What Can a Typical Investor Get?

What is the maximum loan that a typical investor could borrow from a lender ?

The answer to this question will depend upon a number of

factors such as the lender’s loan criteria ( such as DCR, LTV, etc ),

available funds, interest rate, the property’s appraised value

or the property’s purchase price, the investment property’s

Net Operating Income (NOI),

the location and condition of the property being considered for

financing and the credit worthiness of the borrower to name but

a few of the essential requirements. 

To make our lives easy let us assume everything is in perfect

order as per the above and

the investor would qualify for a commercial loan,

then we can figure out the maximum loan from a typical lender. 

Investment grade property in a good location with

tenants on long term leases with escalations, is appraised

for $ 7.2 million (this maybe equal to or less than the purchase price.)

based upon the direct comparative approach to estimating value.

However the current NOI is about $325,000 which may be a

challenge as the lender may feel

that this is not sufficient to support a maximum loan

amount that would have difficulty comfortably

being paid by the rental revenue from the property. 

The investor was hoping for 65% loan to value [ lender’s LTV criteria ]

on the $ 7.2 million that would represent a maximum loan of

$ 4,680,000.  ($7,200,000 X 65% = $ 4,680,000).

The debt coverage ratio (DCR) of 1.35 [ lender’s criteria ]

formula being ; DCR=NOI/ADS.

Assuming the lender is prepared to apply a negotiated interest rate of

5.5% with a 21 year amortization, the annualized payments

for the loan (ADS) would be $ 374,269 (nearest dollar).

Now the investor has a problem, with an NOI of $325,000

(investor’s calculated optimistic number)

the lender will NOT be advancing a loan amount of $ 4,680,000 because

to manage this loan with the current interest rates the

ADS is substantially higher at $ 374,269.

This would effectively run a Negative Cash Flow of $ 49,269 and

leave no margin of safety for either the lender or the borrower.

The DCR on the above works out to 0.86 and would not be acceptable,

given the lender’s 1.35 DCR criteria (requirement). 

Given the NOI of $ 325,000 the most the lender will allow to

be used for ADS would be $240,000 that would result in the

necessary criteria of 1.35 DCR… [ DCR = 325,000/240,000 ]

So what will $240,000 in ADS [ $20,000 monthly mortgage payments ]

support as a maximum loan given the above details?

We run the numbers again with the new information with

a 5.5% semi-annually compounded

not in advance with a 21 year amortization and only limited to

the two lender metrics of DCR and LTV

we arrive at a maximum loan that the lender may provide

the investor for this property

is about $ 3,001,000 (nearest thousand dollars).

Therefore the Maximum Loan is about $ 3 million, substantially

less than the $ 4,680,000 the investor was hoping to receive from the lender. 

With this maximum loan amount by the lender the investor

will need to have $ 4,199,000 of equity plus lender fees and closing

costs available to make this deal happen.

The above is for illustration purposes only and is NOT meant to

provide investment, tax, legal, engineering or environmental advice,

every real estate transaction is unique and every lender

has different policies and criteria for qualifying and lending. 

Working with the appropriate skilled professional(s) can serve to protect

the client’s best interest and the appropriate conditional clause(s) in the

Agreement of Purchase and Sale should be included to protect (mitigate)

against unforeseen events and consequences of changes in the

market place and lender’s criteria/polices.

Envoy Capitol Realty Inc., Brokerage. Toronto / Canada (416) 441-6163

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