Commercial lending
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[{"id": "fsou5pu", "text": "DSCR is a simple ratio, it\u2019s your Net Operating Income / Debt Service Payment. \n\nThe DS payment is pretty static it is what it is. However, a property\u2019s NOI can be underwritten differently based on different expense loads. Different owners operating properties more or less efficiently. Your bank most likely uses a higher expense load, typically higher than how you actually operate your property, which is why you seem to qualify for less.\n\nDo you operate a business or a property? A business loan, 9 times out of 10, is derived off of the tax returns so if you overly write off \u201cBS\u201d expenses then you have a lower Net Income Available for DS. Note, a loan is not derived off of your rent or revenue but rather your net income after expenses.\n\nOh and yes, check out investopedia.", "replies": [{"id": "fsp4q9f", "text": "Bro this is wrong. It\u2019s NOI / DS. Most lenders look for at least a 1.25 DSCR, but higher now", "replies": [{"id": "fsp4s8a", "text": "Lol Tru got me", "replies": [{"id": "fspkbk3", "text": "Also DS payment isn\u2019t static if you got a floater lol", "replies": [{"id": "fspokry", "text": "Cuz it\u2019s still loan amount x constant, doesn\u2019t matter fixed or floating. There\u2019s no way to argue that like a sponsor and lender can argue on replacement reserves and management fee.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fspqlop", "text": "Many use NOI but some also include capex reserves above the line.  Can vary by lender so it\u2019s good to ask lenders how they underwrite so you can mimic theirs.", "replies": [], "depth": 3}, {"id": "fsq94a7", "text": "To add to this - most lenders still remain inactive as the duration of market volatility remains uncertain. I\u2019ve been seeing DSCR of 1.5-2x on stabilized property as a benchmark (former capital markets analyst now turned principal analyst).", "replies": [], "depth": 3}, {"id": "fsrszv7", "text": "Our bank just sent us the proforma and it has three DSCR:\n\nCompany 1.25\n\nPersonal 1.41\n\nGlobal .53", "replies": [{"id": "fstijcx", "text": "Something in their calculation seems off. All of these debt service calculations are some form of cash flow divided by debt service. The global should be all combined cash flow divided by all combined debt service. If both ratios are above 1.00x the global should also be above 1.00x. They are either making some serious errors, or are making some large adjustments that they have not explained to you.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fsqvezm", "text": "Thanks for the explaination. We have a new accountant who saw that our old accountant was not taking signficant deducation. However, I think those deductions may have lowered our numbers making us look less favorable to the bank. Nonethless, I am still having a hard time wrapping my head around the fact that our commercial mortgage would be the exact same as our current rent, which we've successfuly paid, at the current rate, for the last seven years. \n\nI will check out investopedia to learn more about this.", "replies": [{"id": "fsrmm7b", "text": "I\u2019m not sure I understand why you\u2019re equating the mortgage to your rent? You mean the debt service payment on your mortgage is equal to the cost of your rent? This may be true but there are other benefits to ownership such as writing off depreciation and interest expense on your taxable income, building equity as the value of the property goes up and you amortize your loan down, all the while still possessing and using the space for the same cost that you would while renting.", "replies": [{"id": "fsrrxmk", "text": "The bank has said they can't approve a loan because of our cash flow.", "replies": [{"id": "fss7sbj", "text": "I saw your update. I don\u2019t know why your global DSCR is so low when it should be a product of your business and personal ones. I\u2019ll tell you this  I\u2019m a commercial mortgage broker and to be honest, banks make mistakes all the time. Maybe sometimes they aren\u2019t smart maybe sometimes they\u2019re too busy but it\u2019s a rule of thumb to always check their math and assumptions.", "replies": [{"id": "fss9ly2", "text": "It did seem like an odd figure based on the company and personal numbers. Plus we have almost no debt that should be contributing to lower numbers, but nonetheless it may have been their polite way of saying no thank you withouth alientating us a busiiness and personal customer.", "replies": [{"id": "fssbgnj", "text": "Don\u2019t be so sure banks make money by lending money. I would call them back and walk through their math, make sure they understand your expenses and tax returns before you throw in the towel", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fsvsdoh", "text": "Curious - You say business loans DSCR's are 9/10 based off tax returns. Can anyone else confirm this? Of our 12 mortgages, only in one of them dictates NOI be calculated off the tax return, and coincidentally that is the one we struggle to remain compliant. We are constantly balancing lowering tax liab for Owners/Investors with the DSCR. Just curious if our situation is as unique or we just had had good lawyers negotiate these for us.", "replies": [{"id": "fsvsjib", "text": "When i mean business i mean like an operating company not an SPE LLC that owns real estate. Tons of my lenders don\u2019t UW to tax returns.