UNDERSTANDING The 6 C's of Commercial Lending when shopping for a commercial loan
**THE 6 C's of COMMERCIAL LENDING**

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Most banks will traditionally use the 6 C's of commercial lending guidelines when evaluating a commercial loan application. These 6 C's are:

* **CAPITAL**: Company's capitalization, reserves, statement, net worth, etc.
* **CAPACITY**:  Borrowers should demonstrate the ability to repay the loan.
* **CASH FLOW**:  Borrowers should show a debt-service-coverage ratio of at least 1.30
* **CHARACTER**:  Borrower's character, integrity and professionalism
* **CONDITION**:   Business analysis and valuation, as well as a feasibility study of competition and the marketplace.
* **COLLATERAL**:  Borrowers should provide a strong collateral consideration and other securities

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We hope this helps.

Capital Palm Parnters, Inc.

[capitalpalm.com](https://capitalpalm.com)
[{"id": "guzq9t8", "text": "Question - I\u2019ve often heard the 1:2 rule of thumb as primary guarantor needs to have 1/2 the borrowed amount in net worth. Is this still a \u201crule of thumb\u201d? Or is it closer to a 1:3 or 1:1? \n\nI\u2019m kicking off DD on another strip center (3rd as partner or primary) and I\u2019ve outgrown my current lender. Hit legal lending limit with local bank. I don\u2019t want to get to the end of DD, run into a NW crunch and be forced to bring on a partner.", "replies": [{"id": "guzt4ks", "text": "Following for this information", "replies": [], "depth": 2}, {"id": "gv0lm27", "text": "Depends on the lender. Typically GSEs like Fannie or Freddie require a 1:1 ratio.", "replies": [{"id": "gv0o6h9", "text": "What would the GSE for commercial mortgages be? I\u2019m not familiar with it.", "replies": [{"id": "gv10x93", "text": "There are no GSEs for commercial real estate collateral, only multifamily.", "replies": [{"id": "gv2kn18", "text": "That\u2019s what I thought but was questioning my knowledge.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gv3m2id", "text": "The lending limit with your current bank is likely based on your global recourse debt. If you feel as though your current lender offers the best rates, you may want to look at refinancing another loan into non-recourse debt as this will free your limit. \n\nThe 1.20x rule is mainly applicable for the property level DSCR, though we see some banks underwrite the guarantor to this level. Each group is different so 1.20 - 1.30x should be about right. \n\nA majority of the lenders I deal with (cm mortgage broker) are asset based lenders. They primarily focus on the stability and cash flows of the subject property. Not to say they don't consider the guarantor's financial status...", "replies": [{"id": "gv4ox7v", "text": "No - they are a low market cap bank (&lt;100m) I\u2019m hitting their legal lending limit.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "guzygf0", "text": "We don\u2019t use that particular metric, what we do like to see is 10% of total CRE assets in cash.  For example, if you have $4MM in CRE investments, we want you to have $400k in cash.", "replies": [{"id": "gv0qawf", "text": "Ex - \n\n6m in CRE, 2.5m NW, 300k cash. Have a 2.5m development deal on the table (based on a 6.75 cap, borrowed amount would be 2m 75% LTV 1.41 DSCR) (8.5m total CRE portfolio at that point) - don\u2019t want to run into a 1:2 NW to total obligations requirement or anything else that would force me into a partnership on this project.", "replies": [{"id": "gvaf5g8", "text": "In your scenario, the bank would ideally want $850k in cash- 10% of your entire portfolio.  What is the property type?", "replies": [{"id": "gvbgme2", "text": "Small 3 tenant strip (5600 sq feet) solid national tenants with corporate and personal guarantees.\n\nEdit:\n\nA couple of questions. On my other projects it was just 10% of whatever the new deals debt was in funds available at closing, not of global debt.\n\nI\u2019m assuming this change is related to covid losses, would cross collateralizing satisfy this? Barring that it sounds like I\u2019ll need to sell one of my projects to satisfy this requirement and continue developing.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gv0m0u5", "text": "We're glad to see our discussion topic has comments. Thank you everyone. \n\n&amp;#x200B;\n\nThe 1.20 DSCR has historically been the general rule. However, covid has enabled lenders to be more conservative to help reduce the risk.   Even now with restuarants: concidering many businesses have been impacted, we are seeing lending institutions require 1.25. But for us, we have raised our minumum requirements for now.  \n\nAll the best\\~", "replies": [{"id": "gv0oiso", "text": "So that would be the deal cash flow and DSCR but I\u2019m interested in your global picture requirements (net worth, global cash flow, minimum history etc)", "replies": [{"id": "gv10z5v", "text": "Based on what you mentioned, your deal would be a pass for us because of the light cash-at-hand/ cash-flow and the type of development you're looking at. We realize this is in the early stages, but a strip center in this market would not fill our appetite.   Do you have an anchor tenant willing to commit? What about any other pre-leases? How much available equity do you have that could be used in a cross-collateral interest?  These are options that someone else may want to look at.\n\n&amp;#x200B;\n\nBest of luck to you.", "replies": [{"id": "gv2kijr", "text": "5600 sq ft total building - commitments for 3200sq ft with corporate and personal guarantees.\n\nDSCR of 1.41 when fully leased (exceeds your stated DSCR) - in talks with a mobile user for the last 2400 end cap to make that happen. All other properties were fully leased before build, 10yr primary terms 10% escalations at end of year 5 and at exercise of 5yr options. Corporate and personal guarantees. \n\nTypical tenant line up QSR style user end cap with drive through, inline space for pickup food or hair user, end cap sized for mobile user or similar retail. All are amazon/internet proof and in markets that didn\u2019t shut down. Typical leverage is 75% LTV. Other deals all run 1.25 - 1.31 DSCR and are in first 2-3 years of leases.", "replies": [{"id": "gv35a41", "text": "What State are you in?", "replies": [{"id": "gv4p25a", "text": "Oklahoma", "replies": [{"id": "gv5akwa", "text": "&gt;Typical tenant line up QSR style user end cap with drive through, inline space for pickup food or hair user, end cap sized for mobile user or similar retail. All are amazon/internet proof and in markets that didn\u2019t shut down. Typical leverage is 75% LTV. Other deals all run 1.25 - 1.31 DSCR and are in first 2-3 years of leases.\n\nOklahoma is good.  \n\nAre you the owner?  Are you looking to purchase or recapitalize it? What kind of money are you seeking?", "replies": [{"id": "gv5chb8", "text": "Owner and developer.\n\nSeeking construction financing with a perm solution once completed.", "replies": [{"id": "gv5fhia", "text": "How much are you looking to borrow?", "replies": [{"id": "gv5giv7", "text": "Between 1.8-2m depending on building quote for construction - \n\nPerm I\u2019m looking for 7yrs fixed with adjustments every 5 after that on a 25yr term 2% prepayment penalty for first 5yrs \n\nHave a couple similar deals in the hopper but nothing solid yet - probably won\u2019t firm them up till 1st Q 2022", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gv1jcw3", "text": "You can add citizenship in there.", "replies": [], "depth": 1}]