What formula do banks used when evaluating a commercial loan?

What I have been told banks want to see is $1.25 in income for every $1.00 in expenses before loaning for a commercial property. If this is true do they include projected vacancy in the expense column, and do they factor the mortgage payment as an expense? If you know of any other formulas they use it would be appreciated. I may have to invest into my commercial property to raise the income in order to sell so I am trying to see what can be done.

There are a few factors but one they pay attention the most is the DSCR or Debt Service Coverage Ratio the formula is:

NOI/Total Debt Service

So you take the NOI and divide the total debt service and lenders usually look for anything around 1.8 or higher and the higher the ratio the better the deal and the more likely hood the lender will lend out.

Some lenders will lend around 1.2 and above but usually they like a higher ratio.

That is some very good info. By my projections if I accomplish what I feel is realistic I would project dealing with a 1.44 ratio (assuming the buyer puts down 25%). Does that sound like a reasonable deal? Do you think they would have a hard time finding financing with these numbers?

That’s a pretty decent deal I would run that buy your commercial lender and see what he or she says.

A DSCR of 1.25 should be ok . Most lenders will lend about 75% LTV.

Good info on this post, thanks. I am curious about putting 10-20 residential properties under a commercial loan or a blanket. Currently we are at 50% LTV, rents are twice PITI, possibly get cash out and hold for cashflow. Do they have the same requirements? Do you know of any that will do this? Or should I contact a bunch of small local banks? Any help is much appreciated.

I would think you could find local, commercial bankers would offer 75% LTV with a 1.25% DSCR, or greater. It does, of course, depend on how strong the reliability of your NOI statement, and the rate YOU use as your expected vacancy rates may be considerably lower than what the bank will use.

I’ve seen banks insist on one month vacancy, per year, for every single unit, which is an 8.3% vacancy rate. They’ll want to scrutinize your allowance for maintence, property management costs and every expense.

Of course, if you can produce a 2-year P&L on the property, and it’s being managed by a local, professionally responsible company, that’s going to be a feather in your cap.

Good luck!

I am guessing that all your properties were financed with 30-year residential mortgage loans. If so, then expect a commercial loan to have a 15 year amortization, and a five year balloon. Refinancing with a commercial loan will most likely increase your debt service, reduce your cash flow, and leave no room to take any cash out of your equity even if the DCR is a minimun 1.3