TRAINING SERIES ON UNDERWRITING COMMERCIAL FINANCE,
PART 2

TRAINING SERIES ON UNDERWRITING COMMERCIAL FINANCE, PART 2

Charles Pixley
RAMA ENTERPRISES, Inc.
Real asset management associates
515 Madison Ave., 5W, New York, NY 10022
charlespixley@rocketmail.com
Skype: toanangel
585 217 2191


Volume 6 Issue 2
TRAINING SERIES ON UNDERWRITING
COMMERCIAL FINANCE, PART 2

THE COMPONENTS OF AN EXECUTIVE SUMMARY

William Shakespeare wrote: “Brevity is the soul of wit.” If you want someone immersed in this industry to pay attention it most likely will not happen if you submit a series of files that take up allot of disc space and would take hours to read and still not convey the basics of the project.

To spare everyone’s time, get you the fastest answer and have the greatest chance of garnering interest, the most effective means of getting your loan or finance request read understood, and approved by an underwriter for in depth review is the Executive Summary. The following is a sample; obviously you have to tailor the summary to the subject type:

TYPE OF FINANCE REQUESTED
1. Date:
2. BORROWER’S NAME whether personal Corporate or LLC:
3. SUBJECT ADDRESS:
4. PURPOSE OF THE LOAN:
5. TYPE OF PROJECT, OR BUSINESS:
6. DESCRIPTION OF THE PROPERTY OR BUSINESS
7. PURCHASE PRICE:
8. DATE OF PURCHASE:
9. BORROWER CASH INVESTED TO DATE:
10. EQUITY IN DEAL:
11. BREAKDOWN OF ALL IN COSTS:
12. USE OF FUNDS:
13. AS IS VALUE:
14. QUICK SALE VALUE:
15. AS COMPLETE VALUE BASED ON INCOME:
16. ACUTAL OR PROJECTED GROSS INCOME:
17. NET OPERATIONG INCOME Projected or Actual:
18. CLIENT NET WORTH:
19. CLIENT FICO:
20. EXIT STRATEGY:
21. Brief summary of salient facts:

RATIO USED TO DETERMINE VALUE
BASICS OF DETERMINING THE DSCR

Using a copy of the most recent tax returns for the business, or the specific properties, if there are more than one property incomes reported. Take the Adjusted Gross Income. AGI, and add back: Depreciation, Amortization, Interest Expense and specific non-reoccurring charges used to improve, or maintain the business, or property, (new equipment, new roof, bathroom remodeling, etc.

THIS IS YOUR Net Operating Income, N.O.I.

Probably one of if not the most important valuation ratio is the Debt Service Coverage Ratio, DSCR.

To know if your client, or loan request has a chance of flying, if you know a property or business

NET OPERATING INCOME, N.O.I., an underwriter and you can determine value very accurately without referring to an appraisal.
Debt Service Coverage Ratio

In underwriting a business, or commercial property Cash flow analysis is referred to as the Debt Coverage Ratio and it means everything to an underwriter to determine value. For both owner occupied and investment properties, underwriters normally want to see ratio's above a ratio of a minimum of 1.20 to 1.

In other words, for every $1 of mortgage debt the property or business has to have $1.20 of net income to meet the mortgage payments. Obviously the greater the risk or shorter the seasoning or occupancy rate, or property types such as hotels or car washes will be required to have higher ration preferably a DSCR above 1.4.

As a quick method of qualifying a loan request, assume a Capitalization Rate, CAP RATE OF 10% and multiply the N.O.I. X 10 and you will have a general idea of the actual value. However, if you know the CAP RATE, for the area, is 7% you divide the N.O.I., by 0.07, and it will give you a very accurate idea of what the property will appraise for and whether the Loan To Value, LTV, requirements are within the guidelines to have a chance for approval.

A low DSCR, high vacancy rate, speculative transaction, poor credit history, poor business track record, lack of evidence to repay, high LTV, start-up business and so forth make your loan request “Less than Standard” and then MAY, if at all, only qualify for a Hard Money Loan, with much higher interest rates and points and substantially lower LTV.

commercial appraiser, commercial appraisal

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