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Commercial mortgage borrowers often ask us how lenders determine the rates they offer on commercial mortgage loans. There are many criteria that lenders use when determining rates, but lenders will assess the relative riskiness of the 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 which factors are important to lenders and underwriters.
Borrower Qualification. Lenders will analyze a borrower’s 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 may arise and they expect to see that borrowers have a good history of paying their bills on time.
– Property location and market. Good quality properties in large metropolitan and suburban areas are considered less risky than substandard properties and properties in smaller rural locations. Good properties in good locations are easy to rent when tenants move out or in situations where there are short remaining lease terms. For example, if a property in a poor location is vacant, it will require a significant amount of renovation to attract new tenants.
Tenant mix. Multi-tenant properties with good quality tenants and long-term leases are highly desirable when financing office and retail properties. Lenders don’t like vacancy, high turnover rates and assets in a constant state of flux. Lenders like to see well-run properties that attract and retain long-term tenants.
– Stable occupancy. Lenders look for properties that have enjoyed high occupancy levels for the past 2 to 3 years with minimal disruption. Properties with a history of vacancies and fluctuating rentals are considered high risk. Lenders will ask for operational details of the last 2-3 years. They expect to see stable occupancies and net income growth. Properties that fluctuate wildly with income and expenses will generate a lot of questions.
– Property status. Properties in good condition with less deferred maintenance are considered less risky than properties that require major capital improvements. A property in poor condition will usually require that the lender set aside or escrow funds for repairs and maintenance. Assets in poor condition tend to perform poorly as compared to well maintained assets.
– leverage. Loan-to-value is very important in determining risk. A 50% LTV (loan-to-value) loan will be priced better than a loan at 80% LTV. If an asset experiences difficulty, there is much more room for error on low-leverage loans.
Loan coverage. It refers to the excess of net operating income over annual mortgage payments. The more excess cash flow an asset generates, the lower the risk. The excess cash flow can be used to reduce turnover, repair or other cash outflows.
At the end of the day, lenders do not want to expose their lending institutions to undue risk. A borrower must be prepared to address all of these issues on application to the lender’s satisfaction in order to increase his chances of being approved for the loan at the lowest possible rate.
Once you qualify for a commercial mortgage loan, it’s helpful to have an idea of your proposed monthly payments in advance. A commercial mortgage calculator is a very useful and useful tool. Whether you’re buying a new commercial building, or refinancing an existing commercial loan, it’s 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. Mortgage calculator will calculate your monthly payment.
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