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Financial Ratios: Key Numbers When Preparing a Commercial Loan Package


commercial-loan-packageBefore seeking capital for your next project, know the property data points the lender is most likely to consider when evaluating your project. A mortgage broker engaged to help find sources of capital, should have experience with similar projects and know what the lender will approve.

Financial ratios provide underwriting insights about your ability to repay the loan. Loan repayment can come from operating income, the value of the property if sold, and in the case of recourse loans, assets of the borrower. Rent receipts and occupancy of the property heavily influence the value of the property and the likelihood that the loan will be repaid.

The preferred scenario for the lender and the borrower is that net income from the property is enough to cover the loan payment. Secondly, in the event of default, that the value of the property will be enough to cover the loan and that the property can be sold at that the value.

With this background in mind, below are three key metrics:

● Debt Service to Coverage ratio (DSCR): The underwriter evaluates if the property’s net operating income / total debt is adequate to make the monthly loan payment. Net operating income is the total of the income generated by rent receipts less operating expenses, which do not include the loan payment. 1.20 – 1.25 is the minimum DSCR threshold, subject to the type of project. The higher the DSCR the more cushion the borrower has to make the monthly loan payments.

● Occupancy rate becomes a factor in determining the operating income. The percentage of leased units, or occupancy rate, will decide the actual rental income. The lender will also make a judgement about the dependability of the of the rental income. The amount of time remaining on the leased units is an indicator of the likelihood that rental income will be consistent.

● Loan-to-Value, the appraised value of the property relative to the loan amount is a less important indicator and becomes significant if the borrower defaults on the loan and the property is sold. The lender will consider the resale aspects of the property secondarily to the DSCR. The lender will usually prefer to select the appraiser. A property’s appraised value is largely a function of the operating income.

Although these financial measures are crucial, commercial real estate lending is not driven by strict guidelines as are residential mortgages. Experience, knowledge, and judgement are the tools of the trade for a commercial real estate underwriter. The relationship with the mortgage broker can tip a borderline case in the borrower’s favor or make the terms of an offer more attractive.

Experienced in a wide range of large commercial real estate projects, W Business Capital will help you acquire capital from a lender interested in similar projects with similar financial ratios. Our clients benefit from the relationships we’ve cultivated with lenders. Let’s talk about the capital needed for your next project. Call us at 208-297-7704.