Good evening all. I am looking for financing for the following project in Chicago, IL:
Does anyone have any suggestions?
Have you tried CIC here in Chicago?
You will need to determine below also:
What are the factors a lender look at;
Net Operating Income
Net Operating Income or NOI is equal to a property's yearly gross income less operating expenses. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, etc. All income associated with a property. Operating expenses are costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. The following are not operating expenses: principal and interest, capital expenditures, depreciation, income taxes, and amortization of loan points. Net operating income is calculated like this.
Income
Gross Rents Possible 100,000
Other Income 3,000
Potential Gross Income 103,000
Less vacancy Amount 2,000
Effective Gross Income 101,000
Less Operating Expenses 31,000
Net Operating Income 70,000
Net operating income or NOI is used in two very important real estate ratios. It is an essential ingredient in the Capitalization Rate (Cap Rate) calculation that is used to estimate the value of income producing properties. Lets assume we have a market capitalization rate of 10 for the type of property we are considering purchasing. A market cap rate is calculated by evaluating the financial data from current sales of similar income producing properties in a given market place. We are evaluating a similar income property that is currently for sale with a net operating income of $50,000. We would estimate the value of this property like this.
Net Operating Income 50,000
Estimated Value = ------------------------------ = ------------ = $500,000
Capitalization Rate .10
Another important ratio that is used to evaluate income producing properties is the Debt Coverage Ratio or DCR. The NOI is a key ingredient in this important ratio also. Lenders and investors use the debt coverage ratio to measure a property's ability to pay it's operating expenses and mortgage payments. A debt coverage ratio of 1 is breakeven. Most lenders require minimum of 1.1 to 1.3 to be considered for a commercial loan. From a a bank's perspective, the larger the debt coverage ratio, the better. Debt coverage ratio is calculated like this.
Net Operating Income 50,000
Debt Coverage Ratio = ------------------------------- = ---------- =1.25
Debt Service 40,000
Debt service is the total of all interest and principal paid on a loan in a given year. It is equal to the mortgage payment times 12 or the mortgage payments times 12 if you have multiple loans on a property.
Cap Rate - Capitalization Rate
The Capitalization Rate or Cap Rate is a ratio used to estimate the
value of income producing properties. Put simply, the cap rate is the
net operating income divided by the sales price or value of a property
expressed as a percentage. Investors, lenders and appraisers use the
cap rate to estimate the purchase price for different types of income
producing properties. A market cap rate is determined by evaluating
the financial data of similar properties which have recently sold in a
specific market. It provides a more reliable estimate of value than a
market Gross Rent Multiplier since the cap rate calculation utilizes
more of a property’s financial detail. The GRM calculation only
considers a property’s selling price and gross rents. The Cap Rate
calculation incorporates a property’s selling price, gross rents, non
rental income, vacancy amount and operating expenses thus providing
a more reliable estimate of value.
If we have a seller and an interested buyer for particular piece of
income property, the seller is trying to get the highest price for the
property or sell at the lowest cap rate possible. The buyer is trying to
purchase the property at the lowest price possible which translates into
a higher cap rate. The lower the selling price the higher the cap rate.
The higher the selling price, the lower the cap rate. In summary, from
an investor’s or buyer’s perspective, the higher the cap rate, the better.
Investors expect a larger return when investing in high risk income
properties. The Cap rate may vary in different areas of a city for many
reasons such as desirability of location, level of crime and general
condition of an area. You would expect lower capitalization rates in
newer or more desirable areas of a city and higher cap rates in less
desirable areas to compensate for the added risk. In a real estate
market where net operating incomes are increasing and cap rates are
declining over time for a given type of investment property such as
office buildings, values will be generally increasing. If net operating
incomes are decreasing and capitalization rates are increasing over
time in a given market place, property values will be declining.
If you would like to find out what the cap rate is for a particular type of
property in a given market place, check with an appraiser or lender in
that area. Be aware that the frequency of sales for commercial income
properties in a given market place may be low and reliable capitalization
rate data may not be available. If you are able to obtain a market cap
rate from an appraiser or lender for the type of property you are
evaluating, check to see if the cap rate value was determined with
recent sales of comparable properties or if it was constructed. When
adequate financial data is unavailable, appraisers may construct a cap
rate through analysis of its component parts thus reducing the credibility
of the results. Cap rates which are determined by evaluating the recent
actions of buyers and sellers in a particular market place will produce
the best market value estimate for a property.
If you are able to obtain a market cap rate, you can then use this
information to estimate what similar income properties should sell for.
This will help you to gauge whether or not the asking price for a
particular piece of property is over or under priced.
Cap Rate = NOI/Value Estimated Value = NOI/Cap Rate
Example 1: A property has a NOI of $155,000 and the asking price
is $1,200,000.
$155,000
Cap Rate = -------------- X 100 = 12.9 rounded
$1,200,000
Example 2: A property has a NOI of $120,000 and Cap Rates in the
area for this type of property average about 12%.
$120,000
Estimated Market Value = ------------ = $1,000,000
.12
Net operating income is determined by subtracting vacancy amount and
operating expenses from a property’s gross income. Operating expenses
include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating expenses do not include the following items; Improvements such as a new roof, personal property such as a lawn mower, mortgage payments, income and capital gains taxes, loan origination fees, etc.