Commercial Real Estate

Commercial Real EstateSection FourFinancing

1. Parties to the LoanBorrower the loan is a debt

Lender the loan is an investment

Originator (loan officer) Takes loan application and initial information

Processor (usually a term) Processes the application and determines what document/inspection will be required

Underwriter (usually a committee) decides to make the loan or not

2. Types of LendersCommercial Banks Portfolio lenders (usually keep the loan for some period of time). May securitize loan later.

Life Insurance Companies/Pension Funds Usually portfolio lender

Commercial Mortgage Backed Securities CMBS Bonds backed by commercial mortgages (where all the trouble today came from)

Conduit CMBS loan

2. Types of LendersCorrespondent Facilitates Conduit loans

Mortgage Broker Brokers loans with money from any of the above (big ones can portfolio for a time).

Can be paid by fee and/or spread (difference between wholesale rate and loan rate)

Specialty Lenders (any of the above) Specialize in particular types of properties (i.e. gas stations)

3. Lending TermsLoan to Value = Loan Amount/Price (value) 80% = $400,000 (loan / $500,000 (price per value) OR 100% minus the down payment

Debt Service Coverage Ratio DSCR Ratio of income to paymentDSCR = NOI/Payment (principle or principle and interest)1.25 = $50,000/$40,000

Securitized Packaged with others loans and sold as a bond (sold on Wall Street)

3. Lending TermsDebt Ratio

Monthly Payments / Monthly Income

Not often used in commercial lending (more residential)

1:3 to 1:4 is common today (debt service does not exceed 25-30% of monthly income)

3. Lending TermsLoan Term Time until loan is due

Amortization Period May not be same at loan term

30 year amortization due in 10 years

Balloon Payment the balance due at end of loan term

Points

Discount Points = interest on the loanOrigination Points = fee for securing the loan

Buy Down Borrower pays Origination Points to Lower Discount Points (interest rate)

3. Lending TermsLoan Origination Costs paid during escrow

Deposit - may / may not apply to other costs may / may not be refundable. (Not earnest money)!Appraisal (expensive)Environmental (Phase I or Phase II NOT Phase III)Inspection(s)PhysicalEngineeringSpecific trades

3. Lending TermsLoan Origination Costs paid during escrow

Legal Opinion Letters ($20,000 - $60,000)Legal costs (borrower)Legal costs (lender)Title (ALTA will require a recent survey)

3. Lending TermsClosing Costs Paid at Closing

PointsTitle Insurance (sometimes both sides)

Recording fees (can be very high)

Assignment of Warranties

Escrow fees (Closing Agents fees in other states)Proration

3. Lending TermsClosing Costs Paid at Closing

Prepaid Fees Impounds

Taxes

Insurance

Payment

Tenant Improvements

Maybe even CAM

4. Debt Service

The cash that is required for a particular time period to cover the repayment of interest and principal on a debt.

5. Pre-Payment Penalties

Yield Maintenance Defeasance

Loan is assumable (usually 1%)

Can be paid off but extremely expensive

5. Pre-Payment Penalties

Step Down 5% first year, 4% second year, 3% third year, etc.

To avoid prepayment penalties, you may be able to get the buyer to assume and discount the price the difference between current interest and loan interest.

6. Commercial Loan Application Buyers Documents

Tax Returns for borrower(s) and business entities

Bank Statements 3 months (show seasoned down payment)

Personal Financial Statement updated in past 90 days

P&L

Balance Sheet

Management Resume

Borrowers Business

6. Commercial Loan Application Buyers Documents

Resume of buyer experience owning similar properties

Resume of management company

6. Commercial Loan Application Buyers DocumentsLLC or LLP Paperwork

LLC (Limited Liability Company) Not a corporation

LLP (Limited Liability Partnership) - A partnership in which some or all partners (depending on the jurisdiction) have limited liabilities.

Usually require Single Purpose LLC that will own nothing but this property

Ask lender what state it must be formed in

Ask lender what provisions they require in LLC documents (ask before it is formed)

7. Commercial Loan Application Documents from Seller

P&L for past two calendar years and this year to date (do not need balance sheet)

Sellers tax returns (Scheduled E)

Rent Roll showing move in date and lease expiration date

Copy of all leases, rent increase notice, and amendments

Tenant Estoppels / SNDA

Tenants Financials

7. Commercial Loan Application Documents from Seller

Casualty Insurance

Liability Insurance (lender may require endorsements)

Zoning Compliance Letter (you may have to get this)

Certificate of Occupancy

Copy of Current Tax Bill