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

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

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Commercial Mortgages 101