Commercial mortgages 101 everything you need to know to create a winning loan request package

www.ebook3000.com COMMERCIAL MORTGAGES 101 www.ebook3000.com This page intentionally left blank www.ebook3000.com COMMERCIAL MORTGAGES 101 Everything You Need to Know to Create a Winning Loan Request Package Michael Reinhard American Management Association New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C www.ebook3000.com Bulk discounts available For details visit: www.amacombooks.org/go/specialsales Or contact special sales: Phone: 800-250-5308 Email: specialsls@amanet.org View all the AMACOM titles at: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought Library of Congress Cataloging-in-Publication Data Reinhard, Michael Commercial mortgages 101 : everything you need to know to create a winning loan request package / Michael Reinhard p cm Includes bibliographical references and index ISBN-13: 978-0-8144-1507-8 ISBN-10: 0-8144-1507-5 Mortgage loans—United States Commercial real estate—United States—Finance Commercial loans—United States I Title HG2040.5.U5R45 2010 332.7'2—dc22 2009031190 © 2010 Michael Reinhard All rights reserved Printed in the United States of America This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019 About AMA American Management Association (www.amanet.org) is a world leader in talent development, advancing the skills of individuals to drive business success Our mission is to support the goals of individuals and organizations through a complete range of products and services, including classroom and virtual seminars, webcasts, webinars, podcasts, conferences, corporate and government solutions, business books and research AMA’s approach to improving performance combines experiential learning—learning through doing—with opportunities for ongoing professional growth at every step of one’s career journey Printing number 10 www.ebook3000.com CONTENTS xi Acknowlegments xiii Introduction Chapter 1: An Introduction to Commercial Real Estate Loans What Is a Commercial Mortgage? “Mortgage” Defined “Commercial” Defined Types of Commercial Properties Non-Income-Producing Properties Income-Producing Properties Single-Tenant Properties 10 Multitenant Properties 11 Types of Commercial Real Estate Lenders Banks v www.ebook3000.com 14 16 vi Contents Life Insurance Companies 18 Conduit Lenders 19 Agency Lenders 21 Credit Companies 23 Mortgage Bankers 24 Private Lenders 25 Commercial Mortgage Terms 25 Maturity Period 26 Amortization Period 27 Loan-to-Value Ratios 28 Interest Rates 29 Prepayment Penalty 31 Recourse vs Nonrecourse Loans 33 Commercial Mortgage Underwriting 33 Sponsorship 34 Property Underwriting 35 Final Underwriting Analysis 43 Chapter 2: Preparing the Loan Request Package Executive Summary 45 47 Purpose of Loan Request 48 Sources and Uses 52 Property Description and Location 53 Financial Summary 57 Borrower 58 Property Description www.ebook3000.com 59 vii Contents Location and Demographics 61 Property Economics 63 Financial Statements 64 Financial Analysis 65 Schedule of Income 67 Historical Cash Flow 72 Loan Analysis 74 Supporting Documents 80 Market and Submarket Data 81 Sponsorship 84 Chapter 3: Financial Strength and Creditworthiness Net Worth and Liquidity 87 88 Assets 89 Non–Real Estate Assets 91 Real Estate Assets, Cash Equity, and Market Equity 93 Cost vs Market Value 96 Pre-Funding Liquidity 97 Post-Funding Liquidity 99 Lender’s Calculation of Net Worth and Pre-Funding and Post-Funding Liquidity 101 Credit Score and History Five Adverse Conditions Unacceptable to a Commercial Lender Personal Income and Cash Flow Gross Income www.ebook3000.com 108 110 116 117 viii Contents Self-Employment Income 119 Net Cash Flow and Taxable Net Cash Flow from Rental Income 120 Cash Flow Statement 124 Banking and Credit References Chapter 4: Real Estate Experience Ownership and Management Experience 125 129 130 Ownership Experience 130 Management Experience 133 