Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package »

MICHAEL REINHARD (Houston, TX) is an independent mortgage banker for Texas Commercial Mortgage. He has originated and underwritten over $300 million in commercial loans since 1995 covering apartments, retail centers, office buildings, industrial warehouses, and more.

Whether you’re a residential mortgage broker looking to break into the commercial mortgage brokerage business or a beginner real estate investor looking to transition from small residential properties to large commercial investment properties, learning how to think and speak like a commercial real estate lender will put you on an even playing field with the professionals. Commercial Mortgages 101 takes you step-by-step through the entire process of applying for a commercial real estate loan and putting together a professional loan request package. Clarifying common industry terms such as “debt-service-coverage-ratio” and “balloon payment,” and including a sample Real Estate Owned (REO) Schedule, this easy-to-follow beginner’s guide touches on all key aspects of what can all too often be a mystifying and confusing process. You’ll learn how to:

• Correctly apply and use a variety of commercial mortgage terms and phrases.

• Read and interpret a lender’s preliminary loan proposal.

• Quickly size and underwrite a basic commercial real estate loan.

• Prepare a persuasive and professional looking loan request package.

• Identify the different types of non-income and income-producing commercial properties.

• Prepare a personal cash flow statement and calculate your true net worth and liquidity.

• Create and use the all-important Real Estate Owned (REO) Schedule.

• Choose the right form of ownership, (including LP, LLC, co-tenancy and others).

There’s never been a more opportune time to get involved in commercial real estate. Commercial Mortgages 101 gives you all the tools and information you need to put your best foot forward, secure the most favorable terms, and navigate the process like a pro.

Michael Reinhard is an independent commercial mortgage banker for Texas Commercial Mortgage, which specializes in commercial real estate lending across the country. He has originated and underwritten over $300 million in commercial real estate loans since 1995 covering apartment buildings, retail centers, office buildings, industrial warehouses, and more.

Acknowledgments xi

Introduction xiii

Chapter 1 An Introduction to Commercial Real Estate Loans 1

What Is a Commercial Mortgage? 2

"Mortgage" Defined 3

"Commercial" Defined 5

Types of Commercial Properties 7

Non-Income-Producing Properties 7

Income-Producing Properties 9

Single-Tenant Properties 10

Multitenant Properties 11

Types of Commercial Real Estate Lenders 14

Banks 16

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 45

Executive Summary 47

Purpose of Loan Request 48

Sources and Uses 52

Property Description and Location 53

Financial Summary 57

Borrower 58

Property Description 59

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 87

Net Worth and Liquidity 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 108

Five Adverse Conditions Unacceptable to Commercial Lender 110

Personal Income and Cash Flow 116

Gross Income 117

Self-Employment Income 119

Net Cash Flow and Taxable Net Cash Flow from Rental Income 120

Cash Flow Statement 124

Banking and Credit References 126

Chapter 4 Real Estate Experience 129

Ownership and Management Experience 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 155

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

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