Commercial Real Estate

Commercial real estate lending analysis starts with determining the property use and property type.

1. Basic property use essentially asks the question, will you live there, or not? There is commercial property (for example, multi-family residential property) where you may also choose to live in one of the units. Other commercial property is completely income-producing investment property and is non-owner-occupied property.
2. Basic property types: There are a number of property types that include industrial, warehouse, retail, office, multi-family residential, special purpose (hotels or motels, gas stations, car washes, churches, etc.).

What you really need to ask yourself is whether you want to be the person who’s being called when something goes wrong. Owner-occupied is just fine if you’re a handyperson; but most commercial property owners prefer to hire a management company to take care of that for them.

So what mortgage documentation will be required? Well, it depends on what you’re looking for! Let’s break it down:

Owner-occupied property:

1. Application, including purpose and use of loan proceeds
2. Property description (location, land & building size, etc) – survey, insurance coverage, tax info
3. Contract, if purchase
4. Business financial statements and tax returns for prior three years
5. Owner personal financial statement and tax returns for prior three years
6. Business description, including product or service, management, competition, market conditions, and plans for future
7. Appraisal
8. Environmental site assessment

(Repayment analysis is primarily concerned with cash flow analysis and financial strength of the business occupying the property. The owner/guarantor’s other income and assets are also considered.)

Non-owner-occupied investment property:

1. Application, including purpose and use of loan proceeds.
2. Property description (location, land & building, etc) – survey, insurance coverage, tax info
3. Contract, if purchase
4. Income & expense statements of subject property for prior three years (tax returns, financial statements)
5. Rent roll
6. Leases
7. Owner financial statement and tax returns for prior three years
8. Guarantor financial statement and tax returns for prior three years
9. Appraisal
10. Environmental site assessment

(Repayment analysis is primarily concerned with the net operating income generated from the property, and related issues such as tenant analysis and property management. The owner/guarantor’s other income and assets are also considered.)

Each commercial real estate financing transaction is unique, requiring documentation and analysis of credit factors specific to the individual property use, property type, borrower, etc.

However, in most cases, the basic questions are: What is the use of the loan proceeds? How will the loan be repaid? What is the collateral?

Here’s an example of an analysis:

REAL ESTATE INCOME PRODUCING PROPERTY ANALYSIS

Basic income and expense analysis:

• PGI (potential gross income)
• -V&C (vacancy & collection)
• =EGI (effective gross income)
• -Expenses & Reserves
• =NOI (net operating income)
• -Debt Service
• =Cash Flow

Taxable income or loss calculation:

• NOI
• +Reserves
• Adjusted NOI
• -interest expense
• -depreciation
• Taxable income or loss

Want to learn more about purchasing or refinancing a commercial property? We’re experts and we can help you find just the right property for your budget and to meet your financial goals.

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