Chapter 5: Real Estate Assets 143 The REO Schedule 144 The REO Schedule and the Balance Sheet 145 Anatomy of an REO Schedule 151 Property Value Section 153 Property Name 156 Property Description 157 Property Address 157 Date of Acquisition 158 Original Cost of the Property 158 Name and Address of Lender 159 Loan Number 159 Ownership Percentage 160 Market Value of the Property 160 Balance of Mortgages 163 www.ebook3000.com ix Contents Total Equity 164 Net Ownership Equity 165 Cash Flow Section 166 Monthly Rental Income 167 Monthly Operating Expenses 170 Monthly Loan Payments 172 Monthly Cash Flow 173 Net Ownership Cash Flow 174 Chapter 6: Forms of Ownership 177 Borrowers and Borrowing Entities 178 Types of Borrowers and Borrowing Entities 181 Individual Ownership 182 Co-Tenancy and Joint Ownership 184 Partnerships 188 Limited Liability Companies 195 Corporations 197 Trusts 200 Index 203 www.ebook3000.com Fo r m s o f O w n e r s h i p 201 is not mentally incapacitated In lieu of a last will and testament, revocable trusts are becoming increasingly common in the United States because they minimize the administrative costs associated with probate and provide centralized administration of a person’s final affairs after death An irrevocable trust is generally more complex than a revocable trust and under normal circumstances cannot be changed by the trustee or the beneficiaries of the trust In other words, the terms of an irrevocable trust cannot be amended or revised until the terms or purposes of the trust have been completed Although, in rare cases, a court may change the terms of the trust due to unexpected changes in circumstances that make the trust uneconomical or unwieldy to administer Trusts can borrow money for the purchase of commercial real estate the same way that partnerships, limited liability companies, and corporations can, as long as there is an individual or warm body to personally guarantee the loan The warm body or guarantor within a trust is always the trustee and sometimes the settlor or trustor, as well Trustees are treated no differently from individuals, general partners, or managing members and must endure the same financial scrutiny by lenders and their underwriters Lending to a trust requires the same level of due diligence as with any other legal entity In regard to underwriting, lenders often require a complete set of trust documents A complete set of trust documents will include the following: ? ? ? ? ? ? ? Name of the trust Names of the trustees Powers of the trustees Signature page of the trustees with notarizations Copy of trust agreement and all amendments Trust borrowing authorization (signed and notarized) Certification of trust (signed and notarized) 202 C o m m e r c i a l M o r t g a g e s 101 ? Trust guarantee certification (required if trust is guarantor) The trust itself will also be required to submit financial statements (P&Ls) at the entity level as well as tax returns for the previous two years The average lender is able to loan money to a trust, regardless of the number of individual assets owned by the trust primarily because of the personal guarantee However, there are some lenders that will not loan money to certain trusts For example, agency lenders, such as Fannie Mae and Freddie Mac, that offer non-recourse apartment loans prefer only to lend to single-asset entities (SAE) A single-asset entity subject to this narrow lending restriction required by agency lenders such as Freddie Mac and Fannie Mae is what real estate attorneys refer to as a bankruptcy remote entity Bankruptcy remote means that a single and only asset held in the trust is insulated from the trustees’ other creditors A trust can own one or even multiple properties A trust or any legal entity, for that matter, that owns a single property is referred to as single-asset entity or special-purpose entity However, most trusts own more than one asset, and thus rarely ever qualify