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsp3a1e", "text": "If you own a small business, lenders look at you negatively...especially if you haven\u2019t been around for 5 years.  I used to pay myself owner distributions but started taking a salary because it helps with lenders (business loans or refinancing primary house).", "replies": [{"id": "fsqv5pg", "text": "We have been in business, without a loss for 26 years and we pay both the corporate officers a salary.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fspcob5", "text": "What is the collateral for your loan?", "replies": [{"id": "fsqv32s", "text": "We don't have collateral. This was a loan for a commercial piece of real estate.", "replies": [{"id": "fsqwosy", "text": "So, unless you're applying for an unsecured corporate style cash flow loan, your collateral is the commercial real estate.", "replies": [{"id": "fsqx8vd", "text": "We can't even get past the approval process with the bank because they feel our cash flow is not sufficient to pay the loan. That's where I am having trouble understanding. If we are successful paying rent every month, why does that not translate to a mortgage.\n\nAre we better off trying to personally invest in single family home real estate and building up a portfolio that way?", "replies": [{"id": "fsr3q73", "text": "It still isn't clear to me what kind of loan you're even applying for. They are very different animals. Is the loan for a specific piece of commercial real estate with a mortgage on the property securing the debt? Or is the borrower a management /operating /CRE development company and the loan proceeds are not 100% being used for the acquisition of a specific property?", "replies": [{"id": "fsriy54", "text": "The loan is for an owner occupied piece of real estate that would have at least one tenant.", "replies": [{"id": "fsrpq9u", "text": "OK so for owner occupied commercial real estate a lot of the commercial real estate lending \"rules\" don't apply, as non owner occupied properties are underwritten as investment properties, where the building itself should support the debt. For you, it will be more like they're underwriting your business (like a corporate loan), as your cash flows (probably excluding rent from other tenants) will need to support the building cost in much the same way as though you were buying a piece of equipment for your business.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "fsre565", "text": "Are you buying a building as an owner occupant business? Or as an investment for your company?  \n\n\nSounds too small for me to help as a broker but DM me if you'd like and I can give you some lender referrals.", "replies": [{"id": "fsrivoz", "text": "We are searching for an owner occupied building but staying on the lookout for a property that can have at least one tenant.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsqhmqf", "text": "Try multiple banks, smaller, local banks will be easier to work with than large banks.", "replies": [{"id": "fsqv190", "text": "Sadly this was a small local bank, one we've done business with for over 20 years.", "replies": [{"id": "fsqxnhf", "text": "I have one project that took meetings with 39 different banks to get financed. It may be too big for them, maybe too small, they may not have enough capital or appetite for you asset class, or maybe they just don't like commercial real estate right now.\n\nContact more banks.", "replies": [{"id": "fsqxz4t", "text": "Thank you. That is what we are thinking too. The same bank did this once before on a residential loan despite having a terribly high credit score, a down payment, and zero debt. I think it is their polite way of saying no thank you to companies who aren't worth millions of dollars. It is really disappointing since we've been with them for so long.", "replies": [{"id": "fsqy4u5", "text": "Try credit unions as well. Many are flush with deposits right now. One in my market is offering incredible terms. Also consider the SBA 504 route if all else fails", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fsr2pjc", "text": "The above poster has the correct advice. Shop your business to lenders who are looking for your profile. Some small banks are just not into lending for real estate. They will do it for their clients if you are a 100% match for some program but they won't go outside their narrow limits to keep the business. Some people get their feelings hurt when a bank turns down their business. The turn down may be because you are a good risk but don't meet the lenders profile for investment. Banks have niches too and you need to find one that had a niche in commercial land and buildings. Keep shopping even after you found a lender who says yes. There may be a better deal for you somewhere else.", "replies": [{"id": "fsrj1fg", "text": "Thank you. I guess that was the initial reaction was disappointment that we couldn't work with our long time bank.