Commercial Loans are required for apartment buildings above 4 units.

To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the mortgage payment(s). For the sake of simplicity, let us assume that there is only one mortgage on the property:
$500,000 First Mortgage
11% Interest, 30 years amortized
Annual Payment (Debt Service) = $57,139

Then:
DSCR = Net Operating Income (NOI) = $65,000
Total Debt Service $57,139
DSCR = 1.14

For Healthcare Properties:

Fixed Interest Rate: 5.50

Variable Interest Rate: 5.41

Cap Rate: 9% to 12%

Best Rates are associated with: Properties with >1.50 DSCR, <70% LTV, <5% vacancy, appropriate Cap Ex reserves

Issues:

This sector has the highest delinquency rate of all property types

Net Cash Flow calculations include Replacement Reserves ($250-$275/bed)

Scrutinize Private Pay vs. Medicare/Medicaid and property management experience

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

Most lenders will have a set Debt Coverage Ratio that they will want to see when considering underwriting the project. For example, retail property lenders may want to see a 1.3 DCR and an apartment lender may want to see a DCR of 1.2 or 1.25. The riskier the project, the higher the DCR.

There are several Lenders that will fund small commercial projects, similar to residential financing. Ask your Broker or Banker about these companies.

Depending on the market value and equity which you may have in your home or any other residential properties you may already own, it may be possible for you to refinance or obtain a second mortgage or HELOC to help cover all or part of a small to medium sized commercial real estate investment investment.

For Retail:

Fixed Interest Rate: 4.98

Variable Interest Rate: 4.81

Cap Rate: 8.9% to 10.7%

Best Rates are associated with: Properties with >1.25 DSCR, <75% LTV, <8% vacancy, appropriate TI/LC, Cap Ex reserves; spreads are typically higher for unanchored retail

Issues:

High credit, national chains and build to suit properties have been very competitive in the marketplace

Tenant diversification continues to be scrutinized

Non-credit single-tenant properties are under close watch

Spreads are typically lower for properties exhibiting a stabilized Trailing 24-36 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Tenant Improvements & Leasing Commissions and Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Hotel Properties:

Fixed Interest Rate: 5.50

Variable Interest Rate: 5.41

Cap Rate: 8.35% to 12.1%

Best Rates are associated with: Properties with >1.75 DSCR, <65% LTV, >60% occupancy, market ADR, appropriate reserves for FF&E, Franchise Fees, Advertising & Marketing, Repair & Maintenance

Issues:

"Mom & pop" operators are being scrutinized

Non-flagged hotels have an adverse view

Spreads are impacted by variance from market ARD and Occupancy

Many lenders are underwriting to a Max. Occupancy of 75%

Net Cash Flow calculations include FF&E, Franchise Fees, Advertising & Marketing, Repair & Maintenance

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Historical ADR & Occupancy

Departmental Revenue, Departmental Income, Total General Expenses, Operating Expense Ratio

Net Operating Income - Departmental Income minus Total Expenses

Net Cash Flow - NOI minus FF&E and extraordinary cap ex

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

Here are some general underwriting guidelines for commercial property. These guidelines can very from lender to lender and also depends on the property.

Office:
Fixed Interest Rate: 5.02

Variable Interest Rate: 4.91

Cap Rate: 8.7% to 10.9%

Best Rates are associated with: Properties with >1.25 DSCR, <75% LTV, <10% vacancy, appropriate TI/LC, Cap Ex reserves



Issues:

Owner-occupied properties - leases are marked-to-market, using market rent

Staggered lease expirations should display no TILC deficiencies during loan term

Spreads are typically lower for properties exhibiting a stabilized Trailing 24-36 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Tenant Improvements & Leasing Commissions and Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Multifamily Properties:

Fixed Interest Rate: 4.89

Variable Interest Rate: 4.66

Cap Rate: 7.9% to 9.5%

Best Rates are associated with: Properties with >1.20 DSCR, <80% LTV, <5% vacancy, appropriate Cap Ex reserves

Issues:

Spreads are typically lower for properties exhibiting a stabilized Trailing 12-24 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves ($250-$300/unit)

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Mobile Home Parks:

Fixed Interest Rate: 5.02

Variable Interest Rate: 4.71

Cap Rate: 7.9% to 10.2%

Best Rates are associated with: Properties with >1.20 DSCR, <80% LTV, <5% vacancy, appropriate Cap Ex reserves

Issues:

Spreads are typically lower for properties exhibiting a stabilized Trailing 12-24 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves ($50-$75/pad)

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Industrial Property:

Fixed Interest Rate: 5.02

Variable Interest Rate: 4.91

Cap Rate: 9.2% to 10.6%

Best Rates are associated with: Properties with >1.25 DSCR, <70% LTV, <7% vacancy, appropriate TI/LC, Cap Ex reserves

Issues:

Owner-occupied properties - leases are marked-to-market, using market rent

Flex/Multi-tenant - Staggered lease expirations should display no TILC deficiencies during loan term

Spreads are typically lower for properties exhibiting a stabilized Trailing 24-36 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Tenant Improvements & Leasing Commissions and Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Self Storage Properties:

Fixed Interest Rate: 4.98

Variable Interest Rate: 4.66

Cap Rate: 8.9% to 10.2%

Best Rates are associated with: Properties with >1.25 DSCR, <75% LTV, <7% vacancy, appropriate Cap Ex reserves

Issues:

Certain markets have been over built

Higher vacancies are being tied to the overall sluggish economy

Single-story properties are favorable, multi-story properties are adverse

Property management and experience is being scrutinized

Net Cash Flow calculations include Replacement Reserves

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

For Mixed Use Properties:

Fixed Interest Rate: 5.19

Variable Interest Rate: 5.16

Cap Rate: 8.25% to 13%

Best Rates are associated with: based on property components; properties with >1.40 DSCR, <70% LTV, <5% vacancy, appropriate Cap Ex reserves

Issues:

Analyze economic value of each property component income stream independently

Tenant diversification continues to be scrutinized

Net Cash Flow calculations include Replacement Reserves and TILC where applicable

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Tenant Improvements & Leasing Commissions and Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

Commercial loans are for the most part a little harder to get than a residential loan.

Commercial Loans have much more rigorous and often more expensive appraisal processes than residential loans.

Because higher loan amounts are often associated with Commercial Loans, some commercial lenders may require two appraisals from different certified appraisers if the loan amount exceeds a threshold limit. Certain lenders also require the service of their own approved appraisers.

Commercial properties are those other than a single family residence, 2-family, 3-family, or 4-family home. Properties that are 5 units or more, eventhough all units are of residential purposes, are considered commercial properties and require commercial financing. "Mixed-use" properties, those with a commercial unit and one or more residential units on the second/third floor, are also financed with commercial loans.

Appraising a commercial property is often more costly than appraising a residence of equal size

Another name for the Debt Coverage Ratio in the context of commercial mortgages is theDebt Service Coverage or Debt Service Coverage Ratio

The most important ratio to understand when making income property loans is the debt service coverage ratio. It equals Net Operating Income (NOI) divided by Total Debt Service.