Friday, August 29, 2008

When Can LOI Be A Four Letter Word?

In the best of times when a borrower or mortgage broker would bring a scenario to a lender, an LOI, or letter of interest, would typically be fairly easy to obtain. This "indicated" that the lender, or the broker in conjunction with the lender, was providing a pre-approval of your loan based on a set of conditions being met. One of these conditions is that the third party reports come back satisfactorily. Often, some lenders or brokers would require a fee on top of that to put the process in motion.

Today, these LOI's may still be somewhat easy to obtain, but in an environment where money is tight and lenders are backing off, it becomes that much more critical to be SURE that the lender you are bringing a scenario to is actually the right lender for your property type and borrower of a certain level of strength. Remember that if you get an appraisal done for one lender and don't get a commitment, another lender will require third party reports as well, typically by the people they use. Time is money and much time can be wasted with the wrong lender that drags the process out saying they can do a loan when in fact they can't.

Times are hard, but we can't compound the problem by not doing our homework. We can go the the right lender for our property and borrower and still not get the commitment, but we need to give ourselves the best chance at success. What might an LOI look like. Tale a look below and see that the disclaimer is in it that all of the details need to be satisfactory. Sometimes, even when they are the lender will still "find" a reason to back off.

June 18, 2008, 2008

Re: 123 ABC Ave.
Brooklyn, NY, 11223

Dear Mr. Doe,

In response to your request for financing for the above referenced property, I am pleased to inform you that you are approved pursuant to the following terms and conditions;

Loan amount: $850,000 or debt service coverage of not less than 1.30
Term: 5 year fixed/ ARM 20 year amortization
Interest Rate: 9.250 %
Prepayment Premium: 5 years interest guarantee + 3% penalty for 8 years
Borrower may prepay up to 20% of the principal balance of the loan in any 12 month period without penalty
Processing fee to CCA in the amount of $695.00 payable at closing.
The borrower shall pay all 3rd party fees including but not limited to; legal fees, appraisal fee, environmental and assessment fees, title, flood search and tax recording fees.
Rate locks at final underwriting approval

Loan approval will be subject but not limited to:
Appraisal in the amount of $1,062,500 representing the complete value of the property.
Review of borrower’s credit not less than 700 mid score at time of closing
Insurance naming lender as first loss payee.
Title report acceptable to the lender’s attorney.
Receipt of all commercial leases

Property Tax and Insurance impounds are required.

Agreed and accepted Sincerely,


This is not a commitment. It is an offer based upon information provided by the applicant based upon rates and programs available today. A formal commitment will issue after the application process is complete.

Thursday, August 28, 2008

Do Cap Rates Tie Into Treasury Rates?

In a "normal" real estate market, capitalization rates, or cap rates, will typically drop as interest rates drop, and go up as interest rates rise. Remember that cap rates represent the return that a buyer of an income producing property will earn on their investment. If rates drop, then the spread between "risk free" investment returns (aka Treasuries) and the various commercial property types should stay the same, therefore lower cap rates. The opposite is also true, that if Treasury rates rise cap rates should as well. This of course takes into consideration that the cap rates of some markets will rise, fall or stay the same for other reasons as well, such as regional considerations, improving or deteriorating property characteristics (e.g. lodging) or deteriorating or improving area economics.

Now, however, due to shift in the risk profile and real and perceived riskiness of certain asset classes, a drop in treasury rates will not necessarily translate into a drop in cap rates or commercial mortgage rates. Sometimes it will, and sometimes not. Research developed by gives some examples. As always, real estate is local, so it is critical that we do our homework, whether an investor or broker, so that we know what the real story for our particular area is. The chart can be viewed at .

Wednesday, August 27, 2008

What Will Resolve Our Real Estate Crisis

What is going to take the real estate crisis that we are in and begin to stabalize it and allow us to move forward. For answers to my questions I look for people who on a macro-economic basis typically have a great handle on things. In this case, my source may sound like a strange one, but it is Jim Cramer, the guy on TV that talks stocks. While his stock picking can be good and bad, given his extremely thoughtful (and loud) analysis and long history of success on Wall Street, I have found his macro economic anaysis to be spot on most of the time.

This is what Cramer has to say:

"Jim Cramer's "Mad Money"
Cramer told viewers, that until the crisis that has enveloped Freddie Mac (FRE) and Fannie Mae (FNM) is finally resolved, the markets will continue to decline. In order for the market to finally bottom, said Cramer, housing has to stabilize. That requires lower interests rates, lower home inventory and higher home sales, and a resolution with Fannie and Freddie. Cramer said he stands by his prediction that the markets will not take out the lows set on July 15, but that prediction will not hold if the government doesn't step in soon. He started a new "Mortgage Mess Countdown" to see just how long it takes the Treasury to act and save the market from its continued slide."

I agree with what he has to say, but because FNM and FRE are huge political footballs, a clear resolution is not necessarily on the horizon. His point is that Freddie and Fannie are insolvent, and that these quasi governmental agengencies need to become full governmental agencies. While this might not be good for the common stock holders (although it hasn't been a very good ride up till now), it will be a good thing for anyone that has an interest in the real estate markets finding a footing.

