Why should I use a broker instead of a bank or traditional lender? |
First and foremost, since Nationwide Business Consultants is a broker for commercial loans, we only have to pull your credit one time and we can go look for the best terms and programs to fit your needs. Most direct lenders are limited in the property type and borrower situation on which they can lend. If the loan really needs to be done, the experts at Nationwide Business Consultants have the desire and willingness to take the time to understand the loan and figure out how to structure it so that a lender will take the loan. If a borrower works directly with a traditional lender, they cannot expect such service or success.
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How does Nationwide Business Consultants provide lower rates than banks and other brokerage firms?
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Nationwide Business Consultants is able to provide the lowest rates available because it has a larger network of commercial lenders to work with than its competitors. Our lenders vary from publicly owned banks, to privately held investment groups. As a result, Nationwide Business Consultants is able to find the right lender with the lowest rate for virtually any commercial property.
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What type of information will I need to provide Nationwide Business Consultants with to ensure that the loan process runs smoothly and efficiently?
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Although each lender requires different types of specific information all lenders will want to see:
- Three years of individual and business tax returns
- Operating statements detailing any improvements or expenses incurred by the property
- Current rent roll including leases for any apartment building
- Personal financial statements for all partners
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What differentiates a commercial mortgage from a residential mortgage?
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A residential mortgage is limited to as the name implies, "residential properties" no greater than four units per building, whereas, a commercial mortgage is utilized to secure financing for a wide-array of property types. In addition, the residential loan process is essentially standardized through the use of guidelines established by Freddie Mac and Fannie Mae, while the commercial loan process can vary greatly from lender-to-lender.
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What is the difference between a recourse loan and a non recourse loan?
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A recourse loan means the loan is guaranteed by the borrower personally. A non recourse loan means a third-party organization is formed for the property, such as an LLC or corporation. If the loan defaults for any reason, the mortgage holder would the take control of the LLC or corporation.
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What is Net Operating Income (NOI)?
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NOI is gross rent or income less expenses on the property.
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How do I calculate the Net Operating Income of my property?
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Add up all of the income generated from your property such as rent, fees, etc on an ANNUAL basis. Then subtract all of the expenses associated with operating this property such as repairs, utilities, and taxes and what you have left over is your Net Operating Income, also known as "NOI". Your mortgage payment on the property is not taken into account in this formula. That number is used in another calculation process known as Debt Service Coverage Ratio. The more technical formula is: Potential Gross Income + Other Income - Vacancy - Real Estate Taxes - Operating Expenses = Net Operating Income
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Is debt service coverage important for the approval of the commercial loan?
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Yes, it is one of the key factors as to whether a commercial loan is approved. Debt service coverage is the ratio of cash available (after all property expenses) for loan payments to the loan payment. Expressed as: Net Operating Income (NOI) / Principal and Interest on proposed mortgage. Most commercial Lenders require a DSCR of 1.20:1 or higher for most property types.
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What is the debt service coverage ratio DSCR and how is it calculated?
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One of the most frequent reasons a commercial loan is denied is because the property does not meet the commercial lender's minimum DSCR requirements. Understanding how a commercial mortgage lender calculates the DSCR can be helpful to know when applying for a commercial real estate loan, conduit loan or an apartment loan.
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DSCR = NOI/Total Debt Service
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A common misconception made by borrowers when applying for a commercial mortgage loan is that the bank or commercial lender only uses the expenses from the property when calculating the NOI. Commercial Mortgage lenders use the actual expenses plus additional holdbacks, such as, off-site management, vacancy, replacement reserves, repairs and maintenance, etc. Commercial lenders add these numbers to the expenses for several reasons, including, should the borrower default - management fee holdback, should the property lose a tenant(s) -vacancy factor, increase in costs, buffer for unexpected repairs, etc.
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What is ADS (Annual Debt Service)?
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Annual Debt Service is the monthly principal and interest times 12 months (not including taxes and insurance in the ADS).
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What is a CAP Rate?
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CAP rate is a measurement of the rate of return on an investment. You calculate this by taking the NOI and dividing it by purchase price. The NOI divided by the CAP Rate = Value
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Is there a penalty if I pay off a loan before its term?
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Most commercial loans have what is called a "Pre-pay Penalty." This is a penalty assessed if a loan is paid off in full or prior to the Term outlined in the loan documents. Commercial loans often carry a prepayment penalty for four of the first five years or a five year product. It is of the utmost importance to inquire about these penalties because if invoked they can be quite costly.
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Why are commercial mortgage rates higher than residential?
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Commercial properties are riskier. An individual will do almost anything to save their home, and if they lose it, someone will probably buy it pretty quickly. A business owner or landlord, due to economic pressures or bad management or creditors, may have to shutdown and let the lender take over the property. There is greater cost and risk to a commercial property for a lender, both in loan size and in disposing of the property. Greater risk means a greater return is needed which means a greater interest rate. As a solution, longer amortizations help keep payments lower and a shorter term such as five years permit the lender to reduce rates further since the loan will balloon out and return the capital to the lender sooner.
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Why are appraisals so expensive?
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Commercial appraisals cost between $1,000 - $5,000. Qualified appraisers usually have an MAI designation, representing years of education and experience. While a residential appraisal is perhaps 2 or 3 pages of analysis, plus pictures and boilerplate, a commercial appraisal runs 60-100 pages and has considerable analysis of sales comparables, reproduction costs, market rents, and economic and geographic research of the general area.
The appraisal process typically involves three approaches to value. These approaches are based on the following three facets of value:
Cost Approach - The current cost of replacing a property less losses in value from deterioration and functional and economic obsolescence (accrued depreciation).
Sales Comparison Approach - The value indicated by recent sales of comparable properties in the marketplace.
Income Capitalization Approach - The market value that the property's net earning power will support based upon a capitalization of net income, stabilization, and residual equity buildup.
Since the marketability of commercial properties is much less liquid than residential, greater care and analysis of the property is made in the event the lender must take over managing the property.
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How do I apply for a commercial mortgage with Nationwide Business Consultants?
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Simply complete the general question application and we will contact you to discuss the specifics. Click here to access the online application.
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