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CMBS Loans Explained

CMBS stands for commercial mortgage-backed securities. A CMBS loan is a commercial real estate loan that is backed by a first-position commercial mortgage.

CMBS loans are for properties such as apartments, hotels, warehouses, offices, retail, or any other type of real estate that is used in connection with a company or business in need of such a space.

There are two types of CMBS loans — the traditional version or the delegated program.

The traditional version works much like a conventional loan.

Terms are agreed upon by both the investor and the lender, and then the lender appoints a trust vehicle for the loan. The loan is then separated into bonds — also known as tranches — that are created based on a risk assessment of the value of the loan.

The delegated program is a CMBS loan where there is one buyer for the CMBS loan and terms are agreed upon before the actual loan application is filled out.

The terms generally come from the financial institution where the CMBS loan originated from.

Underwriting Parameters:

For CMBS Loans, Conduit Lenders have reverted back to more prudent real estate credit decisions, with a much more conservative attitude towards risk.

In addition to more traditional loan to value (LTV) maximums of 75%, and debt service coverage ratios (DSCRs) of at least 1.25x, Lenders are also calculating the anticipated debt yield (net operating income/loan amount) of at least 7-8%. Borrowers should expect to have "hard cash" equity invested in their projects, while being able to maintain a post-closing liquidity of at least 5% of the loan amount and an overall net worth of at least 25% of the loan amount.

Winston Rowe & Associates prepared this knowledge based article.

They are a commercial real estate advisory and due diligence firm that specializes in structuring the financing for commercial real estate transactions.

They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com

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Six Core Due-Diligence & Underwriting Fundamentals Used By CRE Lender

Winston Rowe & Associates is a no upfront fee commercial real estate advisory and due diligence firm specializes in the financing of commercial real estate transactions.

For more information about Winston Rowe & Associates and their commercial funding solutions, they can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com

They have prepared this article to provide a general overview of the due diligence and requirements for commercial real estate.

Most commercial loan financing is underwritten on a case by case basis, with every loan application as unique and evaluated on its own merits with an approach and methodology considering worst case scenarios.

THE APPLICATION:

All commercial loans begin with some sort of an application that the prospective borrower must complete. It’s critical that borrowers do not misrepresent any material facts pursuant to the proposed transaction. This will only result in your loan request being declined down the road when the loan file enters the due diligence phase.

Common misrepresentations made by applicants are: questionable appraisals, source of down payment, personal credit scores, environmental issues, prior offers or letters of interest, use of proceeds, monies invested to date and bankruptcies.

If you are honest and upfront about the negative issues concerning your proposed transaction. Most professionals in the commercial lending business will work with you in providing the best options available.

DEBT SERVICE COVERAGE RATIO (DSCR):

A key component in making an underwriting evaluation is the debt coverage ratio (DSCR). The DSCR is defined as the monthly debt compared to the net monthly income of the investment property in question. Using a DSCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment.

Typically they will determine the DSCR ratio based on monthly figures, the monthly mortgage payment compared to the monthly net income.

The higher the DSCR ratio is the more conservative the lender. Most lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of income generated). Anything less than a 1:1 ratio will result in a negative cash flow situation raising the risk of the loan for the lender. DSCR's are set by property type and what a lender perceives the risk to be.

Today, apartment properties are considered to be the least risky category of investment lending. As such, lenders are more inclined to use smaller DSCR's when evaluating a loan request. Make sure that you are familiar with a lender's DSCR policy prior to spending money on an application.

Ask them to give you a preliminary review of the investment property that you want to purchase. Information is free, mistakes are not.

LOAN TO VALUE (LTV):

Unlike residential lending, commercial investment properties are viewed more conservatively.

Most lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either a bank or mortgage company.

Some commercial mortgage lenders will require more than 20% contribution towards the purchase from the buyer. What a bank/lender will do is subject to their appetite and the quality of the buyer and the property. Loan to value is the percentage calculation of the loan amount divided by purchase price.

If you know what a lender's LTV requirements are, you can also calculate the loan amount by multiplying the purchase price by the LTV percentage.

Keep in mind that the purchase price must also be supported by an appraisal. In the event that the appraisal shows a value less than the purchase price, the lender will use the lower of the two numbers to determine the loan that will be made.

CREDIT WORTHINESS:

For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies.

For corporations, business performance and credit ratings will be evaluated with a proven track record.

As with all lending, business and personal credit plays an important role. As business professionals we are all taught to shop for the best deal in the marketplace,

This is not true when applying for business credit. If you submit your loan request to too many potential lenders in a short period of time (less than a year), you will be deemed a high risk and most likely have your loan request declined or be forced to pay very high interest rates. This creates a high risk profile because most bank fraud is done through the shot gun approach.

If this may be an issue for you, let your prospective lender know upfront and provide them with all past offers for financing that you received with a letter of explanation. Lenders are business people like you and will review the reasons for rejecting valid and invalid offers for financing.

PROPERTY ANALYSIS:

Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

REPORT COSTS:

Every commercial real estate transaction requires reports which include; appraisals, environmental, certified financials, property inspection and engineering just to name a few.

Reporting costs are not generally part of the loan amount, so expect to pay for these in advance to the funding of your commercial loan.

At Winston Rowe & Associates, their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity for your commercial real estate loans.

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