Chapter 20 Commercial Real Estate Finance

1
Chapter 20Commercial Real Estate Finance
2
Major Topics

• How does commercial real estate finance differ
  from residential?
• What affects the availability of commercial
  property financing?
• Who are the major providers of commercial
  property mortgages?

3
Introduction

• Distinctions between financing Commercial
  properties and Residential financing
• Commercial financing transactions are less
  standardized
• Loan documents are customized to the transaction
  and are heavily negotiated
• Loan terms are much shorter Balloon loans
• 25-year term to amortization, 7-year term to
  maturity
• Underwriting emphasis is on the propertys income
  and value
• Lengthy approval process
• Prepayment ability is limited

4
Sources of Debt Funds

5
Commercial Property Financing Process

• Step 1 Complete the Financing Loan Application
  Package
• Market analysis
• Tenant info
• Pro forma financials
• Step 2 Package Submission and Solicitation of
  Quotes
• Step 3 Loan Application
• Good faith deposit

6
Commercial Property Financing Process

• Step 4 Underwriting
• Loan to Value Ratio
• Equity buffer
• Debt Coverage Ratio NOI1 Yearly PMT
• Income buffer
• Step 5 Loan Committee Approval
• Step 6 Commitment Letter
• Binding contract

7
Commercial Property Financing Process

• Step 7 Due Diligence and Closing Process
• Contingencies
• Appraisal
• Good and marketable title
• Environmental audit (Phase 1 ? CERCLA)
• Step 8. Loan Closing and Funding

8
Typical Underwriting Terms
Permanent, Fixed-rate Financing 3rd Qtr 2002 Permanent, Fixed-rate Financing 3rd Qtr 2002 Permanent, Fixed-rate Financing 3rd Qtr 2002 Permanent, Fixed-rate Financing 3rd Qtr 2002 Permanent, Fixed-rate Financing 3rd Qtr 2002
Apartments Industrial Office Retail
Spread over 10-year Treasury 2.22 2.57 2.61 2.60
Debt coverage ratio 1.37 1.39 1.50 1.43
Loan-to-value ratio 75 72 73 73
Amortization term 26 25 28 26
Maturity term 21 12 8 6
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END