To be continued.

Tuesday, August 26, 2008

The Commercial Mortgage Market: Educate The People

I have written previously about how in this market, it is critical to use more creative ways to drive business. One of the best methods that we have utilized is to provide short educational seminars to both mortgage brokers and real estate investors that are interested in learning more about commercial real estate and how financing these properties differs from financing a home.

These seminars are short, typically 45 minutes to an hour, and are completely content driven. They are generic to the market and do not advertise our firm. They take various forms ranging from in-person if the geography is right to teleseminars and webinars.

How do you generate these sessions for yourself. First decide on a topic that you want to emphasize. Then, it is once again about getting yourself out there. Our method is to reach out to groups and organizations that are always looking for speakers that can talk about a topic that is of interest to the membership.

In this business, it is extremely important to be known, but more important than that is to be known as someone that has the answers and can get things done. Just as an example, this is a flyer that we use as one of our methods of marketing a session that we are going to run. It is short, to the point, and lets the reader know how content driven it will be.

Commercial Capital Alliance/Exeter Commercial LLC
Commercial mortgage lender/broker/trainer since 1990

If You Are Interested In The Commercial Mortgage Market!

We Will Conduct A Free One Hour Session That Will Teach What You Need To Know To Analyze A Commercial Mortgage Deal.

It is critical, particularly with the current market environment, to know every sector of the mortgage market. We will teach you about NOI, Cap Rates and DSCR and how to determine if a deal is viable or a waste of your valuable time.

At the end of the session, you will feel that you have the knowledge necessary, whether you are an investor or mortgage broker, to look for commercial mortgage deals confidently. You will know the questions to ask, the information to ask for and all of the lingo of this market.

Call or email today for more information or to make an appointment! You'll be glad you did.

Michael Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC
131 Jericho Turnpike, Suite 202
Jericho, New York 11753

This solicitation is short, tells the story and most importantly will provide value to whoever attends.

Monday, August 25, 2008

What Does It Take To Succeed In The Mortgage Business (Or Any Business)?

As promised when I started this blog, not everything will be about mortgage training, but some will be about what I consider to be life training. Whether you are a mortgage broker, real estate broker, investor, teacher, builder or anything else, there are certain basic tools that are needed in order to succeed.

None of these tools represent rocket science, but through my experience it sometimes helps to sit back and review them so that they are fresh in our minds. After business school I was a bond trader, and there are few jobs that give you the daily, as well as minute by minute emotional gyrations as having money at risk. This job taught me some simple lessons in human nature, one primary one being that misery loves company. The second lesson I learned is that you cannot succumb to lesson number one.

How Does This Relate To The Mortgage and Real Estate Markets?

When the market was tough, and positions were going bad, the general practice was group commiseration. What does that mean? You know how it goes: groups standing around moaning and groaning to each other about how bad everything is and how there is nothing to do about it.

This situation is very similar to today's mortgage and real estate markets, where most people are not doing particularly well, and the easy path is to latch onto that and use it as an excuse. In reality, those that will survive and perhaps thrive take a different angle, which is to sit, think, maybe think outside the box, and take some proactive steps to try and get business going.

Proactivity is a key. Will every idea work? Will any idea work? Maybe. Maybe not. The truth is that NOT taking any steps isn't working, and maybe out of one idea another will present itself. Like a game of pool, you have to think a few moves ahead. While the market is bad today, it will not always be bad. Markets go in cycles. We had a great market and now we have a bad market. It may stay bad a while longer, but what goes down will eventually go up.

Banks aren't lending right now, but they will again because that is their business. Great borrowers that had money being thrown at them now need to be open to bridge money, but will again be able to go to the banks.

In a round about way what this all means is that whatever you are doing, it is okay to get down. The key and the trick is to not get buried. The way out of a bad feeling is to act in a positive way. One way that I have decided to act is creating this blog which allows me to both educate on the market I am involved in, as well as write pieces like this one that gets me thinking, much like I hope it gets you thinking.

I hope that you find your way too.

Thursday, August 21, 2008

Commercial Mortgage Underwriting Through the Eyes of the Underwriter: The Conclusion

Paperwork Preparation, or The Loan Package

Remember in the beginning we talked about the importance of putting your best foot forward when applying for a loan either for yourself or for a borrower. We talked about having one chance to make a good first impression on the underwriter.

The first step is to know the situation as well as possible so that potential surprises can be avoided (although they will inevitably arise). The second is to make sure that the numbers seem to work for the building as well as the borrower so that the lenders and underwriters time is not wasted with scenarios that have absolutely no possibility of getting funded.

If the minimum credit score for the lender is 600, don’t bring a borrower with a 520 that has no stronger guarantor. If the minimum DSCR for a given building type at that lender is 1.25x, don’t waste their time with a building and loan amount that will result in a DSCR of 1.05x.