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsu10kd", "text": "If I had to guess the analyst that ran the numbers did not add back the rent expense. It is a rookie mistake, but it happens.  \n\nThey calculated the Company Debt Service Coverage Ratio by taking revenue and deducting expenses including the rent expense to come up with a Net Operating Income and divided that by the interest expense of whatever debt service the company has.  \n\nThey did something similar with the personal cash flow using the tax return and applying assumed living expenses to come up with a personal cash flow divided by the debt service shown in the credit report.  \n\nFor the global they added both and the proposed loan, but they failed to give you credit for the rent that you are not going to have to pay. That is the only way two ratios over 1.00X result in one below 1.00X when you are saying mortgage payments are going to be similar to the rent. Assuming that you are taking into consideration property taxes and insurance.\n\nAsk them about the math, and mention that you were concerned that the calculation did not take into consideration the fact that the rent expense would go away and be replaced by the mortgage payment.", "replies": [{"id": "fsutpby", "text": "I got a response about the math. The indicated that the cash flow has declined, which I don't see because they have held steady and grown slightly over the three years they reviewed. The difference, is that we got a new account who saw that our old account didn't take major deductions which resulted in major tax bills. She filed amended returns which I think impacted the returns. \nI got sort of confused mixed signals from the discussion. I think I need to really start learning how this works so I am more comfortable in the conversations.", "replies": [{"id": "fsvrmvz", "text": "It still doesn't explain how two ratios over 1X can combine to give you a global under 1.  Having said that, you are correct that cash flow is not revenue. If there are more expenses now than before then the cash flow should be lower.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fsx55cw", "text": "They took net profit after taxes and added back expenses to get their funds available for debt service, not the other way around. I think they should've added back taxes as well, but they definitely didn't lower the numbers.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fsx4tna", "text": "I just ran the numbers like I do at my bank ( I am a credit analyst for a commercial lender) and it looks like what happened is they gave you back your distribution in the business ratio (giving the 1.25) but didn't add it back for the global. The distribution that is higher than your cash flow (46 thousand with only 33 thousand in cash flow) would kill the deal at my bank. Doesn't look like they are using the traditional DSCR that all the comments are talking about, but they are using what I learned as Cash Flow Coverage (CFCR) but my bank and a lot of others call Fixed Charge Coverage (FCCR). Which I know people might try and argue what ratio they use, but the bank has a policy and they use what they have decided and we can't change that. I noticed someone said they didn't add in the rent, but they definitely did. \n\nBottom line is that, unfortunately, unless that distribution wasn't cash and you can sell them on that, they aren't going to do the loan.\n\nGranted I did do an analysis of their numbers and not the tax returns, so that could have influenced my numbers. But their math is sound. \n\nWish I had better news for you.", "replies": [{"id": "fsx9vll", "text": "Thanks for taking the time to take a hard look at this. What steps can we take to make our numbers appropriate? We definitely either need to buy something commercial or start investing in rental properties .", "replies": [{"id": "fsxf1rf", "text": "Was the loan you applied for through the SBA? With our bank, when we can't do anything because of policy, loan committee, etc. we let the loan officers over the small business center look at it and they can sometimes help a little better. They tend to have a little more wiggle room. If not, then our committee would want you to add another guarantor, or out in a lot more cash or something like that to keep equity. \n\nGoing forward taking distributions, taking smaller ones if possible ( I know it's not always realistic) can help your business ratios. If you have any real estate loans outstanding, doing a cash out refinance can help your position and possibly get you a better deal. \n\nWhat kind of Commercial Real Estate is it? If you are going to lease it out, then you might get a lender to justify it by the rents you expect to get from it.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fuurixd", "text": "It sounds like you're looking for owner user financing, not investment real estate financing. Totally different lending parameters and criteria. Depending on your net worth and several other factors you might be better off with an SBA loan", "replies": [], "depth": 1}, {"id": "fv3bi5c", "text": "Lender here. Former underwriter too. I\u2019d be happy to dig through the numbers with you if you\u2019re interested. Surprised your current lender didn\u2019t do that with you", "replies": [], "depth": 1}]