| In my previous article we touched on the basic criteria | | | | legwork early in the process can save you a lot of |
| that make a commercial mortgage loan a much | | | | time and effort later, as well as the experience of a |
| different animal from a residential mortgage loan. In a | | | | deal "crapping out" late in the process. |
| nutshell, it is the fact that whatever loan amount is | | | | What goes into the NOI calculation? We need the |
| desired for an income producing property must be | | | | following: |
| supported by the income that the given building | | | | Gross rents |
| produces. This leads us to the first most important | | | | Expenses |
| calculation: | | | | Property Taxes |
| Net Operating Income | | | | Building insurance |
| When you are speaking to a potential borrower, one | | | | Utilities |
| of the first, if not the first thing that you will ask is (after | | | | 10% of the gross rents to account for management |
| or at the same time as credit score): Do you know | | | | and vacancy |
| what the net operating income of the building is? | | | | NOI = Gross rents - expenses |
| Simply, the net operating income, or NOI, is the gross | | | | Very simple calculation. For verification of expenses, |
| rents of the building minus the operating expenses of | | | | you can use for taxes or the assessor's office, and |
| the building. Because the NOI of the building has to be | | | | for utilities and insurance ask to see recent bills. As far |
| able to support the desired loan, it is imperative to get | | | | as rents go, have an idea of what market rents in a |
| to a very accurate number. This means that we don't | | | | given area should be, and ask for current leases. Once |
| necessarily rely on what the borrower is telling us, but | | | | again, do not try and manipulate numbers to make a |
| look for verification. This is important because any | | | | deal that won't work suddenly work. In this business |
| "inaccuracies" will come out during the due diligence | | | | your relationship with a lender is more important than a |
| process, so once again we do not want to waste our | | | | single deal, and trying to fudge numbers is the best |
| time on a deal that cannot be done. If actual expenses | | | | way to lose that relationship. Realize as well, that |
| are higher than what we are being told, or actual rents | | | | everything will come out in the wash, or as we call it |
| are lower, this can turn what at first glance looked like | | | | the due diligence process. |
| a great deal into a deal that cannot be funded. A little | | | | |