While exceptions can be asked for and sometimes granted for aspects of a loan that might not fit the lenders’ specific criteria, use COMMON SENSE underwriting when looking at a potential scenario. You ultimately want to be the person that the underwriter is happy to hear from because they know that the loan scenario you are bringing them will be viable, and not a complete waste of their time.

Not every viable commercial mortgage loan scenario will ultimately get funded, as a wide variety of stumbling blocks can come up un-expectantly throughout the process. The key is to know your scenario inside and out, and build a strong base which will lead to a strong loan package.

Rule 6: As in anything, a weak foundation or base for a loan package will lead to a relatively high probability of the loan not getting funded because it will never get through underwriting.

General Documents Required for a Commercial Mortgage Loan Package

What is the paperwork that you should be prepared with to provide to the underwriter?

1003 or loan application
Credit Report with FICO score (and explanations for any derogatory credit)
Two years personal tax returns (for a full documentation loan)
Two years of property tax returns
Property income and expense statement
Digital pictures of the property
Copies of current leases and rent roll
Schedule of other owned real estate
Contract of sale for a purchase
Copy of insurance and utility bills for the building
Current mortgagor information for a refinance
Agreement to subordinate to a new first mortgage loan if a current subordinate mortgagor exists in a refinance


The underwriter at the given lender is going to assimilate all of the paperwork provided, and make a determination on its validity and accuracy. If everything is found to fit into the lenders parameters and risk tolerances, an LOI or letter of interest will be given to the borrower. The interest rate and loan amount will be at a level commensurate with the DSCR and perceived risk of borrower and building.

The relationship that you will have with the underwriter on the one hand needs to be professional and hopefully congenial, but it has to be understood that first and foremost they are there to protect the interests of the lender. Exceptions on a specific building or borrower will ONLY be made if it can be completely and satisfactorily explained to the lenders satisfaction.

If all of the steps are followed correctly and accurately, your loan will have the best chance of passing muster and getting ultimate approval. Commercial mortgage financing can at time be a frustrating undertaking due to the nuance and potential pitfalls involved, but can be well worth the effort.

Final Rule: Know your lenders, and know for each the type of financing that they do. Never attempt to shove a loan at a lender that is not even close to the lending criteria that they look for. Much of the process comes down to the building to be funded, to the borrower and to the credibility of the person that is bringing the loan to the lender.

Commercial Underwriting Through The Eyes Of The Underwriter Part 2

Commercial mortgage underwriting is done on a case by case basis, because every borrower and property to be financed creates a unique situation. Remember that with commercial borrowers there are typically stories that need to be told, whether it concerns the building, the borrower or both. It is the commercial property investor or LO’s ability to communicate the story effectively, and the willingness of the underwriter to listen with an open mind that matters. These are things that can spell the difference between the successful funding of a scenario versus the death of the deal.

An Underwriters First Most Important Criteria: Debt Service Coverage

When an underwriter is examining a building with an eye towards financing, one of the first questions that need to be answered is:


It sounds like a complicated analysis, but it really isn’t.

Gross rents – operating expenses = NOI

The operating expenses include property taxes, building insurance, building utilities, 5% of gross rents for vacancy and 5% of gross rents for management of the building.

If at first glance at a property you do not have all of the expense figures, a very ballpark way to determine NOI is to take 1/3 off the gross rents, and the remainder will give a very raw NOI number. This number should not be used with the underwriter, but to do a first glance attempt to determine debt service coverage.

To determine the DSCR the underwriter will use the following formula:

Yearly NOI/Total yearly principal and interest payments for the loan amount
at a given interest rate and amortization period

The typical minimum level for debt service coverage is:

1.2x for multifamily property’s
1.25x for other commercial property types

Once the underwriter looks at the result and determines that the number is at a high enough level, case closed and loan approved. Right?


It is now the underwriters’ job to take what on the surface seems to be solid financial information, and get down into the numbers to MAKE SURE of the integrity and accuracy of that information.

Rule 4: Do not embellish rent numbers or minimize expense numbers to make a scenario work. This will be caught by an underwriter whose job it is to catch it. The net result will be a rejected loan, and the loss of any relationship with that lender.

As a side note, consider the risk-reward thinking that goes into a lenders decision based on DSCR. All things being equal, what represents a more attractive loan scenario, strictly according to DSCR:

1.25x coverage or the same building at a 1.35x coverage. Sounds simplistic, but of course the higher coverage is better because it provides more of a cushion for the borrower that has to pay the debt service, and creates a better situation for the lender in the event they have to foreclose and sell the building.


Loan to value or LTV, is not a term that a commercial underwriter really considers when making a determination on the dollar amount of a loan that will be offered for a purchase or a refinance. The key determination is going to be how the income of that building will service the debt of a certain loan amount. Of course other factors, such as an outside appraisal, will come into play when an underwriter is calculating loan amount; DSCR is going to be the key number. Without a coverage ratio at an acceptable level, the other factors will become irrelevant.

For the underwriter, as well as for the investor or borrower to get some idea of the value of the building, and whether it has a good chance to appraise at an appropriate value, the capitalization rate for the given area can be used in conjunction with the NOI of the building. Simply use the following calculation:

NOI/capitalization rate will give you a ballpark value for the building, as long as the two numbers are accurate.

