Commercial mortgage training is a broad topic with many areas that need to be mastered in order for the commercial loan officer to be truly competent and successful. Among the more immediate needs is being able to screen deals. We see it all the time as hard working loan officers work on and submit loans that have no chance of closing as there is simply not enough income for the deals to cash flow and thus fund. These loan officers are burning their cash and wasting their time.The idea here is being able to really figure out what the total net income is and then calculate the debt coverage ratio. A lot has been written on how to calculate the Debt Coverage Ratio (DCR or DSCR). The basics of this ratio though is calculated by dividing the annual proposed mortgage payments by the net income that the property (in the case of an investment property) or the net income that the business produces (in the case of an owner occupied transactions). Net income meaning the income remaining after all expenses have been paid (like taxes, insurance, payroll, etc).For example say the proposed loan amount is $1,000,000 and the monthly P & I payments are $10,000 per month or $120,000 per year. And say that the property is owner occupied and the business nets $15,000 per month or $180,000 annually. By dividing the debt payments of $120,000 by the net income of $180,000 the proposed loan boasts a 1.5 debt coverage ratio, which by the way is strong. Most banks want to see a minimum of 1.2 to 1.3 for special purpose properties.The challenge here is trying to figure out what exactly the net income is. This can be difficult to calculate especially on owner occupied transactions. You have to be able to extract the income out of the borrower’s tax returns. And many borrowers will have 3 sets of tax returns to go through – personal, business and real estate entity which often is over 300 hundred pages. So in order for the commercial mortgage broker to figure out if the loan cash flows they will have to know how to read tax returns or they won’t really know if they are working on a viable deal or not. And they will waste many hours working on a loan that has no chance of closing.The commercial loan officer does not need to get a degree in accounting but as implied above has to have a basic understand of what can and what cannot be used as income for a proposed commercial mortgage.
Tag Archives: Credit Tips
Hotel Loan Modifications
Commercial loans are created individually for each industry. One form of commercial loan is the hotel loan provided to the hotel and motel industry. These loans are given to people who wish to either start a hotel or make improvements to the present state of their existing hotel business. In the past, there were many financial institutions that provided commercial loans for the hotel and motel industry. Today many of these financial institutions are in trouble and want to see an exemplary business plan that ensures any loan given can be paid back by the borrower within a specified period of time.If a borrower defaults on their commercial loan, a commercial loan modification is advised. With declining tourist traffic, many hotel and motel owners are unable to keep up with current loan payments. In this case, lenders will usually decide to accept a hotel loan modification to eliminate non-performing loans from their books. A hotel loan modification will typically rework loan payment schedules, lower interest rates and lower the monthly payments for the borrower. A hotel loan modification agreement will be drawn up with the new terms and conditions stipulated and signed by both parties.Hotel lenders are familiar with the hotel and motel business and employ experts to scrutinize the business plan of the borrower. These experts look for certain business essentials, such as the availability of customers and the cost of real estate where a hotel is located. Hotel loan modifications are drafted like any other commercial loan, but specific areas that apply to the hotel and motel industry will be outlined. A long term plan is drawn up for the repayment of the loan which the borrower agrees to meet. Available loans may have a fixed or variable rate, in which the borrower pays set amounts at varying intervals, or a bulk sum or balloon payment which includes the total loan and interest payments respectively.Smart hotel owners should take advantage of the unusual climate in the commercial loan industry and pursue a hotel loan modification.