Commercial lending for Warehouse/Industrial facilities can be broken down into two categories, which are owner occupied and investment. This article will give both a brief look and educate you on how to obtain the best loan possible.
Cash Flow: This is when a company occupies 51% of the property with their business. The lender will predominantly underwrite the cash flows of the business to determine how much someone can borrow. What this means is the lender will calculate the net cash flow by taking the net income of a business for the year, add back interest expense, depreciation and possibly rent. This number will give them the cash flow they need to determine what they can borrow. The magic formula is what is called the debt service coverage ratio of 1.25. Here is an example:
Net income is 100,000
Depreciation is 15,000
Interest Exp is 10,000
Total Cash Flow is 125,000
Payment on a new loan is 100,000 a year. You will take the 125,000 of Total Cash Flow and divide it by the 100,000 payment and you come up with 1.25 times. If one falls below this number, then it makes it more difficult to get a yes from the lender.
Character: The lender wants to see how your operate your business. Are you showing all the profits you make on your tax returns? Are you focusing on taking care of the customer and it shows in your reviews online? Do you run your business with honesty and integrity? Lenders are very focused on who you are and how it shines in your business.
Credit: When we talk about credit, it is much more than just a fico score. The lender wants to see if you have had any bankruptcies, foreclosures or short sales. They want to really know how dedicated you are to stability in making payments. If, however, you have had some credit gliches, then just be prepared to provide good explanations with supporting information.
Now the question is, if you qualify, then what terms are available? Here you go…
*as of 5/27/20 (call for current rates)
Cash Flow: The cash flow will be generally the same, in terms of a debt service coverage ratio, but there are a few differences. Lenders will take the gross income, apply a vacancy factor (probably 5 to 7%), then take the operating expenses, add a 4% management fee, take out 10 to 15 cents of reserves to come up with a cash flow. Here is an example:
Gross Rents 200,000
Vacancy 5% 10,000
Effective Inc 190,000
Op Expenses 60,000 (includes 4% management)
Net Income 130,000
Net Cash Flow 128,500
From here you will calculate the payment of the loan amount, which in this case is 102,800 a year. You take the 128,500 and divide it by the 102,800 and come up with 1.25 debt service coverage ratio. Please note that the max LTV nowadays is about 70 to 75% LTV.
All the other areas apply, i.e. Character, Credit. Lenders will emphasize more on the quality of the tenants and how long the leases are. Here are some general terms:
Have questions? Please feel free to call 480-219-1205.
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