Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package
240
Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package
240Paperback
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Overview
For those in pursuit of commercial real estate opportunities, learn the tools to be successful in this helpful guide by an expert in the industry.
Independent commercial real estate broker Michael Reinhard has been leveraging the financial benefits of our strong economy for years. In this practical and insightful guide, he offers advice to help others in their pursuit of commercial real estate endeavors.
By providing a thorough overview of commercial mortgage underwriting and credit analysis, Commercial Mortgages 101 teaches you how to:
- think and speak like a commercial real estate lender;
- quickly size and under write basic commercial real estate loans;
- prepare personal cash flow statements;
- read and interpret lenders' preliminary loan proposals';
- create a Schedule of Real Estate Owned;
- And prepare a persuasive and professional loan request package.
Credit and financing issues pose the greatest challenges to prospective borrowers attaining the money and mortgage terms they need. Whether you're a real estate investor or a mortgage broker trying to decide on the right form of ownership (LP, LLC, Co-tenancy, or others) or you need to calculate your true net worth and liquidity to ensure your loan is approved, Commercial Mortgages 101 is your start-to-finish guide to success.
Product Details
| ISBN-13: | 9780814415078 |
|---|---|
| Publisher: | AMACOM |
| Publication date: | 05/03/2010 |
| Pages: | 240 |
| Sales rank: | 376,916 |
| Product dimensions: | 6.42(w) x 9.06(h) x 0.71(d) |
| Age Range: | 18 Years |
About the Author
Read an Excerpt
INTRODUCTION Commercial Mortgages 101 is the culmination of fifteen years’ experience in commercial real estate lending and credit analysis that began at the conclusion of the savings and loan crisis of the late 1980s and early 1990s. Toward the end of the savings and loan crisis that dominated the headlines for nearly a decade, commercial real estate lending was virtually nonexistent. Lending practices and underwriting policies once thought sound were now deemed completely unreliable. Eventually, a new breed of lenders rose from the ashes and reestablished the commercial real estate lending industry, transforming and setting in place new underwriting and credit standards still relevant today. Commercial Mortgages 101 embodies this new establishment and attempts to provide a comprehensive overview of commercial real estate loans and fundamentals in underwriting and credit analysis. But before we discuss the contents within this book, a little history is in order. The Tax Reform Act of 1986 and ensuing savings and loan crisis set in motion the beginning of the end for commercial real estate loans. Commercial real estate lenders were about to enter the Dark Ages, a decade-long systematic collapse and decline of the commercial real estate loan industry. From 1986 to 1995, the number of federally insured savings and loan institutions in the United States declined from 3,234 to 1,645. This was primarily but not exclusively a result of unsound commercial real estate lending. While they were not part of the savings and loan crisis, many other commercial banks failed during this time, as well. Between 1980 and 1994, more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance. The U.S. government ultimately appropriated $105 billion to resolve the crisis. After banks repaid the loans through various government interventions, there was a net loss to taxpayers of approximately $124 billion by the end of 1999. Although the savings and loan crisis of the 1980s and early 1990s seemed to have singlehandedly brought the commercial real estate lending industry to a halt, there were a few commercial banks and nonbank lenders such as life insurance companies and pension fund advisors that were still making commercial real estate loans, primarily refinances. But it wasn’t until about 1993 that a new breed of commercial real estate lenders called conduit lenders emerged as a new source of commercial real estate loans, marking the beginning of a new era and forever changing the way commercial real estate loans are originated and underwritten. Conduit lenders, which were created by Wall Street investment banks, reignited the commercial real estate loan industry by providing a secondary market (called securitization) for mortgage banking firms, commercial banks, life insurance companies, and federal savings banks (successors of the savings and loan banks), a market that had never before existed. The commercial real estate lending industry, unlike years before, was now back in business. With the advent of conduit lending or securitization came a new way of underwriting that was sorely absent during the era of the savings and loan turmoil. Stringent underwriting ratios and guidelines set by Wall Street investment banks during this time became the new standard for making commercial real estate loans among traditional banks or any other lender entering the mortgage banking business. Sound underwriting practices didn’t just stop with the Wall Street banks; credit rating agencies such as Standard & Poor’s, Fitch, and Moody’s also provided further scrutiny before a loan was securitized. The adoption of this new underwriting standard by traditional banks and other nonconduit lenders has duly been cemented in the industry and now serves as the basis for understanding how commercial real estate loans are underwritten. The commercial real estate loan industry is ver
Table of Contents
Acknowledgments xi
Introduction xiii
Chapter 1 An Introduction to Commercial Real Estate Loans 1
What Is a Commercial Mortgage? 2
"Mortgage" Defined 3
"Commercial" Defined 5
Types of Commercial Properties 7
Non-Income-Producing Properties 7
Income-Producing Properties 9
Single-Tenant Properties 10
Multitenant Properties 11
Types of Commercial Real Estate Lenders 14
Banks 16
Life Insurance Companies 18
Conduit Lenders 19
Agency Lenders 21
Credit Companies 23
Mortgage Bankers 24
Private Lenders 25
Commercial Mortgage Terms 25
Maturity Period 26
Amortization Period 27
Loan-to-Value Ratios 28
Interest Rates 29
Prepayment Penalty 31
Recourse vs. Nonrecourse Loans 33
Commercial Mortgage Underwriting 33
Sponsorship 34
Property Underwriting 35
Final Underwriting Analysis 43
Chapter 2 Preparing the Loan Request Package 45
Executive Summary 47
Purpose of Loan Request 48
Sources and Uses 52
Property Description and Location 53
Financial Summary 57
Borrower 58
Property Description 59
Location and Demographics 61
Property Economics 63
Financial Statements 64
Financial Analysis 65
Schedule of Income 67
Historical Cash Flow 72
Loan Analysis 74
Supporting Documents 80
Market and Submarket Data 81
Sponsorship 84
Chapter 3 Financial Strength and Creditworthiness 87
Net Worth and Liquidity 88
Assets 89
Non-Real Estate Assets 91
Real Estate Assets, Cash Equity, and Market Equity 93
Cost vs. Market Value 96
Pre-Funding Liquidity 97
Post-Funding Liquidity 99
Lender's Calculation of Net Worth and Pre-Funding and Post-Funding Liquidity 101
Credit Score and History 108
Five Adverse Conditions Unacceptable to Commercial Lender 110
Personal Income and Cash Flow 116
Gross Income 117
Self-Employment Income 119
Net Cash Flow and Taxable Net Cash Flow from Rental Income 120
Cash Flow Statement 124
Banking and Credit References 126
Chapter 4 Real Estate Experience 129
Ownership and Management Experience 130
Ownership Experience 130
Management Experience 133
Chapter 5 Real Estate Assets 143
The REO Schedule 144
The REO Schedule and the Balance Sheet 145
Anatomy of an REO Schedule 151
Property Value Section 155
Property Name 156
Property Description 157
Property Address 157
Date of Acquisition 158
Original Cost of the Property 158
Name and Address of Lender 159
Loan Number 159
Ownership Percentage 160
Market Value of the Property 160
Balance of Mortgages 163
Total Equity 164
Net Ownership Equity 165
Cash Flow Section 166
Monthly Rental Income 167
Monthly Operating Expenses 170
Monthly Loan Payments 172
Monthly Cash Flow 173
Net Ownership Cash Flow 174
Chapter 6 Forms of Ownership 177
Borrowers and Borrowing Entities 178
Types of Borrowers and Borrowing Entities 181
Individual Ownership 182
Co-Tenancy and Joint Ownership 184
Partnerships 188
Limited Liability Companies 195
Corporations 197
Trusts 200
Index 203