DSCR vs LTV. Loan to value (LTV) is the amount a lender will lend "up to" against the value. An LTV of 75% means that a lender will lend "up to" 75% of either the purchase price or the appraised value (whichever is lower). However, the debt service coverage ratio (DSCR) is the first and foremost rule that will determine the amount of the loan proceeds. A DSCR of 1.30 to 1 means that there must be $1.30 of net operating income (NOI) for every $1 of mortgage payment. This means that even if the lender will lend "up to" 75% loan to value, you will only get that leverage if it debt covers. Lenders use an underwritten NOI which will often be different from the properties' actual net. For example, an underwritten NOI will include a vacancy factor even if the property is 100% occupied. It will also include a management fee even if self-managed. Often it will include replacement reserves and tenant improvement and leasing commissions. We pre-underwrite our loans from the lender's perspective so that you know exactly what the property will support and the amount of loan to expect before you start spending money.
Costs depend on the type of property and the type of loan. Lenders will require a deposit at the beginning of the process to pay for 3rd party reports like an appraisal and environmental. These are sunk costs, however, the reports are yours to keep. Any unused monies from the deposit that aren't spent will be credited back at the closing. Other costs to expect are processing, potentially a land survey, origination fees, title/escrow, etc. Private money loans and bridge loans will have higher origination fees than conventional loans. SBA loans have even more fees including guarantee fees. We will help you understand all of the costs involved upfront so there are no surprises down the road.
Timing will vary depending on the type of loan. We have closed loans in as little as 5 days. Typically private money loans can close very quickly as they usually don't require time-consuming appraisals and other 3rd party reports. Conventional type financing usually takes between 45 and 75 days with the average being about 60 days from the time the letter of interest is signed and the deposit for 3rd parties is made. This can be expedited, but expect the process to be about 60 days.
The typical loan to value is about 65% - meaning that the borrower's required equity is the remaining 35%. This of course is dependent on the debt coverage ratio as outlined above. Quite often we see properties being debt-constrained at lower loan-to values - especially when cap rates are low compared to interest rates. This means you might need to come in with a higher downpayment. You will also be required to have sufficient liquidity left after doing the loan - you cannot use all of it in your equity contribution. This is why we pre-underwrite our loans upfront so you have a better idea of exactly what to expect early in the process.
Unlike residential loans, the most common commercial loan term is a 5-year fixed. This means that the rate is set for 5 years, but then the loan will balloon (the balance must be paid in full or refinanced). There can be other options on the term such as 3, 7 or 10 years but a 5-year fixed is typical.
Loan size is also important. Most lender's programs start at $1,000,000. It is extremely difficult to get a loan under $1,000,000 and they usually come at an added increase in rate. The most competitive segment where there are the most capital resources is between $1,000,000 and $10,000,000 in loan size.
Things like market size can come into play as well. Lenders typically have certain demographic population requirements (for example 50,000 people within a 5-mile radius of the property).
Geographic location is another factor and is one of the added values San Diego Lending Inc. provides. We have relationships nationwide and can provide financing for borrowers all across the country.
Another thing to expect is some sort of banking relationship with the lender. It's not always required, but it is common to have at least the operating account for the property with the lender.
Most commercial loans have prepayment penalties. The standard penalty is a "step down" 5%, 4%, 3%, 2%, 1% - meaning that if the loan is paid off in the 1st year the penalty would be 5% of the outstanding loan amount and so on. This declines each year so that in the 5th year it would be 1% of the loan amount and then it's finished - no more penalty. This can often be bought down and we also have loan resources without penalties.
Another commercial loan expectation is a personal guarantee. Although we have non-recourse lenders, it is standard to have a personal guarantee.
At San Diego Lending Inc. we will help explain all of the steps involved, costs, and expectations to you and guide you through the entire commercial financing process.