as single-asset entities INDEX absent owners, 132 accounts receivable, 102–104 acquisition date, 158 addresses, 157–159 adverse credit conditions, 110–111 agency lenders, 21–23 aggregate net cash flow, 122–123, 175 aggregate value, 145, 163 alternative financing, 25 amortization, 26–28, 172–173 annual debt service, 39, 41 apartment properties key characteristics of, 55 loans for, 27 rent rolls for, 36, 68 subclassifications for, 13–14 appraisals, 161 appraised values, 97 appraisers, 81 as-is value, 162 assets cash/noncash, 98 current, 89 fixed, 89, 143 included vs excluded, 92–93 203 intangible, 89 liquid, 107 and liquidity, 89–96 long-term, 89 and net worth, 89–96 non-real estate, 89–93 real estate, see real estate assets recently acquired, 96–97 for REO Schedule, 144–155 short-term, 89, 99 tangible, 89 value of, 91–92 asset values verification, 102 assumed name, 189–190 audited financial statements, 88 bad references, 126 balance, of mortgages, 163–164 balance sheets on Fannie Mae Form 1003, 147–149 on generic bank forms, 149–151 lender adjusted, 103–104 professionally prepared, 88–89 for REO Schedule, 145–147 balloon payments, 26–27 204 bankruptcies, 115 banks commercial mortgage, see agency lenders credit references from, 126–128 investment, 19–20 as lenders, 16–17 loan applications from, 46 REO Schedule forms from, 146–151 base rent, 67 basis points, 29–30 below-the-line expenses, 121 bond classes, 19 bond markets, 20–21 borrowers closing statement of, 161 definition of, 177–178 in executive summary, 58 expectations of, 52 experienced vs inexperienced, 130 individual, see individual borrowers net equity of, 166 as owners, 178–182 pro rata share of equity of, 166 skill set for, 132–133 see also forms of ownership borrowing entities definition of, 177–178 in executive summary, 58 as legal entity, 109–110, 179–182 bridge loans, 49, 51 building components, 59 build to suit, 11 businesses, investment in, 105 business resumés, 84 CAM (common-area maintenance), 68 capital, 88 capital gains, 117 capitalization rate, 40 Index capitalized value, 38, 41 cash assets, 98 cash equity, 93–96 cash flow historical, 72–80 personal, 116–125 stabilized, 78 cash flow analysis, 66 cash flow available for debt service (CFADS), 38, 173–174 cash flow section (REO Schedule), 166–175 column headings for, 154 monthly cash flow column of, 173–174 monthly loan payments column of, 172–173 monthly operation expenses column of, 170–172 monthly rental income column of, 167–169 net ownership cash flow column of, 174–175 real estate assets in, 166–167 cash flow statements, 72–73, 124–125 cash from borrower figure, 99–100 cash reserves, 100 C-corporations, 192 CFADS (cash flow available for debt service), 38, 173–174 closing statement, 161 CMBS (commercial mortgage-backed securities), 19, 22, 32 co-borrowers, 58, 178–179 collateral, 6, 92 collections, 113–114 column(s) headings for cash flow section, 154 headings for property value section, 152–153, 155 ill-defined, 149 monthly cash flow, 173–174 Index monthly loan payments, 172–173 monthly operation expenses, 170–172 monthly rental income, 167–169 net ownership cash flow, 174–175 number of, 149 in REO Schedule, 151 commercial banks, 16 commercial mortgage-backed securities (CMBS), 19, 22, 32 commercial mortgage banks, see agency lenders commercial mortgages, 2–7 commercial mortgage term(s), 25–33 amortization period as, 27–28 interest rate as, 29–31 loan-to-value ratio as, 28–29 maturity period as, 26–27 prepayment penalty as, 31–33 recourse/nonrecourse loan as, 33 commercial mortgage underwriting, 33–43 capitalized value in, 38–41 debt service coverage ratio in, 41–42 final underwriting analysis for, 43 net operating income analysis for, 36–38 property underwriting in, 35–36 sponsorship for, 34–35 commercial properties, 7–14 definition of, 5–7 income-producing, 9–10 multitenant, 11–14 non-income producing, 7–9 rent rolls for, 68 rent schedule for, 70–71 risks with, 