When looking into commercial lending, having your numbers in place can make the difference between an approval or a rejection. Here are a few of the calculations lenders tend to look for.
Loan-to-value ratio (LTV) – This commonly used equation is defined as follows: The amount of the first mortgage / the value of the property x 100 percent. It is used to determine if the commercial property that will be used as collateral is worth more than the amount of the loan. Combined loan-to-value ratios simply means that there is more than one mortgage and the two will be combined. Most traditional commercial lending institutions, such as banks and credit unions, will limit their LTVs to about 70 percent, sometimes 75 percent. Business properties usually come in at around 65 percent. This means that you will need to find additional financing or have at your disposal anywhere from 35 to 25 percent of the total loan amount.
Debt-Service-Coverage Ratio (DSCR) – This ratio confirms that the property is making enough net operating income (NOI) that it can cover the proposed loan plus a little cushion. It is determined by dividing the NOI by the annual debt. The total debt service includes all principal and interest payments. A DSCR of 1.0 indicates that there is enough capital to cover the loan. Commercial lending institutions, however, like to see a little extra in the coffers and may require anywhere from a 1.10x to 1.20x debt service coverage ratio. An example of this would be a business that is netting $120,000 annually and is trying to obtain a loan that would create a debt of $100,000 per year. In this instance, their DSCR would be 1.20x.
Net-Worth-to-Loan-Size Ratio – This ratio is often used to determine the amount for construction loans. It is determined by dividing the net worth of the developer by the loan amount. Ideally, it comes in at 1.0, meaning that the builder or developer has a net worth that equals the amount of the construction loan. If one developer does not qualify, two or more contractors can combine their net worth in order to come up with the needed financing.
Banks and other lending institutions want to know that you stand to make enough profit that abandoning the project half-way through the construction phase is not warranted despite some unexpected costs and setbacks.
Profit Ratio – This ratio is also predominantly used in the construction industry. It determines what profit is expected once all T’s are crossed and I’s dotted and is a way to confirm that the developer is in it for the long run despite a few potential and always possible set-backs. It is the Developer’s Projected Profit divided by the Total Cost of the Construction Project x 100 percent. Commercial lending institutions look for this ratio to come in at 20 percent or more.
At Level 4 Funding, we provide easy-to-quality construction loans for up to 24 months with monthly draws.
Our APR starts at 9.5 percent with loans available for up to $50 million. What do we need to get you started? Simply bring in your budget, plans and permits.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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