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  • Writer's pictureColin Dubel

Commercial Real Estate Loan Underwriting

Commercial real estate loan underwriting is the process by which lenders evaluate the risks and potential returns associated with a commercial property and borrower, in order to determine whether or not to extend a loan. This process typically involves a thorough analysis of various factors related to the property, the borrower's financial history, and the overall market conditions.


When evaluating a commercial property, lenders typically look at a number of different factors, including the property's location, size, age, condition, and potential income-generating capacity. They also consider the property's current and projected occupancy rates, as well as any leases, rental agreements, or other income streams associated with the property.


In addition to evaluating the property itself, lenders also typically evaluate the borrower's financial history and creditworthiness. This includes a review of the borrower's credit score, income, assets, liabilities, and overall financial stability. Lenders will also typically look at the borrower's experience in the commercial real estate industry, as well as their track record of successfully managing similar properties.


When evaluating a commercial real estate loan, lenders will typically look for a combination of factors that indicate a high likelihood of repayment. These factors may include a strong cash flow and occupancy rate for the property, a low loan-to-value ratio, a high debt service coverage ratio, and a strong credit history and financial position for the borrower.


Ultimately, the goal of commercial real estate loan underwriting is to identify properties and borrowers that are likely to generate a positive return on investment for the lender, while minimizing the risk of default or loss. By carefully evaluating both the property and the borrower, lenders can make informed decisions about whether or not to extend a loan, and at what terms and conditions.


Commercial real estate loan underwriting is a complex process that requires extensive due diligence on the part of the lender. In addition to the factors mentioned above, lenders may also consider a variety of other factors when evaluating a loan, including the borrower's business plan, market trends, and regulatory and environmental issues that could affect the property's value.


For example, lenders may look at the borrower's business plan to assess their ability to effectively manage the property and generate income over the long term. They may also evaluate market trends to determine whether there is strong demand for similar properties in the area, and whether there are any risks to the property's value or income potential.

Similarly, lenders may consider regulatory and environmental issues that could affect the property's value or the borrower's ability to manage the property effectively. For example, they may look at zoning laws, building codes, environmental regulations, and other factors that could impact the property's use or value over time.


In addition to these factors, lenders may also consider the overall economic and political climate when evaluating a commercial real estate loan. For example, they may look at macroeconomic indicators such as interest rates, inflation, and GDP growth, as well as geopolitical factors such as trade policies, sanctions, and other issues that could impact the overall health of the economy.


Overall, commercial real estate loan underwriting is a complex process that requires careful analysis and evaluation of a wide range of factors. By taking a thorough and comprehensive approach to underwriting, lenders can help ensure that they are making informed and responsible lending decisions that benefit both the borrower and the lender.


Here are some quick math examples that lenders may use during commercial real estate loan underwriting:

  1. Loan-to-Value (LTV) Ratio: The LTV ratio is the loan amount divided by the appraised value of the property. For example, if the property is appraised at $1,000,000 and the borrower is requesting a loan of $750,000, the LTV ratio would be 75% ($750,000 / $1,000,000).

  2. Debt Service Coverage Ratio (DSCR): The DSCR is the net operating income (NOI) of the property divided by the annual debt service (the amount of principal and interest payments on the loan). For example, if the NOI is $200,000 and the annual debt service is $150,000, the DSCR would be 1.33 ($200,000 / $150,000).

  3. Capitalization (Cap) Rate: The Cap rate is the rate of return that an investor would expect to earn on a property based on its net operating income. For example, if the NOI of a property is $100,000 and its appraised value is $1,000,000, the Cap rate would be 10% ($100,000 / $1,000,000).

  4. Gross Rent Multiplier (GRM): The GRM is the ratio of the property's sale price to its gross annual rental income. For example, if a property is sold for $1,000,000 and generates $100,000 in annual rental income, the GRM would be 10 ($1,000,000 / $100,000).

These math examples are just a few of the many calculations that lenders may use during commercial real estate loan underwriting. By using these and other financial metrics, lenders can evaluate the risk and potential return of a commercial property, and make informed lending decisions that benefit both the borrower and the lender.


If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at colin@harborwestcommercial.com or 949-735-6415.

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