE investors here:

What’s something you thought was a great deal that became much less attractive once you started working through the financing or due diligence?

I'd love to hear the lessons learned.

Claudia Rodriguez · Answer

Henry — #2 and #3 are the ones I'd flag as most predictive from the lender side. A 1-point rate stress test catches more marginal deals than people expect, and tying it to an actual occupancy/revenue breakeven (not just a DSCR ratio in isolation) shows you're underwriting the property's real cash flow, not just the borrower's optimism. The deals that clear both of those cleanly are almost always the ones that close without drama later. Appreciate you laying out the checklist — this is exactly the kind of thing I wish more investors asked before going under contract, not after.

Claudia Rodriguez · Answer

Well said, Brian. The part that trips people up is that "producing today" and "could produce" are answering two different questions, and a lender only underwrites the first one. It's not that the upside doesn't matter, it's that the loan has to be serviceable on what's actually there before any of that upside shows up. Once investors run their own numbers through that lens before going under contract, a lot of "surprises" during underwriting stop being surprises.

G. Brian Davis · Answer

Looking at a deal from the lender’s side is something a lot of investors probably don’t think about enough. It’s easy to focus on what the property could be producing, but the lender is looking at what it’s producing today and whether the numbers still work if things don’t go as planned. Sometimes that brings up issues you didn’t see when you were just looking at the upside.

Henry Clark · Answer

OP there has never been a deal that I didn't like.  Just a question of price and terms.

Exceptions:

a.  We stay within a 40-mile radius of our house so those outside are immediately excluded.

b. Deals to small, not worth the time and energy to look at or manage.

We always give our lenders stress tests>

1.  Cost overrun.

2.  1% point interest rate change

3.  Occupancy/revenue break even point.  Means we covered all expenses plus P/I.

4.  Market study- competition/price/occupancy/distance/zoning availability.

5.  Personal guarantee- they are covered double.

6.  Business track record.

7.  Value add valuation.

Have a conference call with one of our local bankers and our SBA in the morning on an existing property expansion with a loan addition.  Main discussion points from my end are No downpayment, use existing property Equity; Amort term 20 or 25 years with no Balloon on the SBA side and 10/5/5 balloon on the participating bank side.  Fixed interest rate during construction and rent up, with interest only for 18 months after project completion.

Both bank groups have already received our Deal Analysis and Stress tests.  Have Quotes on 90% of all of the cost in their hands.

Will see if I looked at both sides perspectives.