I often tell the following story to my commercial loan brokerage trainees. Goliath Bank offers a $2 million commercial loan to the borrower at 5.75%, 1 point, 25 years amortized, ten years due, with a rate readjustment at the beginning of year 6. The prepayment penalty is 3% in years one through five. Caution: While the above quote accurately reflects today's market for bank commercial loans, rates are definitely going up.
A mortgage broker, competing against Goliath Bank, brings in a quote of $2,150,000 at 6.25% interest and two points. The broker is making one point.
Guess which commercial loan quote the borrower will most likely chose? Nine times out of ten, the borrower will choose the 6.25% offer, even with a one-point higher fee, because the broker is getting him more dollars. With most commercial mortgage borrowers, it all about max cash. They want as large of a commercial loan as possible, as long as the interest rate is not too much higher.
So how did this experienced commercial mortgage broker get a larger loan for his borrower? The key to getting the largest possible commercial loan is to pay attention to the TOP LINE of the Pro Forma Operating Statement.
When you look at a Pro Forma Operating Statement - a projected budget for the property for the next twelve months - the very top line is typically listed as the Gross Potential Income. This line item represents the amount of rent that the property could generate if every single unit was rented.
When submitting a Pro Forma Operating Statement to a commercial lender, many borrowers and commercial mortgage brokers repeatedly make the same mistakes:
(1) They fail to show the market rent of any vacant units. They will submit an apartment Rent Roll showing 58 units occupied, with the actual rent next to the number of the apartment; but they will leave the rent showing as zero for the two vacant units. By the way, a Rent Roll is a list of the rentable units / spaces by number or letter, the name of the tenant, the size of the unit, and the current rent.
(2) If the borrower fails to show the market rent of vacant units, the lender will often just take the Total Rent from the bottom of the Rent Roll and multiply it by twelve in order to compute the Gross Potential Income. If this happens, the borrower is screwed. He might lose ten to fifteen percent off the size of the loan that the commercial lender might have offered.
(3) Another common mistake is to fail to show the onsite manger's unit at market rent. Borrowers to often cut $500 to $1,000 off the manager's rent as compensation for his work.(4) The reason why your Gross Potential Income line item must appear as large as possible, especially when applying for an apartment loan, is because many lenders will simply grab the Gross Potential Income and lop off 35% for Operating Expenses. The lender will often totally disregard your projected expenses.
(4) Let's go back to the Onsite Property Manger. If the borrower had wisely shown the manager's unit at market rent and had deducted $1,000 per month down below in the "Property Management - Onsite" line item, then the lender wouldn't even have deducted the $12,000 per year ($1,000 per month) from the Gross Potential Income. He would simply have ignored this line item expense in favor of using a 35% Operating Expense Ratio. Wow, huh? This is huuuuge.
(5) When choosing the market rent of a vacant unit, be sure to use the highest rent that you have ever achieved for a unit of that size. Let's suppose you have six identical units. Five of the units are rented at $2,000 per month, and one is rented at $2,200 per month. If a seventh unit is vacant, be sure to show the market rent as $2,200.
If you want to obtain the largest possible commercial or apartment loan, pay particular attention to the top line of the Pro Forma Operating Statement - the Gross Potential Income.