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

want to use the original sales price and there is no recent appraisal,

then it is best to capitalize the NOI using the profit-and-loss state-

ment. In fact, many lenders use this method even if there is an

appraisal or a closing statement showing the original sales price as a

way of testing the current cash flow against these proven values. For

example, if there has been an increase in operating expenses or

income and occupancy is on the decline since the effective date of the

most recent appraisal, it is safe to assume that the property value is

in decline as well, thus making this method a safeguard for the

lender.

Balance of Mortgages

An REO Schedule must include the balance of mortgages for each

property encumbered by a first lien. What the lender is after here is

the borrower’s current total debt on the property, which should

include all subordinate liens. Often the amount of the new loan

request is insufficient to pay off all of the existing loans, so it is very

important to make sure that the total balance shown in this column

truly represents the total outstanding balance of all liens. Many times

borrowers omit the second or even third liens, creating confusion for

the new lender. First liens, second liens, and even third liens must be

added to show how much debt is owed against the property. This

amount can help the lender determine the loan-to-value (LTV) ratios

for each property. For example, if the market value is stated to be $5

million and the total debt is $4.5 million, then the borrower’s current

LTV on this property is 90 percent. That is a highly leveraged prop-

erty, which lenders consider unacceptable. However, if the aggregate

market value for all of the properties is $20 million and the aggre-

gate debt is $15 million, then the aggregate LTV is much lower at 75

percent. A lender can tolerate a few properties that may be over-

leveraged as long as the aggregate leverage is in line with the usual

Real Estate Assets

163