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Chapter 20 Commercial Real Estate Finance

Chapter 20 Commercial Real Estate Finance. Major Topics. How does commercial real estate finance differ from residential? What affects the availability of commercial property financing? Who are the major providers of commercial property mortgages?. Introduction.

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Chapter 20 Commercial Real Estate Finance

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  1. Chapter 20Commercial Real Estate Finance

  2. Major Topics • How does commercial real estate finance differ from residential? • What affects the availability of commercial property financing? • Who are the major providers of commercial property mortgages?

  3. Introduction Distinctions between financing Commercial properties and Residential financing: • Commercial financing transactions are less standardized • Loan documents are customized to the transaction and are heavily negotiated • Loan terms are much shorter – Balloon loans • 25-year term to amortization, 7-year term to maturity • Underwriting emphasis is on the property’s income and value • Lengthy approval process • Prepayment ability is limited

  4. Sources of Debt Funds

  5. Commercial Property Financing Process Step 1: Complete the Financing Loan Application Package • Market analysis • Tenant info • Pro forma financials Step 2: Package Submission and Solicitation of Quotes Step 3: Loan Application • “Good faith” deposit

  6. Commercial Property Financing Process Step 4: Underwriting • Loan to Value Ratio • “Equity buffer” • Debt Coverage Ratio = NOI1 ÷ Yearly PMT • “Income buffer” Step 5: Loan Committee Approval Step 6: Commitment Letter • Binding contract

  7. Commercial Property Financing Process Step 7: Due Diligence and Closing Process • Contingencies: • Appraisal • “Good and marketable” title • Environmental audit (Phase 1  CERCLA) Step 8. Loan Closing and Funding

  8. Typical Underwriting Terms

  9. END

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