Rule 5: Most if not all lenders are going to require an appraisal by an independent firm on that lenders approved list. Getting an appraisal upfront before speaking to the lender can be a waste of time and money. Of the different methods that an appraiser will use to calculate the value of a property, the INCOME APPROACH is the key method.

Tuesday, August 19, 2008

Commercial Mortgage Underwriting Through the Eyes of the Underwriter

This is going to look at the underwriter and the process as though it was being approached by a mortgage broker. If you are an investor in commercial property looking to get a building funded, the thinking is the same only in the 1st person.

At first some of what you read today will sound redundant, but as we move into the next couple of days I hope that we can demystify the process, and bring you up to speed on who this person behind the curtain is, and how they look at your scenario.

Commercial Mortgage Underwriting Through the Eyes of the Underwriter

Getting a borrower to approach you with a commercial mortgage loan scenario is only the 1st step in the commercial mortgage loan process. Upon your first analysis of the scenario, there are a great many combined factors that will determine if it will ever fund or close. The best borrower and the best property means nothing if due to some error, a careless mistake or a poorly put together loan package there is no closing. Equally, if not more so than residential financing, the commercial mortgage business is extremely relationship driven, particularly when talking about lenders.

An old adage is that two LO’s can bring the same deal to the same lender, and due to something that has or has not happened in the past or because of the lack of a current relationship, one will get a loan approval and one will not.

Rule 1: Always do what is in the best interest of the borrower, AND in the best interest of the lender. Happy borrowers lead to referral business, and happy lenders lead to your next viable deal getting strong consideration.

Rule 2: Always manage your borrower’s expectations when it comes to the potential rate, timing of the transaction and money that is necessary to close a loan. DO NOT tell your clients what you think that they want to hear, tell them the reality. If someone else is over-promising and can’t deliver, the borrower will be back. If for some reason they are able to get that better deal, you want to recommend what is in their best interest.

Rule 3: Do not burn bridges with a borrower and the potential referral business they might provide by jamming the wrong deal at them to make a quick dollar.

Who is the Underwriter?

The underwriter is the representative of the lender whose ultimate job it is to gauge the risk that a specific transaction possesses to go into non-performance. It is his or her job to study every aspect of the loan from the quality of the building, the income stream of that building and the quality of the borrower to determine if the loan fits into the lenders risk guidelines. In order to enhance the potential for loan approval, present the underwriter with the most complete and accurate loan package.

Some of the items they will consider includes:

  • What is the “curb appeal” of the building, or how does it look? In the event of a foreclosure, an ugly building would be harder for a lender to sell than an attractive one, increasing the risk to the bank.
  • Who are the tenants and how long are the existing leases? If the tenants leases are expiring 30 days after the loan closes, that represents more risk to the income stream of the building than a lease that expires in 3 years. What is the quality of the tenant’s? If you had a building that had Kmart as a tenant, that would have seemed very strong until they went into bankruptcy and closed locations. For a lender that had to foreclose on the property and sell it, a space that size is hard to rent out which makes the building harder to sell at the price they need to cover the defaulted loan that they made. A Home Depot with a long term lease as an anchor tenant would score more points with an underwriter than a $1 store. Like an investor in anything, a commercial mortgage lender always has to make a risk-reward judgment.
  • Who is the borrower? While the key to a commercial mortgage loan is the net operating income that the building produces, the quality of the borrower does come into play. An underwriter wants to know credit score, and whether the borrower has payment lates, particularly on mortgages. Mortgage lates will be the death knell of a loan for a majority of lenders. Again, everything is looked at by the underwriter with an eye towards the risk that a loan will present to the lender in terms of default. The greater the risk that a loan possesses, the higher the reward or interest rate that a bank will charge and the more stringent the guidelines of the loan. (i.e. an additional monthly reserve mandated for maintenance if it is felt that the borrower might not have the means if an unexpected repair came up)

Just Who Is The Underwriter?

Now that we have taken a look at the criteria that we use to analyze a loan and determine if it is viable, the next step is to learn how to view a loan through the eyes of the most important person in the process (besides the borrower), the underwriter. Over the next few days we will see how the yay or naysayer in your loan looks at what you present.

The underwriter is really the gatekeeper of your loan. You deal with a person inside the bank or a field rep who then presents your scenario to the underwriter. When you deal with the rep. it is imperative that you explain the loan, the building and the borrower in very clear terms. If there are little nuances to the loan that make a difference, make sure that those are explained. If the borrower's financial background is better than it looks, explain that. If the building, the tenants and leases needs an explanation, provide it. Include a picture of the building as many lenders are concerned about curb appeal. Because you will be dealing with a middleman that is presenting your information, make sure that everything you need to be told is explained.

Remember what your parents told you growing up, you have one chance to make a good 1st impression. The same goes for your loan. If it is not presented well, the underwriter will develop a bias against the loan, even if the facts are later corrected. Your best bet, whether you are the borrower or a mortgage broker is to make sure that all of your i's are dotted and t's crossed.

