January 2nd, 2012 12:24 PM by Chuck Green
Top five reasons why your commercial property has not been approved:
1) Value. Commercial properties are valued based upon their ability to produce income. Many if not most commercial properties have been faced with declining occupancy, and declining rental rates per square foot as tenants demand better value for their rental income. Issues such as these have a direct bearing on the value of your property, and are the major cause for declining commercial property values around the country. Meanwhile, more and more banks want to lend at a 65% loan to value.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources, including pension and hedge funds, which will allow in many cases a loan to value of up to 80%, even on a commercial investment property.
2) Debt Service Coverage Ratio, a commonly used underwriting criterion, can be calculated as net operating income divided by the debt obligation payments; either a monthly or yearly expression is acceptable. For the same reasons as described in #1 above, net operating income has been under pressure (due to increased vacancy and declining rent income). Since DSCR is based upon NOI / debt service; this means that in many cases DSCR is declining as well. Banks are looking for DSCR of 1.25, at a minimum….some want 1.35 or even 1.45 DSCR.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources, including pension and hedge funds, which will allow in many cases a DSCR of as little as 1.00, even on a commercial investment property……although keep in mind that rates and terms are better for properties that can demonstrate a more reasonable 1.15 to 1.20 DSCR.
3) Property Condition. This nebulous and highly subjective characteristic is a very useful “copout” for many banks in our current market. The thing is, is that banks of course can set their own internal standards for property condition. It is the inconsistent application of these standards that I find highly irritating. Many banks are looking for, and lending on only properties that are not only nice to look at but are in pristine condition with no deferred maintenance issues.
Solution: Bay Area Capital Funding Inc. has access to niche lending sources, including pension and hedge funds, and certain banks that are actually seeking less than perfect properties...at a slightly higher yield of course. Recent closings include an apartment in a very difficult portion of Oakland California and in the Sacramento Valley area as well. The key is an up to date understanding of which bank will like which property.
4) Lack of Historical Documentation: It is not uncommon with properties that have gone through foreclosure, or bank repossession and resale, for there to be no historical operating statements, no historical rent rolls or vacancy numbers, and no historical expenses. Most banks will decline a property such as this without going any further; they simply cannot accept the risk of a property with unknown expenses.
Solution: Bay Area Capital Funding Inc. has access to certain niche and financial lending sources, which will allow in many cases a loan to move into underwriting on the basis of estimated expenses and NOI….these numbers will need to be reasonable and eventually verified (or slightly amended) by the appraisal process.
5) Unfinished / Unrentable / incomplete Property: Most banks and lenders will expect and require your property to be not only complete, but functioning, with tenants and low vacancy, and several years of operating history. Banks have very little interest in anything that they consider “speculative”, and most banks would consider an incomplete property to be “speculative” not just because of the construction perspective, but doubly so because of the unknown income and expense numbers for the property as well.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources such as niche banks and pension funds that accept (and even seek out) rehab and construction projects, often with loan funds not just for purchase and / or the refinance of existing debt, but often with additional funds advanced (or set aside) for the rehab or completion of the project as well. A heavy reliance on the appraisal for estimated costs, estimated income, and estimated expenses are of course standard in this instance.