| Two of the more common reasons for | | | | will still have $.20 left over after all expenses and |
| commercial mortgage decline are property value | | | | the commercial mortgage have been paid. |
| and or concern over net income. As capital | | | | Banks that are conservative will raise the DSCR |
| sources continue to tighten underwriting | | | | to a 1:1.25 or even a 1:1.35 on properties like |
| standards, borrowers feel the pinch in lower loan | | | | hotels, assisted living facilities, etc. Sometimes |
| to values and higher debt coverage ratios. | | | | though a bank will become more conservative |
| Transactions that were tight, but doable 3-6 | | | | with this guild line but do it in a less obvious way. |
| months ago are, in many cases, simply not | | | | For example, they may raise their underwriting |
| fundable today. | | | | vacancy or management percentages from a 3% |
| Building types and or borrower situations that are | | | | to a 5% (or as high as 10%)but still say their |
| considered unusual are having a worse time at it, | | | | minimum is an aggressive 1;1.2 - which is basically |
| and are often simply ignored. In fact, it is | | | | misleading. |
| estimated by our contacts at banks, that as high | | | | Another component that is often tweaked is the |
| as 80% to even 90% of all commercial mortgage | | | | replacement reserves. On office building it's |
| requests are being declined by traditional banks as | | | | normally $.20 per square foot for example. By |
| of this writing (2/1/08). | | | | raising that to $.30 psf it further covers their |
| Value | | | | position and makes the loan that much more |
| First of all, banks tighten the "reigns" by lowering | | | | difficult to qualify for. |
| loan to value standards. This reduces their | | | | Margin |
| exposure as banks are questioning where exactly | | | | Another issue which is especially relevant today is |
| values are and are going to be. On a refinance it | | | | the widening of margins by banks. There doing |
| is was not that difficult to find lenders that would | | | | this out of uncertainty of the market/risk and or |
| go to 80% loan to value 6 months ago. Now, | | | | for increased profit. In many cases we have seen |
| there are only a few lenders in the nation that | | | | banks doable their margins from a year ago. So if |
| continue to offer such high ltv's and they want to | | | | you are currently shopping for a commercial |
| be compensated with high margins and fat | | | | mortgage and are confused by the fed lowering |
| prepayment penalties. A good example of this is | | | | the discount rates and yet the rates your quoted |
| on flagged hotels. 75% ltv on a cash out refinance | | | | are increasing or remain the same it's due to the |
| were common, assuming of course that the net | | | | bank increasing their margin/spread. |
| operating income supported the debt a year ago. | | | | For example, many commercial mortgages are |
| Today we struggle to find lenders that will go to | | | | tied to the 5 year swap, an index you may have |
| 60-65%. | | | | not heard of before. As of 1/18/08 this index |
| There are different ways to compute value as | | | | was at an incredibly low 3.3% vs. 5.5% roughly 18 |
| well. For example many hard money lenders will | | | | months ago. So if the lenders margin was 4% |
| use a shortened marketing period, like 3-6 months | | | | your actual rate on your loan would be 4%+ |
| as opposed to the normal 9-12 months period. By | | | | 3.3% or 7.3%. Three month ago it was common |
| doing this it often reduces the appraised value by | | | | to see margins as low as 2% -3%, which would |
| 20-30% of the properties real worth; because the | | | | have equated into an effective rate in the 6%'s. |
| property is essentially being valued on a liquidation | | | | One last thought, if you have recently been |
| standard. | | | | declined, it is to your advantage to find out why |
| Income | | | | ,so that you can better prepare yourself and your |
| Another way banks reduce their risk is by | | | | next lender of the issue. Discuss the issue early |
| increasing Debt Service Coverage Ratio's. This | | | | on, it may not be a problem with the new source |
| ratio computes a business's or income properties | | | | or they may have a different way of dealing with |
| ability to meet the potential mortgage payments. | | | | it. Do not try to cover it up. Underwriting will |
| A typically ratio is a 1:1.2; meaning that for every | | | | discover it and you will waste your time and |
| $1.20 in net income, the proposed mortgage | | | | money. |
| payment cannot exceed $1 dollar. So the owner | | | | |