12–13 schedule of income for, 70–72 single-tenant, 10–11 tenant rent roll for, 70 commercial real estate appraisers, 81 205 commercial real estate industry collapse, xiii–xv commercial real estate lenders, xix–xx agencies for, 21–23 and asset calculations, 90–91 banks as, 16–17 conduits for, 19–21 and corporations, 199 and co-tenancy ownership, 186–188 credit companies as, 23 executive summary for, 46–47 and general partners, 193 life insurance companies as, 18–19 with mortgage bankers, 24 net worth calculations of, 101–107 potential losses for, 94–95 private, 25 and trusts, 202 types of, 14–16 commercial real estate loans, 1–44 debt service coverage ratio with, 41–42 final underwriting analysis for, 43 lenders for, 14–25 mortgages for, 2–7 mortgage terms for, 25–33 mortgage underwriting for, 33–36 NOI analysis for, 36–42 types of properties for, 7–14 common-area maintenance (CAM), 68 community property laws, 182–183 company resumés, 84 comparable rental surveys, 83 comparable sales surveys, 83 compiled financial statements, 88 conduit lenders, xiv–xv, 19–21 construction loans, 51–52 controlling partner, 191 co-owners, 184 corporate debts, 198 206 corporate guarantee, 199–200 corporations, 197–200 correspondent relationships, 15–16 cost, 29 cost value, 96–97 co-tenancy, 184–188 credit card balances, 112 credit companies, 23 credit ratings (of bonds), 19 credit references, 126–128 credit reports, 108 credit score and history, 108–116 adverse credit conditions for, 110–111 collections and delinquent accounts in, 113–114 and foreclosures/bankruptcies/ summary judgments, 114–116 and high credit balances, 111–113 issues in, 108–110 and late payment history, 111 credit unions, 17 creditworthiness, see financial strength and creditworthiness current assets, 89 date of acquisition, 158 DBA (doing-business-as), 189 debt, personal, 112 debt coverage ratio (DCR), 78 debt ratings, 23 debt service, 100 debt service coverage ratio (DCR), 38, 41–42 declining schedule, 32–33 deeds of trust, defeasance, 32 Delegated Underwriting and Servicing (DUS) lenders, 22 delinquent accounts, 113–114 demographic information, 61–62 Index Deposit Insurance Fund (DIF), 17 description of property, 157 DIF (Deposit Insurance Fund), 17 disposable income, 116 doing-business-as (DBA), 189 double taxation, 192, 198–199 drive-by inspections, 134 DUS (Delegated Underwriting and Servicing) lenders, 22 effective gross income (EGI), 38, 169 English common law system, entities borrowing, see borrowing entities individual, 177 legal, xx–xxi, 177, 179–180, 185 single-asset, 109, 188–189 special-purpose, 109, 188–189 equity information, 164–166 equity participation, 28–29 escrows, 172 exclusive correspondent relationships, 15 executive summary section (loan request package), 47–58 borrower in, 58 financial summary in, 57–58 property description and location in, 53–57 purpose of loan request in, 48–52 sources and uses in, 52–53 expense categories, 74 expense reimbursements, 65, 67 experience, see real estate experience experience narratives, 131, 141–142 Fair Isaac Corporation, 108, see also FICO scores Fannie Mae, 21–22, 147–151, 187–188 Federal Deposit Insurance Corporation 207 Index (FDIC), 16 Federal Home Loan Bank, 17 Federal Home Loan Mortgage Association, see Freddie Mac Federal National Mortgage Association, see Fannie Mae Federal Savings and Loan Insurance Corporation (FSLIC), 17 federal savings banks, 16–17 FICO scores and collections/delinquent accounts, 113–114 and commercial lenders, 108–109 and commercial loan approval, 34–35 and credit history, 114 and debt, 112 and payment history, 111 required by commercial lenders, 110–111 final underwriting analysis, 43 finance companies, 23 financial analysis, 65–67 financial data, 57–58 financial statements audited, 88 compiled, 88 monthly, 64–65 personal, 146 in property economics section, 64–65 yearly, 64–65 financial strength and creditworthiness, 87–128, 187 banking and credit