These nonoperating expenses should always be excluded when cal-
culating both monthly and annual operating expenses. If not, the
monthly average will be grossly overstated by as much as $68,083
per month or by as much as $817,000 annually. Therefore, be on the
lookout for these types of nonoperating expenses, and be sure to
exclude them when calculating the monthly average.
Monthly Loan Payments
The monthly loan payment column is fairly straightforward, with only
a few minor exceptions. The cells in this column, like those in the
monthly rental income and monthly operating expense columns, are
intentionally left blank, requiring the borrower or mortgage broker to
enter a value. The monthly loan payment should include both prin-
cipal and interest if the loan is amortizing. However, the figure
should not include any monthly escrows such as real estate taxes,
insurance, or capital replacement reserves. These were already
included in the monthly operating expenses previously discussed. Be
sure to add to the first lien payment all other second and third lien
monthly payments, as well. Sometimes the monthly loan payment
on a loan for the property listed on the R EO Schedule covers interest
only. Most interest-only loan payments are short-term, usually less
than two years, depending on the type of loan. It is perfectly fine to
use the monthly interest-only payment if the loan has no amortizing
component, meaning that it is probably a short term loan with
a balloon payment. However, if the interest-only monthly loan pay-
ment is temporary, with amortization kicking in after a year, it is
better to use the principal and interest payment instead of the
interest-only payment. Using the interest-only payment, which will
eventually convert to an amortizing payment of principal and inter-
est, can grossly overstate the property’s monthly net cash flow. Look
for these aberrations like short-term interest-only payments when
Commercial Mortgages 101

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