Along these same lines, underwriters are human. If a borrower or a broker is constantly presenting deals that are not good and do not have much chance of getting funded, when a good deal is presented the underwriter will already have placed one strike against it. If, however, a borrower is always presenting strong deals with a high likelihood of success, the deal will initially be looked at in a positive light. Think about it like college. If you handed in A work in the beginning, you were looked at as an A student. If you handed in C work, you were looked at as a C student even if future work deserved an A.

The bottom line is that your reputation is everything, so do everything you can to keep it. Next we will begin to break it down.

Monday, August 18, 2008

The Final Puzzle Piece: Debt Service Coverage Ratio

Over the past week or so, I have discussed some of the basic criteria and analysis that go into the determination of the viability of a commercial mortgage loan. We have looked at how we get to a building’s net operating income or NOI. This is key, because it tells us how much, after expenses, the building earns. And remember, in a commercial loan the key is what the building earns. This is one of the reasons why two side by side buildings with the same number of stores and apartments above can be worth two different amounts. Different levels of NOI! We have looked at capitalization rate, or the return that a buyer of a commercial property wants on their investment. We showed how this number, along with NOI, can give us an idea of what a building is worth.

Now let's put it all together, and look at what an underwriter is going to look at. Will this income be able to service the desired loan at the appropriate level.

Debt Service Coverage Ratio or DSCR

We are now going to examine the most important number, the number which will go a long way in determining whether or not a commercial mortgage loan can get funded. It is a number that can get a loan amount cut, or even potentially increased. This number is the debt service coverage ratio, or DSCR. Remember what we said early on. Commercial mortgage loans are not about LTV, but they are about the DSCR.

DSCR is not a complicated formula, but it will tell us if the debt service (principal + interest) of a given loan amount at a given interest rate will be adequately covered by the NOI that the building produces. Again? Will the annual NOI divided by the annual debt service coverage of the desired loan result in a DSCR high enough to satisfy the lender. Typically, the minimum DSCR level will be 1.20X or 1.25X depending on the property type.

Now let’s take a look at an example. Remember that the calculations are not complicated, but the results are critical to the success or failure of loan funding:

NOI = $80,000 Annual Mortgage Expense = $65,000

DSCR = $80,000/$65,000 = 1.23X which is OK for certain property types

What if the NOI goes down, or the mortgage expense goes up?

NOI = $75,000 Annual Mortgage Expense = $68,000

$75,000/$68,000 = 1.1X DSCR which is not a good number.

A way around this is a lower loan amount which will result in a lower mortgage expense. This will require a larger down payment for a purchase, or lower proceeds in the event of a refi.

If a DSCR is just below the required number (i.e. 1.17X when 1.20X is required), exceptions by an underwriter can be made. The decision to make the exception will be affected by the state of the market (not to many exceptions going on now), as well as the relationship that you have with the underwriter. If you have always brought quality deals and know what you are doing, your situation will be considered more seriously than someone who typically brings questionable deals and seems to not know what they are doing.

In any event, the bottom line still remains that:

The Income Producing Property Must Be Able To Support Itself!

Friday, August 15, 2008

What If I Need A Non-Conventional Commercial Mortgage Loan?

Good morning. In a continuation of this weeks focus on looking at, and analyzing a commercial mortgage loan scenario, today I am going to address the information that you will need to know if you or your borrower is looking to do a commercial construction project, or if as a borrower you can't qualify for a conventional commercial mortgage loan.

In these turbulent times in the mortgage markets, minimum credit scores that were once 600 or even below are now typically in the 660+ range. If you need to borrow money, and at this point can't qualify conventionally, you can still borrow against property that you currently own, IF there is equity in that property to use as collateral for the new loan that you want.

Typically, bridge or "hard money" lenders will lend up to 60-65% of the "quick sale" value of the property they are using as collateral. What does this mean? If you have a building that appraises at $1.2 MM, the quick sale value, or the price that it would sell fast at in the event that the lender had to foreclose is $1 MM. The lender would lend you about $600 K interest only with typically a 1 year term. These are expensive loans in terms of rate (typically 12-16%) and cost (typically 2-5 points to the lender), and the lender will need to see a clear use of funds, but more importantly a CLEAR AND VIABLE EXIT STRATEGY. That is, how are you going to get out of the loan. If you have mortgage lates on your credit, that will typically kibosh the deal, even for a bridge lender.

Bridge money is also available for construction, and although it is more expensive than bank financing, in some cases it is the only game in town. It is just one more expense in the deal, and if the deal is good, and the developer is good, won't make that much of a difference.

There is more to the story of bridge money, but for the purpose here I tried to be as concise and clear as possible. If you have any questions please contact me at exetertraining (@) aol (.) com.

Below is a list of the items that you will need to know in order for a lender to get an idea of the deal. An Executive Summary or ES should also be written that describes the overall outline of the deal, use of funds, developer, market, pre-sales and exit strategy as well as any other critical details that make your deal good, viable and profitable. Here is the list, and again, let me know if there are any questions.

Have a good weekend.