references for, 126–128 credit score and history for, 108–116 net worth and liquidity for, 88–107 personal income and cash flow for, 116–125 financial summary, 57–58 financing terms, 26 fixed assets, 89, 143 fixed-income securities, 19–20 fixed schedule, 32–33 foreclosures, 3, 114–115 forms of ownership, 177–202 borrowers and borrowing entities as, 178–182 corporations as, 197–200 co-tenancy and joint ownership as, 184–188 individual, 182–183 limited liability companies as, 195–197 partnerships as, 188–195 trusts as, 200–202 401(k)s, 99 fraud, 33 Freddie Mac (Federal Home Loan Mortgage Association), 21–22 free cash flow, 118, 124 FSLIC (Federal Savings and Loan Insurance Corporation), 17 full guarantees, 17 fully amortizing loans, 26 garnishments, 115–116 gas interests, 105 General Electric (GE), 23 general partners (GPs), 58, 191 generic bank form, 148–150 goodwill, 106 GPI (gross potential income), 37 GPs (general partners), 58, 191 gross building square feet, 59 gross income, 116–120 gross potential income (GPI), 37 guarantors, 58, 194–195, 199, 201 hard-money lenders, 25 high credit balances, 111–113 208 historical cash flow multifamily example of, 75 office example of, 76 retail example of, 77 summary of, 66, 72–80 historical income and expenses, 66 historical property data, 65–66 homestead property laws, 182–183 hospitality and hotel properties, 14 husband-and-wife ownership, 183 income disposable, 116 effective gross, 38, 169 gross, 116, 119 gross potential, 37 historical, 66 miscellaneous, 67 net, 116 net operating, see net operating income primary, 53, 67 rental, 37, 120–123, 167–169 secondary, 53, 67–68 self-employment, 119–120 income and expense statement, 64 income approach, 40 income-producing properties, 9–10 income schedules for commercial properties, 70–72 for multifamily properties, 68–70 unit-mix and rent, 68 income sections of historical cash flow summary, 73–74 of P&L Statement, 168–169 income tax returns, 119–120 indebtedness, 187 individual borrowers as co-borrowers, 182 Index as entities, 177 in executive summary, 58 personal guarantee of, 109–110 individual ownership, xx–xxi, 182–183 individual retirement accounts (IRAs), 99 industrial properties, 14, 56–57 installment loans, 112–113 intangible assets, 89 interest-only loans, 28 interest rates, 18, 29–31 interest rate swap spread, 31 interim loans, 49 Internal Revenue Service (IRS), 120, 193 investment banks, 20 investment properties, 10 investments, 52, 105 IRAs (individual retirement accounts), 99 irrevocable trusts, 201 IRS (Internal Revenue Service), 120, 193 joint liability, 179 joint ownership, 184–188 joint tenancy, 184–186 key principals, 58, 192 lack of credit, 114 landlords, 9–10 land tracts, late payment history, 111 leases, 11 legal entities, xx–xxi, 177, 179–180, 185 lender adjusted balance sheet, 103–104 lender information, 159–160 lenders, see commercial real estate lenders letter of intent, 26 Index letter of interest (LOI), 46–47, 81–82 leverage limits, 28–29 liability joint, 179 lender adjustments to, 106 limited, 192 of limited liability companies, 195 personal, 192 protection from, 191 several, 179 LIBOR (London Interbank Offered Rate), 30–31 liens, 2, 163 Lien Theory states, 2–3 life insurance, 18–19, 102–104 limited liability, 192 limited liability companies (LLCs), 195–197 limited partners, 58, 192 liquid assets, 107 liquidity definition of, 98 lender’s calculation of, 101–107 post-funding, 99–101 pre-funding, 97–99 see also net worth liquidity ratio, 98 lis pendens, 115–116 list of sources, 53 list of uses, 53 LLCs (limited liability companies), 195–197 loan analysis, 74, 78–80 loan number, 159–160 loan request package, xvi–xix, 45–85 executive summary section of, 47–58 location and demographics section of, 61–63 market and submarket data section of, 81–83 209 property description section of, 59–61 property economics section of, 63–81 sponsorship section of, 84–85 loans application forms for, 46, 