Commercial Loan Basics

 
Below you will find some of the basic commercial Loan calculations Lenders use to determine loan amounts and property value. Throughout the loan process your financial consultant will calculate and discuss these calculations in detail.

Please click on the links below for additional information
   

The Lender says they can only lend up to 75% LTV. What does this mean?

   

Almost all loans programs require a Debt Service Ratio. Does my property meet the lender's guidelines?

   

Net operating income is rental income of a property after operating expenses. These expenses would include all operating expenses, including maintenance, vacancy, janitorial, supplies, insurance, accounting, management, etc.

 
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The Lender indicates that I am over leveraged with my obligations to get the loan I need. How do I figure Debt to Income Ratios?

   

Throughout the country Cap Rates vary depending on property types, tenant quality, and net operating income. How do I calculate my Cap Rate?

   

My Real Estate Broker says my property has a Gross Rent Multiplier of 8. What is a Gross Rent Multiplier?

   

Loan-To-Value Ratio

Loan-To-Value = Total loan balances (All mortgages) / Fair market value

Example:

75% LTV = $500,000 (1st mortgage) + $250,000 (2nd mortgage) / $1,000,000 (Fair market value)

Almost all lenders require a LTV of 75% or less. The exceptions to this rule are:

1. Apartment units which generally can go to 80% LTV

2. SBA loans which generally can go to 90% LTV

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Debt Service Coverage Ratio Debt Service Coverage Ratio = Net Operating Income / Mortgage Debt Service

Example:

1.25 DCR = $62,500 Net Operating Income / $50,000 Annual Debt Service

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Net Operating Income

     
Potential gross income (all figures are on an annual basis)
   Scheduled rent $xxxx
   Other income $xxxx
Total potential gross income   $xxxx
Vacancy and collection loss   -xxx
Effective gross income   $xxxx
Operating expenses
   Fixed $xx
   Variable $xx
   Replacement allowance $xx
Total operating expenses   -$xxxx
NET OPERATING INCOME   $XXXX

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Debt to Income Ratio

Debt Ratio = Monthly Debt Obligations / Monthly Gross Income

The Debt to Income Ratio compares the amount of debt that the borrower must pay each month to the amount of gross monthly income the borrower earns.

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Direct Capitalization Rate

Net Operating Income / Value = Direct Capitalization Rate

Example:

$300,000 / $5,000,000 = .06 or 6%

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Gross Rent Multiplier

Value = Potential Annual Gross Income X Gross Rent Multiplier

Example:

$1,200,000 = $150,000 (Potential Annual Gross Income) X 8 (Gross Rent Multiplier)

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