Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package

Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package

by Michael Reinhard


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Commercial Mortgages 101 is a step-by-step guide for both real estate investors and mortgage brokers, offering insight, practical tools, and a thorough overview of commercial mortgage underwriting and credit analysis.

Product Details

ISBN-13: 9780814415078
Publisher: AMACOM
Publication date: 05/03/2010
Pages: 240
Sales rank: 424,185
Product dimensions: 6.42(w) x 9.06(h) x 0.71(d)
Age Range: 18 Years

About the Author

MICHAEL REINHARD (Houston, TX) is an independent mortgage banker for Texas Commercial Mortgage. He has originated and underwritten over $300 million in commercial loans since 1995 covering apartments, retail centers, office buildings, industrial warehouses, and more.

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

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