Getting money for your commercial project can be quite a challenge if you do not know how to analyze and present the property properly to a commercial real estate lender. Before presenting your property to a potential lender it is important to determine the most probable ratios that the lender is going to use in making a decision to lend you the money.There is an increased risk with commercial real estate loans because of the size of the loans. Hundreds of thousands to millions of dollars are loaned on commercial properties and projects. A commercial lender wants to make sure that he or she will get their money back from the generated income of the property.Most lenders will use the following three ratios to determine if they will loan the money on a project.The first ratio is the debt coverage ratio or DCR. The DCR applies to the property itself and how much income it is producing compared to the debt service, or how much money is paid out towards the mortgage on a monthly basis. It is expressed by the net operating income divided by the total debt service.The net operating income is the total income left over from the property after paying all the operating expenses. The debt service is determined by the mortgage terms, such as interest rate, length of the loan, and how often a payment is made. The higher the DCR, the more ability the property will have to cover the debt service. Many lenders require a DCR above 1.2 in order to consider it a relatively safe investment. Anything below that indicates that the property is either barely breaking even, or losing money. A lender does not want to loan money on a project that is not able to cover its debt service.The second ratio is the loan-to-value ratio. This is expressed by the total loan balances (sum of all mortgages) divided by the market value. When you apply for a commercial loan, as you do for a residential loan, you must determine how much value of the property you are actually borrowing versus what will remain as equity. If you can acquire a loan-to-value ratio of 75%, then that is generally a good number.If you can get more than 75% of the value loaned to you, then consider that a bonus. Lender’s rules and guidelines may differ greatly depending on how much they are willing to risk on the project.The third ratio is the debt ratio. For smaller commercial projects commercial lenders may require that you submit personal information to back the loan. This includes your personal income and debt on a monthly basis. The debt ratio is expressed by dividing monthly housing expenses by gross monthly income.The results show how much debt stands in relation to income. Many commercial lenders will not accept a debt ratio greater than 25%. However, some commercial lenders have been known to go up to 28% or even 36%. A debt ratio greater than 25% stands a good chance of having budget problems.The lower debt ratio you have, the more likely you will be able to get funding for your smaller commercial project.Before approaching any lender, it is really important to analyze these ratios on your own. They pertain to your specific deal for which you want to get financing. By performing the ratio analysis on your own, you can better determine if financing will be easy or difficult to obtain, depending on the nature of the project and its level of risk.It may be a good idea to contact several potential lenders and ask them their basic criteria and guidelines that they follow in evaluating properties. You may find that some lenders are far more conservative than others.By understanding your property, you can better fit a lender to your specific needs. Also remember that private lenders can be extremely helpful with those risky deals that public lenders will not even consider. Be sure that you are well equipped with the proper information and supporting documentation no matter what lender you approach.

Who would have guessed that the beginning of 08 there would be so many issues with the capital markets and subsequently individual entrepreneur’s options to refinance their commercial mortgages? Margins have nearly doubled in the last 6 months from 2% to as high as 4%, despite index’s and the fed rate cuts. Inflation looms and many commercial real estate owners scrabble to get into long term fixed rate financing out of fear of what the market might look like in a year or two.We hear borrowers that lived through the Jimmy Carter days talk about 20% plus rates and a strong desire to never live through that again. We’ve even seen borrowers voluntarily refinance out of their current loan into higher rate, yet longer fixed period loans.What is still out there? What can a borrower expect if considering a commercial refinance?Sincere General State of ConfusionIn general there is a real confusion as to what the guidelines are and what they will be in the coming weeks. Many lenders have simply bowed out and are not quoting rates until the situation stabilizes. No one likes to tie up a loan, order third party reports, only to have the loan declined due to altered underwriting guidelines. Further, the general mentality if a deal is borderline, is a very quick “no” or to simply ignore the loan request.It is frustrating to all involved – not just the borrower. Below is a look at a few specifics but the borrower should keep an open mind as these and other guidelines are changing – in both directions.Recourse vs. NonrecourseOwner occupied non recourse is basically gone; exceptions on this would be for extremely liquid strong borrowers with loans above $2,000,000. Income producing properties can still qualify but criteria is tightening. Underwriting guidelines like town population have moved up to 50,000 – 100,000 minimum from a minimum of 10,000 a few months ago. Debt coverage ratios need to be above 1.3 and minimum loan to value have tightened significantly. Essentially the deal needs to be perfect to qualify for nonrecourse.Loan to ValueLoan to value requirements on refinances vary widely based on building types. For example, flagged hotel operators now are hard pressed to find lenders that will fund 60% on a cash out refinance. 6 months ago, 75% was difficult, but doable. For your standard office, retail, or industrial buildings, loan to value on cash out refi’s have dropped to 65% across the board with a few lenders still going to 70%.Rate and term refinance maximum have stay pretty stable, 75% is still available. However, lenders compensate by tweaking other less obvious requirements. For example, underwriting vacancy minimums have been increased to 5%-7%, from 3%-5%, management to 5- 7% from 3-5%. Essentially, by changing these smaller components the loan to value is indirectly reduced.TermMany borrowers confuse term with fixed period. The term can be more precisely related to when the loan balloons. So it’s possible to have a 5 year fixed, 10 year term loan that is amortized over 25 years, for example. At this point, the term has not been too affected, though fixed periods have in general been reduced. It is still possible to find lenders that offer commercial 30 year and 25 year fixed programs, though rare.PrepaymentLike the term, prepayment penalties have not been greatly affected by the current market. From typical banks, borrowers can still expect 5% -3% for 5 -3 years. National CMBS lenders still ask for stiffer prepays often at 10% for 5 years.Third Party ReportsTitle, appraisal, environmental fees have stayed virtually the same though the timing has shortened as the demand for these reports has softened. Borrowers can expected to pay $2,000 -$5,000 for an appraisal, $800-$4,000 for title and around $2,000 for a phase one.The general feel and advice for borrowers is to take advantage of the current, still available, options and close their commercial loan refinance as soon as possible.