Commercial Loan Underwriting IssuesCommercial mortgage loans can run into problems in many area. The commercial mortgage underwriters evaluate your loan request to see if there are any undue risks for the lender. Answer all of the questions that make sense for your project. We'll list the areas of your request may need extra attention or may decrease the amount or increase the rate of your loan.
What is the quality/class of this project?
What is the quality of this project's location?
Projects that are in areas where the economy is growing with similar projects nearby are less risky that projects that are off by themselves or in locations among other property types (an office building in an industrial area) or in neighborhoods in economic decline. Similar nearby projects implies there is a large base of tenants in the area that could potentially become leasse's of the subject building. Likewise if there is no new construction activity or re-hab activity in the area and surrounding buildings are in neglect, this is an indication of decreasing tenant demand.
Is there an environmental problem or the potential to find one?
A major part of due diligence is to determine if there is an environmental problem on the property. This is accomplished with an Environmental Phase I report which is prepared by an environmental engineer. Common problems are dry cleaning plants (in retail properties), leaking underground storage tanks (UST)(industrial properties and gas stations), asbestos (apartment ceilings) and chemical spills (R and D properties). Dry cleaning plants pose a recurring problem as even the latest equipment has failed to prevent spills. It is also important to know if there ever was a dry cleaning plant on the property.
Is the borrower or an individual within the borrowing entity a felon or in bankruptcy?
Lenders generally won't lend to borrowers convicted of felonies or that are in bankruptcy. They may provide a loan to someone who has declared bankruptcy in the past. The lender will consider an involuntary bankrupcty more favorably than a voluntary bankruptcy. Lenders are most sceptical of borrowers that have declared bankruptcy to avoid foreclosure on a property. It is best to disclose this information before signing an application. Lenders conduct sophisticated background checks that include legal, criminal and credit searches. Assume the lender will find this problem. It is better for the borrower to initially provide their side of the story rather than risk the deal collapsing when this information is revealed at the last minute.
Will the rent from tenants in occupancy, in operation and paying rent at loan closing exceed debt service (all must be true)?
Lenders are underwriting the net income from a property from tenants in occupancy, in operation and paying rent. There is higher likelihood that a tenant with a lease but not in occupancy will negotiate a buyout and/or terminate their lease prior to the expected expiration date on the rent roll. Likewise if the tenant is not paying rent there means these revenues are not available to pay debt service. An investment-grade tenant who is no longer in occupancy but remains obligated on a lease (dark space) may allow a lender to include this rent in underwriting.
Is this student housing?
Rental projects for students (generally in college communities) create special problems. The projects are generally rented on an annual basis but are occupied by students only during the school term. The potential for rental defaults during unoccupied periods can be high. Maintenance costs are higher as these units generally have new tenants every year and the occupants cause more damage.
Is this property governed by a rent control ordinance?
Rent control obviously inhibits rental increases but the major concern to lenders is expenses. In many localities expense pass-throughs are considered rental increases and are thus limited by ordinance. If the ordinance doesn't allow revenues to increase faster than expenses lenders will pass on financing this property.
Is the property on a ground lease?
Ground leases come in many forms and all are a concern for a lender. The ground lessor becomes an uninterested third party to completing the transaction. The optimal ground lease is one that has been pre-paid so there is no financial risk during the term of the ground lease. A subordinated ground lease insures the lender will not lose their collateral should the ground lessee lose the ground lease. The most difficult situation is the unsubordinated ground lease. Ground lease payments are a concern, especially if they can increase faster than the revenue generated by the property.