Mike Haltman



The following questions will supply us with most of the information required to determine whether this bridge loan and/or construction project can be funded, as well as the ability of the owner to acquire that financing. Please fill it out as completely as possible, and fax it back to us at 516.741.6838 or send the information in an email to haltman easycommercial com . Each item is marked either bridge, construction or required for both. Items marked with an * are of particular importance. Thank you.

*Broker (if applicable) (bridge and construction):
*Borrower Name(s) (bridge and construction):
Commercial Capital Alliance contact (bridge and construction):
*1003 completed (bridge and construction)?
*Is a PFS available (bridge and construction)?
*Exact location and description of the property (bridge and construction):
Is a recent appraisal available (a new appraisal will be required) (bridge and construction)?
*Net operating income for the property to be financed (bridge loan):
*Amount of existing liens on the building (bridge loan):
*Loan amount desired (bridge and construction)?
Interest reserve requested (bridge and construction)?
*Hard dollars borrower currently has in the deal (construction)?
*Land free and clear or the amount of the mortgage remaining (construction):
Idea of the current value of the land (construction):
*When was the land bought, and for how much (construction)?
*Plans, permits and approvals already obtained (construction)?
Does the borrower have funds available for the interest expense (bridge and construction)?
*Borrowers’ FICO (bridge and construction):
*Is a line item budget available for hard costs (construction)?
Are there any other uses for loan proceeds ((construction)?
*What is the use for the loan proceeds (bridge)?
*For condo projects, an idea of rental comps in the area (construction):
*Finished value of the project (construction)?
*Resume of the borrower and builder (construction):
*Does the borrower have other collateral available, and would they be willing to use it to cross collateralize this loan (bridge and construction)?
*If yes, describe it and the amount of available equity (bridge and construction):
*How much of their own money will the borrower have in the project in hard costs (including the equity in the land) (construction)?
*Are their any pre-sales (construction)?
*Are the down payments for pre-sales being locked into an escrow (construction)?
*Overall exit strategy (bridge and construction):

Thanks again.

Thursday, August 14, 2008

A Commercial Mortgage Deal: What Do I Need To Know?

If you are a mortgage broker looking to do your first commercial mortgage deal, or you are an investor that is looking to purchase your first piece of income producing property, the question will be:

What information do I need in order to apply for this loan? Whether you are the mortgage broker or investor, the information that you will need to have is the same.

The information on the form below is what we need to see from whoever is bringing us a deal to evaluate. The key thing to remember is that as always, ACCURACY is the key. If your income and expense numbers are wrong, or the credit score is not right, much time can potentially be wasted on a deal that can't get done.

Here we go, and as always, let us know if you have any questions.

Mike Haltman, President
Exeter Commercial LLC


- Property Type (Mixed-use, multifamily, office, retail, warehouse, etc.):
- Property description (i.e., # units/unit type)?
- Purchase or Refinance?
- Cost of the building/property for purchase?
- Amount remaining on existing mortgage (s) for refi.?
- Amount of loan desired?
- Seller financing offered and amount?
- Owner occupied property or investment only?
- Full document or stated application?
- Credit score?
- 2 years tax returns available?
- Contract of sale available?
- Personal financial statement available?
- Survey available?
- Recent appraisal available (new appraisal will be required)?
- Borrower 1003 completed?
- Unit leases available and expiration information provided?
- Recent environmental report available?
- Any prepayment penalty on the current mortgage(s) (for refinance)?

Gross Yearly Rents for the building including the owner occupied portion if
Building expenses:
- Property taxes (per year)?
- Building insurance (per year)?
- Utilities (state per month or yearly total)?

Do the tenants pick up any percentage of building expenses?

Note - 10% will be deducted from the gross rents to account for vacancy and
building management unless specifically accounted for when calculating NOI.

Wednesday, August 13, 2008

How Do I Figure Out If My Commercial Mortgage Loan Will Work?

Commercial Mortgage/Real Estate Analysis Con't.

You are an investor, mortgage broker or property broker, and you want to figure out if the property that is being looked at will be able to support a mortgage of a certain dollar amount, assuming that the person applying for the mortgage is a "good" borrower (appropriate credit score, reserves, etc.).

Two days ago we examined the 1st most important calculation, which is net operating income, or the amount of money that the building generates that will be available to pay principal and interest. Today we will look at capitalization rate, or the number that will help us determine the value of our income producing property.

Capitalization rate is a term that you probably have heard but maybe not completely understood. Simply put, this number represents the return that a buyer of a commercial property is looking to earn on his or her investment, and is also used in the process of trying to place a price on a building for a seller as well as a buyer. Needless to say, the cap rate is not an exact science, and depending on whether you are the buyer or the seller of a building, can definitely vary.

Capitalization Rate

As a buyer of an income producing property, you would like to earn as high a return on your investment as is possible, at a given level of risk that you are comfortable with. Every city, town and even area within a town will have a cap rate associated with it. Depending on a variety of factors that includes the quality of the area in terms of availability of tenants, levels of rent, type of building, quality of tenants (i.e. national chain vs. small mom and pop), etc., an area will be analyzed at a certain cap rate. Cap rates are not static numbers, but can change over time as the nature of an area changes. A perfect example would be parts of Manhattan that have seen significant cap rate declines over the past 10 years as they have become gentrified, rents have risen and available tenants have risen.

