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

 

Formula:
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.

2. LIBOR

• "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