146–151 maximum amount for, 43 origination of, 14–15 servicing of, 24 solicitation methods for, xvi terms for, 26 see also specific loans loan-to-value (LTV) ratios and balance of mortgages, 163–164 calculation of, 78 of commercial real estate loans, 28–29 location and demographics section, 61–63 LOI (letter of interest), 46–47, 81–82 London Interbank Offered Rate (LIBOR), 30–31 long-term assets, 89 LTV (loan-to-value), see loan-to-value ratios lump sum value, 145 MAI (Member of the Appraisal Institute), 161–162 management real estate experience, 133–135, 139–141 managing members, 58, 196 managing partners, 191 maps, 62 margin, 29 marketable securities, 98 market and submarket data section, 81–83 market equity, 93–96, 164 market research firms, 82 markets, 81 210 market surveys/studies, 82–83 market value, 40 calculation of, 41, 78 cost value vs., 96–97 estimation of, 38 and loan-to-value ratios, 28 for property value section, 160–163 married couples, 186 maturity period, 26–28, 30 maximum loan amount, 43 maximum value, 40–41 MBS (mortgage-backed securities), 19 Member of the Appraisal Institute (MAI), 161–162 Microsoft Excel, 151 minimum NOI required, 42 miscellaneous income, 67 misrepresentation, 33 monthly columns cash flow, 173–174 loan payments, 172–173 operating expenses, 170–172 rental income, 167–169 monthly debt service, 35 monthly financial statements, 64–65 mortgage-backed securities (MBS), 19 mortgage bankers, 24 mortgagees, mortgage instrument, mortgages balances of, 163–164 commercial, 2–7 terms for, 25–33 underwriting for, 33–36 mortgagors, motel properties, 14 multifamily properties historical cash flow example for, 75 schedule of income for, 68–70 subclassifications of, 13–14 Index tenant rent rolls for, 69–70 multimember limited liability companies, 195–196 multitenant commercial property, 11–14 narratives, 131, 141–142 National Credit Union Share Insurance Fund, 17 net cash flow, 116, 120–123 net income, 116 net operating income (NOI) analysis of, 36–42 calculation of, 35–36 minimum required, 42 and monthly cash flow, 173 net cash flow vs., 121 understatement of, 166–167 underwriting of, 74 net ownership cash flow column, 174–175 net rentable square feet, 59 net worth, xx, 88–107, 166 and assets, 89–91 and cost vs market value, 96–97 lender’s calculation of, 101–107 and non-real estate assets, 90–93 real estate assets as, 93–96 real estate assets/cash equity/market equity as, 93–96 see also liquidity NOI, see net operating income noncash assets, 98 noncash expenses, 121 nonexclusive correspondent relationships, 15 non-income-producing properties, 7–9 nonoperating expenses, 121 non-real estate assets, 89–93 non-real estate ventures, 105 nonrecourse loans with conduit lenders, 21 Index for corporations, 200 for general partners, 193–194 personal guarantees with, 110 nonresidential rent rolls, 36–37 notes receivable, 104–105 office properties, 13, 56, 76 oil interests, 105 one-person corporation, 198 on-site property management, 133 open period, 33 operating expenses in financial statements, 65 of historical cash flow summary, 73–74 and net cash flow, 121 on profit-and-loss statements, 171–172 verification of, 38, 39 oral references, 126 organizational charts of borrowing entity, 180 of limited partnership, 194 original purchase price, 158–159 original settlement, 161 out-of-state lenders, 82 outstanding credit balances, 112 overstatement of net operating income, 166–167 owner-managers, 133–134 owner-occupied commercial properties, 7–10 owner of record, 177 owner’s equity, 88, 93 ownership, see forms of ownership ownership interest, 193 ownership percentage, 160 ownership real estate experience, 130–133, 135–139 para pasu, 22 211 partnerships, 105, 188–195 passive owners, 132 payment history, 111 percentage of ownership, 160 personal cash flow statement, 124 personal credit reports, 108 personal financial statements, 84–85, 146 personal guarantee, of loan, 194–195, 197 