My New Blog

Stated income loans have been popular for years. In commercial lending, the concept of "stated income" can be confusing, because there are different ways to calculate income. The traditional method of calculating income, and the one used by most banks, involves a detailed review of your tax filings, usually the last three years. The banks will use the income and expenses you have reported, historically, on the tax returns. Your other personal income and expenses will be thrown into the mix, as part of a "global cash flow" analysis.

The other method of calculating income for commercial properties is to use income and expenses from the income statement for the last couple of years.

So stated income for commercial is misleading - since there is more than one way to calculate income - in a way there is no such thing as a "stated" income loan for commercial loans, because there are zero lenders who don't utilize either one or the other method of income calculation.

So many lenders "claim" stated income but what they are doing is actually a "no tax return" type loan, however income is still calculated using however just historic income statements and rent roll. Usually lenders charge more for this.

Our favorite apartment lender now has a policy of not asking for tax returns, and they use only the income and expense statements for their analysis. They do not call it a "stated income" loan, and most importantly there is no surcharge, and their rates are as good as any other apartment lender I have found.

This is an enormous advantage for consumers; files typically fail for either having too many write offs on the schedule E, or for too many debts overall - global cash flow analysis failure.

Commercial Apartment Loans

Although rates have started to slowly climb back to historic norms, they are still overall very attractive. Most of our lenders are offering a five year rate, and some offer a seven year rate. We have only one lender now who offers a ten year fixed rate. This is reflective of industry concerns about rising rates; banks don’t want to hold your 4.00% rate for ten years when rates could be back at 6.00% by 2018.

It is important for consumers to look at more than just the rate. This is of course the first question every consumer wants to ask, but more seasoned investors will look more closely at the “terms of conversion” or how the rate adjusts after the five year period expires, which is typically index plus margin = new rate.

Even more important are the prepayment terms. Many lenders now have a prepayment penalty and a yield guarantee, or a defeasance clause. Your plan is to buy and hold? Terrific, but life is unpredictable and a statistically high number of commercial loans need to sell or refinance in the first five years.

What about points? Most commercial loans require at least one point. Most of our lenders provide a commercial loan at par (no points) which allows room therefore for the broker to charge a point (more or less) and still have the loan be competitive.

What about wear and tear on the buyer / borrower? We just closed a large commercial loan in southern California for a 25 unit property, and we were competing against the Freddie Mac program. (This is a great program by the way, but not when you are in a hurry…). The Freddie Mac program had a better rate than we did, but not by much.

The Freddie program not only asked for a huge fee in advance, but required an engineering study (along with the appraisal) – many thousands of dollars to hire an engineer, and had other difficult hurdles, including requiring an insurance policy with a terrorism rider. After a while, the client gave up and focused on our loan, which had a great rate, was non-recourse, and the client paid less than one point, and we finished ahead of schedule.

So not only did we close the loan ahead of schedule, but we also saved the client from losing his earnest money deposit, which he would have lost with the Freddie Mac loan. Of course, he not only would have lost the deposit – he would have lost the property as well.