This four-minute video training lesson will help you become better at underwriting commercial real estate loans
Historically commercial lenders and commercial construction lenders have required that a borrower's or a developer's net worth be at least as large as the commercial loan or construction loan that he is requesting.
In a perfect world, if the developer is applying for a $5 million construction loan, he should have a net worth of at least $5 million.
Fortunately commercial construction money is so plentiful today that many construction lenders are relaxing this requirement.
The test that commercial construction lenders apply is the Net-Worth-to-Loan-Size Ratio. Simply divide the net worth of the developer by the loan size. This result should be greater than 1.0. During recessions, banks will often require this ratio to be as high as 1.5.
What if there are several members of the development company with a decent net worth, but none of them alone satisfies this test? Answer: You can combine the net worth of the developers.
You need to work every day towards building your
own loan servicing portfolio. Is where the money is.
Commercial mortgage money and commercial construction money is immensely plentiful today, so lenders are relaxing the Net-Worth-to-Loan-Size Ratio. How low will they go? Nothing is written in stone, but some commercial construction lenders may consider a Net-Worth-to-Loan-Size Ratio as low as 0.75.
But if the developer's net worth is not even 75% of the commercial construction loan that he is requesting, then the loan request is seriously flawed.