personal income and cash flow, 116–125 cash flow statement for, 124–125 gross income in, 117–119 from rental income, 120–123 self-employment income in, 119–120 personal liability, 192 photographs, 63 P&I payments, 39, 41 P&L statement, see profit-and-loss statement portfolios, xx, 135, 143–144 post-funding liquidity, 99–101 pre-funding liquidity, 97–101 prepayment penalties, 31–33 primary income, 53, 67 prime rate, 30–31 private lenders, 25 profit-and-loss statement (P&L statement) income sections of, 168–169 for market value determination, 162–163 operating expenses section of, 171–172 in property economics section, 64 and verification of operating expenses, 38, 39 year-to-date, 166–167 profits, 190–191 pro forma cash flow, 74 212 property description and location section (loan request package), 53, 55–57 property description section (loan request package), 59–61 property economics section (loan request package), 63–81 financial analysis in, 65–67 financial statements in, 64–65 and financial summary, 57 historical cash flow in, 72–80 schedule of income in, 67–72 supporting documents in, 80–81 property(-ies) address of, 157–158 appraisal of, 161 as-is value of, 162 description of, 157 income-producing, 9–10 information on, 156–159 market value of, 160–163 name of, 156–157 original cost of, 158–159 profit-and-loss statement of, 162–163 stabilized value of, 162 types of, 7–14 property management companies, 73–74, 131–132 property rent rolls, see rent rolls property underwriting, 33–36 property values, estimating, 97 property value section (REO Schedule), 155–166 balance of mortgages for, 163–164 column headings for, 152–153, 155 equity information for, 164–166 lender and loan information for, 159–160 market value for, 160–163 property information for, 156–159 of real estate assets, 155–166 Index purchase loans detail list for, 49–50 schedule of sources and uses in, 54 underwriting analysis for, 43 purchase price, 158–159 purpose of loan request, 48–52 rate of return, 40–41 real estate assets, 143–175 for balance sheet, 89–90 in cash flow section, 166–175 as net worth and liquidity, 93–96 in property value section, 155–166 for REO Schedule, 144–155 real estate experience, 129–142 importance of, 129–130, 141–142 in management, 133–135 narrative examples of, 135–141 in ownership, 130–133 Real Estate Owned Schedule (REO Schedule), 85 for aggregate net cash flow, 123 balance sheet for, 145–151 cash flow section of, 166–175 format of, 151–155 monthly columns for, 173–174 for ownership experience, 131 property value section of, 155–166 for real estate assets, 144–155 real estate portfolio, 143–144 recently acquired assets, 96–97 recourse loans, 33 references, 126–128 reference to a schedule, 148 refinance loans detail list for, 50 property value estimates for, 43 schedule of sources and uses in, 54 rehab loans, 49 renovation loans, 49 213 Index rental income, 37, 120–123 rent comparables, 83 rent rolls for apartment properties, 36, 68 for commercial properties, 68 for nonresidential properties, 36–37 professionally prepared, 68 tenant, 68–69 rent schedule, see unit mix and rent schedule REO Schedule, see Real Estate Owned Schedule residential mortgages, 1–2 residential properties, resumés, 84 retail properties historical cash flow example for, 77 key characteristics of, 55–56 rent schedule example for, 71 subclassifications of, 13 types of, 6–7 revocable trusts, 200–201 right of survivorship, 185–186 risks, 12–13 SAE (single-asset entity), 109, 188–189 sales comparables, 83 savings and loan crisis, xiii–xiv savings banks, 16–17 schedule of income for commercial properties, 70–72 for multifamily properties, 68–70 in property economics section, 66–68 Schedule of Real Estate Owned, see Real Estate Owned Schedule Schedule of Sources and Uses, 52–54 schedules, 148–149 secondary income, 53, 67–68 securitization, xiv–xv self-amortizing loans, 26 self-employment income, 119–120 self-management, 134–135 