Commercial mortgage borrowers often ask us how lenders determine the rates that they offer on commercial mortgage loans. There are many criteria that lenders use when determining rates, but lenders will assess the relative risk of a loan when reviewing a loan application. The lower the risk, the lower the rate. 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 a borrower or guarantor’s net worth, liquidity, cash flow, credit history and real estate experience in determining overall risk. Lenders like to see borrowers with a good history owning and managing similar properties. They want to see sufficient cash reserves to cover unexpected issues that might arise and they expect to see that borrowers have a good history of paying their bills in a timely matter.
– Property location and market. Good quality properties in large metropolitan and suburban areas are considered lower risk than inferior properties and properties in small rural locations. Good properties in good locations are easier to rent in the case where tenants move out or situations 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.
– Tenant mix. Multi-tenanted properties with good quality tenants and long-term leases are very desirable when financing office and retail properties. Lenders do not like vacancy, high turnover rates and properties in a constant state of flux. Lenders like to see well run properties that attract and maintain long term tenants
– Stabilized occupancy. Lenders look for properties that have enjoyed high occupancy levels with minimal disruption for the last 2 to 3 years. Properties with vacancies and fluctuating rental histories are considered higher risk. Lenders will ask for operating statements for the past 2-3 years. They expect to see steady occupancy and increasing net income. Properties that fluctuate wildly with income and expenses will generate lots of questions.
– Property Condition. Properties in good condition with little deferred maintenance are considered lower risk than properties in need of major capital improvements. Properties in poor condition will usually require that the lender set aside or escrow funds for repairs and maintenance. Properties in poor condition tend to perform worse than well maintained properties.
– Leverage. Loan-to-Value is very important in determining risk. A 50% LTV(loan to value) loan will price better than a loan at 80% LTV. If a property experiences difficulty, there is much more room for error on low leverage loans.
-Debt Coverage. This refers to the excess in net operating income over annual mortgage payments. The more excess cash flow a property produces, the lower the risk. Excess cash flow can be used to mitigate against turnover, repairs or other cash drain.
At the end of the day, lenders do not want to expose their lending institutions to undue risk. A borrower should be prepared to address all of these issues to the satisfaction of the lender at application in order to increase the chances of getting approved for a loan at the lowest rate possible.
Once you are qualified for a commercial mortgage loan, it is helpful to get an idea of your proposed monthly payment in advance. A commercial mortgage calculator is a very helpful and useful tool. Whether you are purchasing a new commercial building, or refinancing an existing commercial loan, it is helpful to know how much of a loan you can afford at today’s rates. A 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.