What Are The Main Metrics In CRE Lending?
In a hurry:
Apply it today:
Loan to Value: how much property value there is relative to loan borrowed
Debt Service Coverage Ratio: how much income is available to pay the debt service
Debt Yield: the return the lender would earn on the amount lent if they foreclosed
By the end of this episode you’ll learn:
What are the main metrics used by lenders to evaluate a property?
Why do they exist?
What is the Debt Service Coverage Ratio?
What is the Debt Yield?
What is the Loan to Value Ratio?
Have a few minutes:
Commercial real estate lenders take great care in evaluating properties to decide how much, and under what terms, to lend. Part of the process involves evaluating a property’s quality and source(s) of income. This directly affects the value of the property.
So, there are three main metrics used by lenders to evaluate commercial real estate. One that qualifies income based on the proposed loan terms (Debt Service Coverage Ratio). One that qualifies income exclusive of loan terms (Debt Yield). And, one that qualifies value (Loan to Value Ratio).
When combined, lenders have a clear(er) picture of how the financial performance of the property can support the proposed loan.
In the end, borrowers must understand and be ready to negotiate these three mortgage metrics, as they will have an immediate impact on how much money can be borrowed.
In other words, being able to estimate these mortgage metrics will help investors estimate how much they can borrow and how much equity they will need.