settlement, 161 settlors, 200 several liability, 179 shareholders, 196–198 shopping centers, 6–7 short-term assets, 89, 99 single-asset entity (SAE), 109, 188–189 single-family investment properties, 130 single-family residential mortgages, see residential mortgages single-member limited liability companies, 195 single-tenant commercial properties, 10–11 site details, 59–61 “sizing the loan,” 66–67 sources and uses, 52–54 special-purpose entity (SPE), 109, 188–189 special-purpose properties, 14 sponsorship section, 33–35, 84–85 spread, 29–30 stabilized cash flow, 74, 78 stabilized value, 162 standard indexes, 30 statistical information, 63 step-down schedule, 32–33 subchapter S corporations, 199 subject property, 81 submarkets, 81–83 suit pending, 115–116 summary judgments, 115–116 supporting documents, 80–81 syndication, 25 table funding, 24 tangible assets, 89 taxable net cash flow, 121–122 214 taxation, 192 tax liabilities, 195 tax liens, 115–116 tax returns, 119–120 telephone interviews, 126 tenancy by the entirety, 186 tenancy in common (TIC), 184–185 tenant rent rolls, see rent rolls tenants, 9, 12 1031 tax exchanges, 185 term loans, 26 term sheets, 46 third-party lenders, 24 TIC (tenancy in common), 184–185 time shares, 105–106 title searches, 179–180 Title Theory states, total equity, 93–94, 164–166 tracts of land, trailing twelve-month cash flow, 74 trustees, 200 trusts, 17, 200–202 understatement of net operating income, 166–167 underwriting commercial mortgage, see commercial mortgage underwriting of net operating income, 74 practices in, xv of property, 33–34 underwriting cash flow, 66, 74, 78 “underwriting the borrower,” 35 Uniform Residential Loan Application, 147–148 Index unit-mix and rent schedule example of, 69–70 in property economic section, 66 as schedule of income, 68 U.S Census web sites, 63 U.S Treasury yields, 30 utility reimbursements, 68 vacancy factor, 37–38 value of assets, 91–92, 97 capitalized, 38, 41 in loan-to-value concept, 29 maximum, 40–41 verification of mortgage (VOM), 126–127 vested ownership, 177, 181 visual aids for location and demographics section, 62–63 for property description, 61 VOM (verification of mortgage), 126–127 W-2 employees, 117, 119 Wall Street investment banks, 19–20 Wall Street Journal, 30 warehouse properties, 14 “warm body,” 199, 201 wish list, 52 written narratives, 131, 141–142 written references, 126 year-end, 72 yearly financial statements, 64–65 year-to-date, 72 yield maintenance, 31–32 Look for These Informative AMACOM Titles at www.amacombooks.org: Decoding the New Mortgage Market by David Reed $17.95 Financing Your Condo, Coop, or Townhouse by David Reed $18.95 An Insider’s Guide to Refinancing Your Mortgage by David Reed $16.95 The Landlord’s Financial Tool Kit by Michael C Thomsett $18.95 Mortgages 101, Second Edition by David Reed $16.95 Mortgage Confidential by David Reed $16.95 Navigating the Mortgage Minefield by Richard Giannamore and Barbara Bardow Osach $17.95 The Property Management Tool Kit by Mike Beirne $19.95 The Real Estate Investor’s Pocket Calculator by Michael C Thomsett $17.95 Saving the Deal by Tracey Rumsey $17.95 Stop Foreclosure Now by Lloyd Segal $19.95 The Successful Landlord by Ken Roth $19.95 Your Successful Career as a Mortgage Broker by David Reed $18.95 Your Eco-Friendly Home by Sid Davis $17.95 ... Cataloging-in-Publication Data Reinhard, Michael Commercial mortgages 101 : everything you need to know to create a winning loan request package / Michael Reinhard p cm Includes bibliographical references and.. .COMMERCIAL MORTGAGES 101 www.ebook3000.com This page intentionally left blank www.ebook3000.com COMMERCIAL MORTGAGES 101 Everything You Need to Know to Create a Winning Loan Request Package. .. commercial real estate loans and underwriting to start searching for his first commercial real estate loan But before the search can begin, he must prepare a loan request package By now you may be asking