Despite the dearth of capital currently pursuing commercial real estate transaction in recent years, lenders have applied increasingly more conservative standards when underwriting risk. Often these requirements are set by companies that buy loans from the original lender. Even if the lender doesn't plan to sell the loan immediately, the lender tries to conform the loan to these standards so the ability to sell is always an option.

When underwriting, the lender will first look to the property to see if it can support the loan. A loan-to-value ratio is calculated by dividing the amount of the loan by an assumed value -- based on your net income and an assumed market cap rates -- and/or a recent appraised value. The lender knows that if you have some of your own money tied up in the property, you are more likely to be making debt payments. Also, if the loan must be foreclosed, the property should be worth enough to repay the loan balance. Generally, multi-family loans are made for no more than 80% of value. Commercial office, retail and industrial loans will typically underwrite for no more 75% of value.

Another measure of risk used in underwriting compares net operating income to debt payments. Lenders usually like to see net operating income at least 20% higher than debt service (a minimum debt service coverage ratio of 1.20) for multi-family properties. When commercial tenants have high credit ratings and sign a long-term lease, a lower ratio might be accepted. By contrast, when leases are short, a higher ratio is required.

Finally, lenders examine the strength of a borrower's balance sheet and operating experience. Traditionally, lenders will be looking for a net worth that is roughly equivalent to the value of the property they're trying to secure. The borrower should also have enough liquidity to cover six months of debt of service.

Financial institutions that are important to individuals who want to borrow on real estate are:

Life Insurance Companies: Large life insurance companies are usually interested only in loans that exceed $3 million. They lack the ability to service many small loans and therefore prefer a smaller number of large loans. With billions of dollars in assets some life insurance companies can make large loans-$50-100 million or more in some cases. Life insurance companies rarely offer construction loans; they offer low rates but are conservative and want the long-term yield and safety provided by permanent mortgages on stabilized assets. They typically also require low loan-to-value ratios.

GSE Lenders: GSE (Government Sponsored Enterprises) or agency lenders focus exclusively on stabilized multi-family properties and properties limited to seniors. Agency Lenders are highly popular since rates are usually lower than other funding sources and second mortgages are allowed. Agency lenders also only tend to fund higher quality, stabilized assets.

Commercial Banks: Commercial banks are active in making construction loans on all types of property. Such loans are usually offered only if the borrower has a take-out commitment from a permanent lender; upon project completion, the permanent loan will "take" the bank "out of" (repay) the construction loan. Commercial banks typically offer only recourse loans where the borrower is compelled to provide additional collateral guaranteeing any capital deficiencies if the bank is forced to foreclose.

Conduit Lenders: Conduits are a relatively new breed of lender attempting to address virtually every type and class of asset. By definition, conduits are organized to pool your loan with similar assets and sell them to outside investors. As a result, underwriting standards are set by these buyers and can often be quite limiting to borrowers with unique properties or borrowers that require more freedom managing their cash flows. The loan application process can also be intimidating for borrowers new to conduit lending since every loan needs to documented for an easy sale. However, the upside to these loans can be considerable. Because hedging in the secondary market mitigates risk, conduits can often offer rates that are more competitive than traditional lenders. Conduit loans are also typically non-recourse.

From the time the application is signed, most loans typically fund within 45 to 60 days. For small balance loans funding can happen within 30 to 45 days. In instances where we are engaged to secure traditional debt, Steelhead acts on behalf of the borrower to professionally package and present your loan request to the capital markets. Once a lender is chosen, we help negotiate the application, guide the borrower through the due diligence process and ultimately coordinate the loan closing.