Commercial mortgage borrowers often ask us how lenders determine the rates they offer on commercial mortgages. There are several criteria that lenders use when setting rates, but lenders will evaluate the relative risk of a loan when reviewing a loan application. The lower the risk, the lower the price. The higher the risk, the higher the rate. It is important to understand what factors are important to lenders and underwriters.
Borrower qualifications. Lenders will analyze the borrower or guarantor’s net worth, liquidity, cash flows, credit history and real estate experience in determining overall risk. Lenders like to see borrowers who have a good history of owning and managing similar properties. They want to see enough cash reserves to cover unforeseen issues that may arise and they expect to see that borrowers have a good history of paying their bills in a timely manner.
– The location of the property and the market. Higher quality real estate in large urban and suburban areas is considered less risky than inferior real estate and properties in small rural locations. Good properties in good locations are easy to rent out in case the tenants move out or in cases where the remaining lease terms are short. For example, if a property in a poor location becomes vacant, it will require a significant amount of renovation to attract new tenants.
Shared accommodation. Multi-tenanted properties with good quality tenants and long term leases are highly desirable when financing office and retail properties. Lenders don’t like vacant jobs, high turnover rates, and properties in a state of flux. Lenders like to see well-run properties that attract and keep long-term tenants
Occupancy stability. Lenders look for properties that have enjoyed high occupancy levels with minimal disruption over the last two to three years. Properties with vacancy and checkered rental history are a greater risk. Lenders will request operating data for the past 2-3 years. They expect to see stable occupancy and increased net income. Properties that fluctuate wildly with income and expenses will generate a lot of questions.
– The condition of the property. Properties in good condition with little deferred maintenance are less risky than properties that need major capital improvements. Properties in disrepair usually require the lender to set aside funds or a security for repairs and maintenance. Properties in poor condition tend to perform worse than properties that are well maintained.
– impact. Loan to value is very important in determining risk. A loan at 50% (loan-to-value) will be better than a loan at 80% LTV. If the property is in difficulty, there is much more room for error in low leverage loans.
Debt coverage. This refers to the excess of net operating income over annual mortgage payments. The more excess cash flow a property produces, the lower the risk. The extra cash flow can be used to mitigate turnover, repairs, or drain other cash.
At the end of the day, lenders do not want to expose their lending institutions to undue risk. The borrower must be prepared to address all of these issues to the satisfaction of the lender when submitting the application in order to increase the chances of getting approved for a loan at the lowest possible rate.
Once you qualify for a commercial mortgage, it’s helpful to get an idea of the suggested monthly payment up front. Commercial Mortgage Calculator is a very handy and useful tool. Whether you are purchasing a new commercial building, or refinancing an existing business loan, it is helpful to know how much loan you can afford at today’s rates. The commercial mortgage calculator will calculate your monthly payment for you. You will be asked to enter the loan amount, number of years, and interest rate. The mortgage calculator will calculate your monthly payment.