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Thank you for the opportunity to share general information
relating to the commercial real estate finance industry and to
inform you on what's new at Cornerstone Commercial Mortgage.
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Debt Service Coverage Ratio- A Main Factor Limiting Leverage |
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 In the last several years Cap Rates have been at historic lows. This has resulted in higher property values relative to the same net operating income; therefore, the debt service coverage ratio required by lender’s plays more of a factor in determining the maximum loan amount than does the loan to value ratio.
The Debt Service Coverage Ratio (also referred to as the debt coverage ratio, or DCR) is a ratio used only for loans on income producing properties. It is defined as: Debt Service Coverage Ratio = Net Operating Income (NOI)/ Debt Service. The higher this ratio is, the larger the loan on the property.
A DCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. A DCR of 1.25, would mean that the property will generate 25% more cash flow than the debt service giving the lender a margin of error for any net operating income shortfall.
The DCR limits the loan amount as follows: The lender works backwards taking the NOI divided by the DCR giving the maximum debt service allowed, then the lender uses the loan amortization term and the interest rate to determine the maximum loan amount allowed.
The longer the amortization, the lower the interest rate and the lower the DCR requirement, which all help in achieving more leverage and a larger loan amount.
So when you're shopping for a loan on income property look closely at the lender’s required DCR because that will usually determine the maximum loan amount. Historically, the Loan to Value Ratio was the driving factor in determining the maximum loan amount, but as long as the cap rates are as low as they have been recently, the DCR will continue to be a driving force in determining the maximum leverage allowed.
By John Lloyd
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How to Profit in a Slow Economy |
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The question of the day for commercial real estate investors is: What is the effect of a slowing economy and possible recession on valuations? The run-up in values for some sectors has raised alarms, and opinions range from "no more than a ripple" to "impending doom." For investors, there is much to consider in plotting our course.
Along with general economic conditions, valuations in commercial real estate are driven by four factors:
1. Capital availability: Real estate is a capital- intensive industry, and its health rises and falls with capital availability. Currently the capital markets are so flush with cash, they can't find a place for it all.
2. Supply: Boom times typically engender oversupply of product. But construction prices have skyrocketed due to natural disasters and rising commodity prices, which has tempered new building in all property types. That lack of new supply increases rental pricing power and occupancy levels in existing properties.
3. High demand from investors: Stable performance and ample capital have spurred high investor demand, with no letup in sight.
4. Interest rates and the economy: The lone head wind for commercial real estate is higher interest rates and their potentially negative effect on economic growth.
Let’s look at the current economic conditions and outlook, the capital markets, and the likely effects on commercial real estate valuations and performance.
by Ray Alcorn - click here for more of the article
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Leveraging other people’s ideas
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 When you notice flashes of brilliance from other companies, follow these guidelines and examples to turn their ideas into workable solutions for you:
1. Substitute. What could you substitute in your approach, materials, ingredients or appearance? For example, Sugar Pops became Corn Pops – a more nutrition-conscious name.
2. Combine. What could you blend with an existing idea? Lipton combined fruits and flavors with its tea to develop a new line of iced teas.
3. Adapt. What else is this idea like? What could you copy? Sony adapted its Walkman concept into the Watchman TV and Discman CD.
4. Magnify or minimize. What if you added, lengthened, strengthened or subtracted? Ford upped the ante in the sport utility vehicle game by introducing the even bigger Expedition. McDonald’s minimized its outlets to fit inside airports and retail stores like Home Depot.
5. Eliminate. What could you get rid of? Saturn set out to eliminate the fear customers had of car salespeople.
6. Put it to other uses. What other ways could you use what you already have? Arm & Hammer Transformed baking soda into a refrigerator deodorant, an underarm deodorant, and a toothpaste ingredient.
7. Reverse or rearrange. What could you transpose or look at backward? For example, reverse the physics of a cold thermos and you have a hot thermos.
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Integrity is
the cornerstone of our business |
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Cornerstone Commercial Mortgage specializes in commercial
real estate finance. We act as mortgage consultants, focusing
on providing the appropriate financing solutions for each
client. We work with investors and developers on all product
types from land loans to permanent loans providing the best
financing option available.
John P. Lloyd,
President/Owner
Phone: (619) 293-3919
Cell: (702)
379-3468
Email: john.lloyd@cmlv.net
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About Cornerstone |
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