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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2003

Commercial Mortgage Originator - Strategy, Training & Tools for Mortgage Brokers

Commercial Mortgage Origination for the Residential Mortgage Broker

Now that residential mortgage business is leveling off, there is some breathing room to consider new opportunities — such as commercial mortgage loans.  The most important thing to remember about  commercial mortgage loan origination is that lenders underwrite the property, not the borrower, and to underwrite the property, the lender needs to know what is the stabilized Net Cash Flow (NCF).  As such, you need to demonstrate how you calculated the NCF and put together a credible and professional loan request.  Like the residential business, packaging is everything.

Since it is unusual for lenders to use the property’s reported Net Operating Income (NOI) without first normalizing the income and expenses, applying the property-specific underwriting parameters and calculating the stabilized Net Cash Flow (NCF), it is important for brokers to make these calculations ahead of time and present everything in a credible and professional loan package.

Here is a step-by-step guideline for Loan Package creation:

Step One

Reconstruct the Operating Statement to calculate the stabilized NCF.

  1. PGI: Calculate the Potential Gross Income that a property is capable of generating (contract rent + vacant space at market rent).
  2. Vacancy Reserve: Subtract from PGI the greater of the Actual, Market or Underwriting Guideline for Vacancy.
  3. Normalizing: Remove any unusual, non-recurring income and expenses like Tax Refunds, Lease Buyouts, TI/LC costs, Replacement Reserves and Extraordinary Capital Expenditures.
  4. Adjust for Inflation: Multiply the remaining expenses by three percent.  
  5. Calculate NOI: Subtract PGI from the Vacancy Reserve, and then subtract the inflation-adjusted expenses.
  6. Apply Property-specific Underwriting Parameters: Management Fee (3-5%), Replacement Reserves (by square foot or by unit), and TI/LC Reserves (for Office, Industrial or Retail properties).
  7. Calculate NCF: Subtract NOI from the Underwritten Fees and Reserves 

Step Two

Calculate Value, Loan to Value (LTV) and Debt Service Coverage Ratio (DSCR)

  1. Value = NCF / Cap Rate (previous appraisal will not be accepted by lenders)
  2. LTV = Requested Loan Amount / Value
  3. DSCR = NCF / Annual Debt Service (mortgage payments on proposed loan amount) 

Step Three

Prepare Executive Summary - address the issues as they affect the underwriting above.

Step Four

Submit to Lenders

  1. For deals under $1MM, submit to local lenders for best terms and lowest fees
  2. For deals $1MM to $3MM, submit to either local lenders, regional or national lenders 
  3. For deals over $3MM, submit to regional and national lenders


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