Net Operating Income (NOI)/cap rate = Building value

Remember that this is a building value based on the cap rate that you put in. As an example, take a building that has an NOI of $80,000 per year, and it is in an area where the cap rate is approximately 7.5%. That is, a buyer in that area wants to earn a return on investment of 7.5%.

$80,000/.075 = $1,066,666 building value

The higher the cap rate or return desired, the lower the value of the building and visa versa.
The mortgage rate on a commercial mortgage loan has to be below the cap rate for the deal to make sense.

If the cap rate in the example above were higher or lower, how would it affect the value of the building?

$80,000/.08 = $1,000,000
$80,000/.07 = $1,142,857

The buyer of a building wants to buy at the highest cap rate possible, and the seller wants to sell at the lowest. The process of the negotiation of price must begin with a reasonable determination of cap rate for the building and for the area, and ends with some meeting of the minds between the buyer and the seller.

The next step in the process is going to be the most important, and that is going to be determining the debt service coverage, or DSCR, of the desired loan at a given interest rate and NOI that we calculate.

If net operating income, capitalization rate and soon debt service coverage ratio are all understood, an investor, mortgage broker or property broker will put themselves in a much better competitive position in the process.

Michael Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC

Tuesday, August 12, 2008

A Commercial Mortgage Prospecting Peptalk

There is no denying that if you are a professional in the real estate markets today, these are trying times. There are two choices that we can make as to our direction going forward, as there are always choices. The first is to throw up our hands, turn to the guy in the seat next to us, and commiserate on how bad things are. This is the route that the majority of people will take, and it is certainly not the most productive. The second is to try and think outside of the box, and come up with new ways to drive your business. This is a productive way to handle things.

If your sector focus is the residential real estate or mortgage markets, one thing to consider is to expand into the commercial markets. There is always hesitation when you mention the commercial markets for a variety of reasons. However, if you look at my previous post, the initial legwork is not difficult, and my next couple of posts will complete the initial phase of analysis and those steps are also not difficult. It is more about overcoming your mindset against it.

In any event, the following is an article I wrote discussing the great potential for prospecting for deals in your everyday life.

Prospecting For Commercial Mortgage Deals

Michael Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC

When it comes to prospecting for commercial mortgage deals, we like to say that the sky is the limit. What do we mean by that? Simple: When you sit down and think about it, your daily life is touched by commercial real estate much more than it is touched by residential real estate.

When you leave your house, or better yet, your apartment building in the morning, almost everything that you see on your way to work, the gym, the doctor or most any other destination will have something to do with commercial real estate, and by extension commercial mortgage financing.

Let’s go back to your apartment building. That building has an owner, and that owner may need to refinance, may need to cash out, or may not need anything at all. RIGHT NOW! The fact is that at some point that building owner may need to do something with the current property, OR might want to buy a new property. At the very least, that owner will probably know other owners that at some point will be in a similar situation. SEE WHAT I MEAN?

As you continue on your way, think about all of the other buildings that you see, and the fact that each one has an owner with potential needs, who probably has friends with those same potential needs.

Commercial mortgage prospecting is as simple as putting yourself out there as an expert in this field and talking to as many people as you can. You then need to fully educate yourself so that you are smarter and better than the next guy.

At Commercial Capital Alliance/Exeter Commercial LLC, we can help you with both the education, as well as the financing.

Monday, August 11, 2008

The 1st and Most Important Building Block In Your Commercial Mortgage Deal

In my previous blog entry we touched on the basic criteria that make a commercial mortgage loan a much different animal from a residential mortgage loan. In a nutshell, it is the fact that whatever the loan amount a borrower desires for a commercial property, the loans principal and interest payments must be supported by the net income that the given building produces. This leads us to the first most important calculation:

Net Operating Income

When you are speaking to a potential borrower of a commercial building, one of the first, if not the first thing that you will ask is (after maybe credit score): Do you know what the net operating income of the building is?

In a nutshell, the net operating income, or NOI, is the gross rents of the building minus the operating expenses of the building. Because the NOI of the building has to be able to support the desired loan at a level typically above 1.2X, it is imperative to get to a very accurate number. This means that we don’t necessarily rely on what the borrower is telling us (although we all know that borrowers don’t bend facts), but look for verification. This is important because any “inaccuracies” will come out during the due diligence process, so once again we do not want to waste our time on a deal that cannot be done. If actual expenses are higher than what we are being told, or actual rents are lower, this can turn what at first glance looked like a great deal into a deal that cannot be funded. A little legwork early in the process can save you a lot of time and effort later, as well as the experience of a deal “crapping out” late in the process.
What goes into the NOI calculation? We need the following:

Gross rents

Property Taxes
Building insurance
10% of the gross rents to account for management and vacancy

NOI = Gross rents – expenses

As you can see, this is a very simple calculation. What can create the problem are numbers that are not correct. For the gross rents number, ask for leases and have a good idea of what market rents for an area are. Also, remember that in New York City and some other areas as well landlords with 5 or more units have to file the rents with a City agency, so rents the borrower provides you with cannot be adjusted as the underwriter will see the actual numbers. For verification of expenses, you can use for taxes or the local assessor’s office, and for utilities and insurance ask to see recent bills. Once again, do not try and manipulate numbers to make a deal that won’t work suddenly work. In this business your relationship with a lender is more important than a single deal, and trying to fudge numbers is the best way to lose that relationship. Realize as well, that everything will come out in the wash, or as we call it the due diligence process.

