Commercial real estate loans are the loans secured by means of commercial property such as an industrial warehouse, shopping centre, leaseholds, cooperatives or even oil in some countries. These loans are designed in a manner such that the borrower and lender both have their needs met and the common purposes of these loans are to refinance, acquire or redevelop the commercial property. Commercial real estate is one of the three primary types of real estate. The other types are residential real estate, which is used for living purposes; and industrial real estate, which is used for manufacturing and production. In this, the investor owns the building and earns off the business activities taking place in his building.
To understand how commercial real estate lending works, we need to know what Debt Service Coverage Ratio or DSCR means. DSCR = (Annual Net Income + Depreciation + Interest Expense + other non-cash and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments.) Another key term is loan to value ratio, calculated by taking the ratio of a loan to the value of an asset purchased. These are the main two means of calculating the loan amount. Interest rates for commercial mortgages may be fixed-rate or floating rate. The interest rate on a commercial estate is dependent on market interest rates as well as underwriting factors. Banks, conduit lenders, government agencies and insurance companies lend commercial real estates; banks being the most common provider.
Finding a strong commercial real estate deal is easier when you are familiar with the above key terms. Also, it is important to determine a map of action. It is necessary to be aware of how much you can afford to pay, the returns made etc. Another necessary step is finding the best deal out there. To make the right choices, you need to be aware of the different providers and their ways with commercial real estate lending. Depending on your location, a little research work will definitely help make a better decision.
According to trends, providers of loans usually prefer a minimum debt service coverage ratio in the range of 1.1 to 1.4. As an example, if the owner of a shopping mall receives $600,000 per month from tenants, pays $73,000 per month in expenses, a lender will typically not give a loan that requires monthly payments above $479,091 ($600,000-$73,000)/1.1), a 1.1 debt cover. As for loan to value, the lenders prefer it to be in the range of 55% to 70% for commercial real estates. For instance, if a borrower wants $7,000,000 to purchase an office worth $10,000,000, the LTV ratio is $7,000,000/$10,000,000 or 70%. Lenders also consider rents per square foot, replacement cost per square foot and cost per square foot. These are dependent on the location and the use of the property but are anyway useful terms. However, after the financial crisis, debt yield has become a more common metric. It is calculate by taking the ratio of net operating income of the property and the amount of mortgage.