The Mystique of Commercial Real Estate Lending – Solved

Misc Picts From Canon 127

If you are a homeowner, you know the basics of underwriting a single family residence. The lender’s emphasis was placed on your creditworthiness. If your creditworthiness passes muster, the property is evaluated to see if it is a viable investment. It’s fairly simple right? But what do commercial real estate lenders look for?

Underwriting requirements for commercial real estate lending are much different. The lender’s focus will shift more to the prospective rental property rather than the buyer’s personal credit. Why is that?

Well, as they say, follow the money. The emphasis on cash flow, which determines the ability to pay, turns from the borrower’s cash flow in lieu of personal income to the property’s cash flow in lieu of income production. The borrower’s credit worthiness is still vetted but the real emphasis is on the prospective property. Here is a simplified version of the process.

Lenders dig deep into the history of the rental property. To do this, the underwriter will consider the property’s Net Operating Income, Capitalized Value, and Debt Service Coverage Ration to determine the creditworthiness of the property. We’ll look at each of these.

Net Operating Income, or NOI, is the Effective Gross Income minus Operating Expenses. EGI is the income brought in by the occupied rental units. Rent rolls are used to calculate this figure. Rent rolls are calculated by totaling all potential rent collection on each unit, occupied or not. After the annual EGI is calculated, it’s time to look at annual operating costs. Operating costs would include things such as real estate taxes, maintenance and repair, insurance, management fees, etc.

To illustrate, we’ll use a ten unit property that was 90% occupied last year with each unit paying $1,300 a month. The property’s Gross Effective Income was $140,400 last year. The operating expense was $68,724. This makes the property’s NOI $71,676. Next, we’ll calculate the property’s Capitalized Value.

Capitalized Value is a ratio of the building’s purchase price compared to the cash it makes. It measures your investment’s performance. Cap Value = NOI / Purchase Price. If the NOI was $71,676 and the property was purchased for $1,000,000 then our Capitalized Value is 7.2%. The current average annual Capitalized Value of an investment property in the U.S. is 7.5%. This leaves us with the DSCR.

Debt Service Coverage Ratio is the percentage of the NOI that exceeds the properties annual debt service. Debt service is the cost of the mortgage. Lenders typically lend at 75% Loan to Value on multi-family commercial property. This makes our loan amount $750,000. If your mortgage interest rate is 6.5% on a 30 year fixed loan, the annual debt service is $56,886. The DSCR = NOI ($71,676) / debt service ($56,886). This would make the DSCR 1.26%. Most lenders are requiring a DSCR of 1.25% or above so this would be adequate.

There are a few more details that the lender will analyze but these are the most important ones. If these cash flow indicators meet the lender’s standard, and  your personal creditworthiness is sufficient, you are on your way to owning a solid real estate investment. It’s not time to sit back and rest on your laurels though. Now it’s time to look for ways to improve the cash flow of your new investment… stay tuned.


As a Matter of Factor

As a Matter of Factor

When I am engaging in a small business networking event, eventually someone asks what I do. I explain to them that I get small businesses and commercial real estate investors loans when banks can’t lend to them. It never fails that at least one person in the crowd will respond with, “Oh, so you factor huh”, after which a solemn sigh seems to be collectively released from the crowd.

Well, the “factor” of the matter is, yes, that is one of my many loan products that I can offer. As a matter of “factor”, it is one of my best products. Because of that, I would like to take some time to debunk some myths that are well entrenched in the small business world about factoring. Let’s look at the facts of factoring.

Factoring is simple to understand. Let’s say that you are a company that receives much of your capital from accounts receivable. It may take you thirty days from the time you spend some of your working capital to supply your customer with a product you sold to them, to the time your customer pays.

What if your customer orders double the amount of the product you are selling them? You have to come up with twice the normal amount of working capital to produce the order. You don’t make it a habit to keep twice the capital you need just sitting in an account doing nothing. That is bad business. So now you are in jeopardy of losing your position with your customer if you don’t come up with the capital to produce the goods your customer needs. Both you and your customer lose future sales revenue and your customer looks for another vendor to supply them with what they need.

But wait; there is a solution to the problem. What if you could find someone to buy your receivables before they are due, at a discounted price, and provide you with cash giving you time enough to manufacture and deliver your product.

Welcome to factoring. All you need to do is find a good, non-recourse factoring company.

The factor company I use will do just that without robbing you blind. They are a non-recourse factor, which means that if your customer skips out without paying your receivable, you are not stuck with the bill. How about that for credit insurance? This factor also has some of the best factor rates in the business.

Here is a typical deal. You have a receivable worth $100,000. This factor will buy that receivable for 97 cents on the dollar. They will immediately give you 80% of the receivable, $80,000. You then use the money to manufacture your goods. After the factor receives the rest of the receivable in 30 days, they will give you $17,000 and keep $3,000. Your sales revenues doubled minus 3% of the receivable.

To me, that is something to sigh about… a sigh of relief. That is a deal that not many small business owners would pass up. There are factoring companies that do take advantage of small businesses that need this service. Some factors take as much as 30% of your receivable. To that, I say, it’s your own fault for not shopping around and going with a good factor. Would you agree?


Position Yourself to Get a Non-traditional Small Business Loan

In a world where traditional banks have cut back on their small business lending, small businesses have had to scramble, sometimes unsuccessfully, to raise working capital. To the shock of many small businesses, getting a small business loan from a traditional bank hasn’t been as easy as it may have been in the past. When this happens, the search for an alternative source of borrowing is on. This is where non-traditional lenders step up.


Many small businesses seeking more working capital are unaware that there are other borrowing options out there. Well, there are. Actually, there are many different options for borrowing the working capital they need. These non-traditional lenders do not conform to the same underwriting guidelines as a regular bank.


One example is a lender that will not consider the small business owner’s personal FICO score as a major factor in its underwriting process. This type of lender will focus more on the health of your small business. To do this, they look at your small business’s cash flow using your business bank statements. They also consider your annual revenue.

Here is how to position yourself to get a non-traditional loan based on your cash flow. We will discuss the minimum criteria and then the average criteria. First, the minimum criteria:

  • FICO = 500 or better.
  • Annual revenue = $100k or more.
  • Minimum monthly business bank balance = $1k/month for the last three months.

This type of loan may get you up to $35k in working capital.

Here is the criterion for an average loan that may get you up to $100k in working capital:

  • FICO = 620 or better.
  • Annual revenue = $150k or more.
  • Minimum monthly business bank balance = $3k/month for the last three months.


These are just ballpark figures to position you to get a non-traditional, business cash flow oriented working capital loan. If you meet, at the least, these requirements, though, you are well positioned to get some decent working capital funding.

For more information on small business loans, go to or Google Specialized Capital Funding.