Borrowers should be prepared to furnish detail and documentation on both the purchasing or vesting entity along with basic information on the key principal individuals involved in the transaction. Commercial lenders are mostly focused on the collateral property for qualification, but borrowers are still reviewed and expected to meet their minimum requirements. Strong borrowers (financially, experienced, etc.) can also help improve qualification for the most competitive programs so a review of this is important to securing best available financing.
Recourse vs. Non-Recourse
A recourse loan requires personal guarantee, while a non-recourse loan does not. However, even non-recourse loans require some level of guarantee for “bad boy” carve-outs which typically refer to criminal or fraudulent activity by the borrower causing default
The personal financials of the borrowers (typically any person owning 20% or more of the purchasing entity along with all Managers) will be collected and reviewed by the lender.
If the client is a business owner operating his company from the subject property, the ability to repay is dependent on the profitability and success of that company, and not on the cash flow of third-party tenants since they do not exist.
This is usually only a consideration for owner-user transactions where the loan qualification is based solely on the borrower’s business.
Credit & Character
Loan qualification comes down to the lender wanting to determine to the best of their ability how likely you are to default on your new mortgage payment. While they can’t predict what will happen in the future.
The asset type (multifamily, office, retail, etc.) is the first factor a lender will evaluate when looking at a new commercial loan request.
Lenders mostly want to see properties that are in major metropolitan markets as opposed to rural areas, in areas of high traffic count and visibility, and ideally in an area with less competition or potential for future competition.
Quality & Condition
This hurdle is usually evaluated by the inspectors that complete the on-site inspections of the property on behalf of the lender and delivers their report(s) to them for review. Many times, this is solely an appraisal.
The property appraisal is a very important factor in determining the final loan terms from the lender. A property appraisal will be completed by an accredited appraiser that specializes in the specific commercial subtype and usually in the same market as the subject property.
NOI & Cash Flow Ratios
Cash flow is arguably the most important factor for a lender when evaluating a commercial loan request. There are many uncontrollables to a lender once a lender funds the loan.