RE61RC10: Commercial Real Estate Loan Packages

Approved June 16, 2010

1. Identifying what lenders review for underwriting purposes (10 mins)

  • Using the lender's underwriting as a contingency to an offer
  • Protecting the buyer from its agreed price to financing price

2. Loan-To-Value, Debt Coverage Ratio, Loan-To-Cost (30 mins)

  • Identifying the 3 underwriting techniques

    A. Loan to Appraised Value and the percents for financing
    • This amount may be quite different than the agreed price
    • Often used with user-occupied properties
    • The state of the current LTV ratios
    • Loan-To-Value ratio (known as LTV) is used by banks to determine the amount financing they decide to issue on a real estate investment




LTV Ratio=

Total Loan Balances
Fair Market Value of the Property

B. Debt Coverage Ratio

  • Employed by the lender on income property
  • Different ratios; 1.1, 1.25, 1.3, etc.
  • How the ratios affect determined loan amount
  • Used to determine loan amounts on income-producing properties or build-to-suits
  • Measures the property's potential or actual net operating income as a way to pay for the annual loan payments or debt service
  • The ratio is the "spread" or "buffer" between what the property will produce for annual net income and the annual loan payments to be paid to the bank
  • For instance, 1.0 DCR means that 100% of the annual net income can be used to pay for the final undetermined loan payment. This is a great ratio for a borrower.
  • Current state of DCR

C. Loan-to-Cost

  • Employed on new construction
  • Actual replacement cost
  • Based on a percent of the construction cost of the project
  • Lender will decide which ratio to use
  • Loan is based on a percent of the estimated construction cost
  • Appraisers and lenders not using this approach as often

D. Lender's Interest Rate Criteria
Benchmark Rates

1. Prime Rate

  • Often defined as the rate charged by major commercial banks to their best business borrowers.


  • "London Interbank Offered Rate"
  • Is a daily reference rate
  • Based on interest rates banks offer to lend to unsecured funds to other banks in the London wholesale (or "Interbank" money market)

3. 10 year Treasury Notes

  • Rates paid by the Federal Government to pay for short-term cash requirements.
  • These rates legally peg the maximum amount of interest banks can pay on CDs of less than $100,000.

4. Discount Rate

  • The New York Federal Reserve's charge to member commercial banks.
  • Frequent banks are often charged an additional fee.

3. Contents of a Commercial Loan Application (70 mins)

A. Concepts of Project

  • Location and address
  • Land size
  • Title survey
  • Parking area
  • Design of building
  • Landscaping
  • Special amenities
  • Lobby entrance
  • Name of architect, engineers, general and sub-contractors
  • Blue prints, site plans
  • Utilities provided to building
  • No. of loading docks or ground level
  • Stories
  • Age
  • Sprinklered
  • HVAC system
  • No. of elevators
  • Gross vs. usable vs. rentable square feet
  • What was the method used to measure building
  • Overall appearance and quality

B. Market Studies to indicate demand

  • Broker market analysis of supply and demand
  • Annual absorption rate study
  • Asking and effective rental rates
  • Size of tenant leases
  • Rent concessions
  • Location of each competitor
  • Estimated market vacancy
  • Background information on any new projects, building permits, site plan approval or zoning board variances

C. Review of Annual Property Operating Data, income, expenses (include copy of APOD)

  • Last 3 years of cash flow analysis of actual income, expenses and capital repairs or replacements
  • Current rent roll
  • CAM
  • Taxes
  • Insurance
  • Management
  • Percent Rent
  • Fixed Rent
  • Any rent increases
  • Other income: parking, satellite dish
  • Net operating income
  • Leasing commissions
  • Tenant improvements
  • Capital expenses
  • Extraordinary capital expenses

D. Feasibility Study (if new construction)

  • Appraisal or consulting report indicating highest and best use
  • Legally permitted
  • Physically possible
  • Financially feasible

E. Site location

  • Maps, aerials, distance to highways and secondary roads
  • Precise size of land
  • MPH, traffic counts, nearest signal lights
  • Any proposed public works
  • Site views
  • Highway visibility

F. Site Studies

  • Environment 21E studies
  • Wetland delineation
  • Soil testing
  • Site surveys
  • Site Contours

G. Plan for building

  • Architectural and engineering plans of any new construction
  • Building inspection
  • Any past appraised reports or value?
  • Owner occupied or leased?

H. Cost for project

  • Architectural and engineering costs
  • Contractor bid estimates
  • Improvements documented

I. Developer's Pro Forma and financial feasibility analysis

  • Hard and soft costs
  • Loan analysis

J. Loan Amount Requested by Prospective Borrower

  • Recourse Preference
  • New loan based on new purchase or refinancing?
  • Construction or permanent financing?
  • Expected closing date
  • Variable or fixed interest rate?

K. Management Plan for the Project

  • The name of the asset and/or property management
  • History of experience
  • Names of staff, experience and field maintenance
  • Fees related to management

L. Lease Abstracts

  • Summary of tenants, date of lease signing, term, rent, any other economic obligations, rent concessions, type of signatures, etc
  • Name of tenants and years in building
  • Floor location
  • Lease expiration
  • Occupied Since
  • Options and terms
  • Copies of Corporate Resolutions/Clerk Certificates
  • Certificate of Insurance Binder
  • Eventually copies of all originals
  • Discussions on Estoppel Certificates
  • Copy of current draft lease

M. Operating Company

  • Federal tax returns and/or reviewed statements for the last 3 years

N. History of Real Estate entity/trust (if applicable)

  • Federal tax returns and/or reviewed statements for the last 3 years

O. Personal/Individual

  • Experience of each individual in real estate and with properties similar
  • Biography and expertise
  • Federal tax returns for the last 3 years
  • FICO score
  • Net worth
  • Any past bankruptcies?

P. Updated Interim Financial Statement

  • For the current year including long-term debt schedule matching interim financial

Q. Personal Financial Statements

  • On all owners or partners with accompanying corporate returns for other affiliates / entities owned

4. Case Study (10 mins)

  • Sample Loan package or bank check list for a loan package

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