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Commercial Real Estate Loan
Requirements- Part 1
Based on a WomenforWealth.com interview with Ann Ethridge-Painter
by Kirsten Lee
Baffled by commercial real estate loan requirements? The
WomenforWealth.com community recently joined Ann Ethridge-Painter, CEO of
the Apartment Loan Store, for a power-packed Tele-Seminar. Ann graciously
shared wisdom gathered from years of helping commercial investors construct
lucrative deals with strong financing. Her insider knowledge distils
the approval process into clear, concrete steps. When obstacles threaten to
block those steps, Ann finds out-of-the-box solutions.
Commercial real estate loan requirements is very different from
residential loan requirements. In a commercial deal, each property
paints a picture or & tells a story. The 'story' of the property tells
(rents collected, purchase price, type of property, demographics of the
area, etc) determines if the lender is actually interested in lending on it.
Every piece of information brings a greater understanding of the whole deal.
Is the deal really as good as it looks? Is this property a diamond in the
rough?
Ann begins with the basics when analyzing commercial real estate. She
first examines net income. "What I'm going to ask for is a current
rent roll, year-to-date profit, profit and loss statement for the past two
years, and the Schedule E tax returns of the current owner on the property."
"We're going to ask for pictures and sometimes we're even going to ask
for the leases because we want to make sure there are no concessions on the
leases. (We want to know if the tenants are actually paying full
rent.)" She explains. "A picture tells the story. The numbers tell a
story. We're just putting the whole story together to create a package we
can take to the banks and other funding sources we as brokers use."
What if the owner is not yet ready to divulge sensitive information on
his commercial real estate property? Ann will do a pre-approval on you, the
borrower, and prepare a letter to show the seller your interest and your
qualifications. Instead of a stone wall, the obstacle is reduced to a
stepping stone and you are building trust with that seller.
Ann gathers the typical information needed for commercial real estate
analysis: utilities, janitorial and residential manager fees, repairs,
maintenance, internal and external decorating, administration, association
and professional fees, and legal fees. Ann really nails it down when
calculating reserves.
A replacement reserve fund is usually required for upcoming capital
upgrades, like new roofs, new appliances, etc. That fund can be
required by the bank to be held in escrow with them as part of your
mortgage, or it can be held aside voluntarily by an owner to offset the
expense of big expenses.
Replacement reserve required by the financing can depends on the the
quality of the commercial real estate, apartment building, Ann clarifies.
A Class A building is something that has probably been built in the last 10
years. It has generally better landscaping. It has a very attractive, higher
quality construction and a higher quality tenant. Your reserves are going to
be a lot lower because the building is newer and therefore there is
less to replace in the near-term. B property is usually built within
the last 20 years and therefore needs more maintenance than an A property.
What replacement reserve does Ann affix to the different grades of
commercial real estate? About $150 per unit per month for a class A, $175
for a class B, and about $200 for a class C. It does not make a difference
if the unit is a three-bedroom or a studio.
Please continue on to Commercial Real Estate Financing: Painting the
Picture Part 2.
Want to learn more about the difference between
residential lending and commercial lending practices? Or how to find a
broker to work with? Check out our interview with Ann Ethridge-Painter
on CD and MP3: How to Build Wealth with the
Bank's Money to learn more.
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