The initial process for analyzing a commercial mortgage loan scenario is step by step, with the next step that we will examine being capitalization rates. As we discuss in greater detail during our live and taped seminars, the process after the initial scenario analysis can be much less direct. Therefore, as with everything that we do:

Education and knowing the business better than your competitors is critical!!!

Michael Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC
131 Jericho Turnpike, Suite 202
Jericho, New York 11753
516.741.8880 (O)
haltman easycommercial com

Sunday, August 10, 2008

What makes a commercial mortgage loan a VIABLE commercial mortgage loan?

If you are a residential mortgage broker or investor that wants to begin to get involved in the commercial side of the market, one of the keys will be your ability to take a look at a property and determine if it is viable in terms of being able to support a loan. You can tell fairly early on in the process if it is worth the time, or is a waste of time. Remember, with commercial mortgage loans it is not about LTV, but it is about the INCOME that the given property produces. This requires a little bit of a change in thinking, but it is imperative that you understand this. I am therefore going to say it again. LTV is out when thinking about commercial mortgage financing. It is all about the verifiable income that a building produces, and how well the resulting net income will service the desired loan. The amount of a loan that someone will qualify for, or LTV, comes into play ONLY after an underwriter calculates the debt service coverage (we will look at this number later) of a given loan amount at a given rate of interest. While on the surface this all sounds very complicated, it really isn’t. It is a fairly straight forward progression that you will follow.

Is the quality of your borrower important when looking at a commercial mortgage loan? Of course it is, to the extent that certain lenders require a credit score over 650, some require it over 700 for certain loan types, and payment lates, particularly mortgage lates will kill a loan before the process even starts.
This is all a brief introduction into the process that we will be examining over the next few articles which, at the end, will put you in a position to be extremely knowledgeable about the process, and very comfortable prospecting for commercial mortgage deals.

What are some of the areas that we will look at? Initially it will be the key ratios and calculations that are the initial building blocks of any commercial mortgage deal:
Net Operating Income
Capitalization rate
Debt service coverage ratios or DSCR

I will leave you now with this basic rule of commercial mortgage finance that needs to be never forgotten:

An income producing property must be able to support a desired loan with the net operating income that it earns. Period.

Mike Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC
131 Jericho Turnpike, Suite 202
Jericho, New York 11753
516.741.8880 (O)
haltman (at) easycommercial (dot) com
www easycommercial com
www thecommercialcapitalmortgageseminar com

The Commercial Mortgage Hotline: An Introduction

I would like to take this opportunity to introduce myself, my firm and my blog to those who have an interest in the commercial mortgage market, commercial real estate market or in real estate in general.

We have been in the business as a commercial mortgage lender, broker and trainer since 1990. Throughout this time markets have constantly changed, sometimes for the better and sometimes worse. We are now in an unprecedented period of flux which is causing strain, not only in my business, but the entire real estate market which in turn filters down to just about every other sector of the economy.

To be able to understand and work within the current environment, investors and industry professionals alike will be in a much stronger position once the current “crisis” comes to an end, as these crises always do. Sometimes it is quick and sometimes more protracted, but cycles come and cycles go.

As much as there are great opportunities in the property markets today, the lack of liquidity on the part of the lending institutions is making it difficult for even the most quality of buyers, let alone the marginal ones.

My purpose for writing this blog is to offer any insights that I can to those that may be struggling, as well as any tools that I think might be of help.

Today I would like to offer a group that my firm created call CommercialCapitalAlliance1. For those of you that are not familiar with Yahoo Groups, this is a completely free venue. This particular group is spam free and monitored by myself. This is its’ purpose:

Network with the 800+ members in our Yahoo Group CommercialCapitalAlliance1 (investors, lenders, property owners, mortgage brokers and real estate brokers nationwide). This group provides a place for the beginner to ask questions, an investor to ask for help in finding a commercial mortgage lender, lenders to present the programs that they offer, property owners to offer commercial property for sale, investors to describe the type of commercial property they are looking for as well as any other insights that members may have into the markets. It is free to join and completely monitored and spam free.:

Once again, I am happy to be a member and look forward to any comments readers may have.


Michael Haltman, President
Commercial Capital Alliance/Exeter CommercialLLC
Commercial mortgage trainers since 1990
131 Jericho Turnpike, Suite 202
Jericho, New York 11753
516.741.8880 (O)516.741.6838 (F)
haltman @ easycommercial com