DCR and Pro Forma with Percentage Rents - Posted by Tom - WA

Real Estate Investing Real Estate Financing
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Posted by Jim Rayner on July 05, 2001 at 13:43:54:

Tom,

Using you handy pocket financial calculator solve for the loan amount as follows;

((-)Net Operating Income/Debt Coverage Ratio)/12 = Monthly Payment

n= number of payments
i= interest rate

then solve for Present Value

this would be the maximum allowable loan that this property could service safely.

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DCR and Pro Forma with Percentage Rents - Posted by Tom - WA

Posted by Tom - WA on July 04, 2001 at 15:20:35:

Hi, all:

I’m a novice, trying to put together a loan application package for a refinance of a mixed-use building. Two questions:

  1. Do I use the CURRENT mortgage figure for the debt in the DCR, even though they’re applying for a refinance? What if the current lowers the DCR to .68? (ouch) Or when the lender says they’ll accept a DCR of 1.2, should I start from there and try to compute the rest of the loan terms as if that were the effective DCR?

  2. The borrower has a pro forma which shows not only the actual rents from tenants, but a different amount for each tenant called “percentage rent.” What does that mean?

Any help greatly appreciated! Anywhere I can find a good book for learning these financial ratios as applied to commercial mortgage loans? (OK, that’s three questions!)

Thanks,
Tom

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Re: DCR and Pro Forma with Percentage Rents - Posted by ray@lcorn

Posted by ray@lcorn on July 05, 2001 at 11:30:56:

Tom,

  1. Use the debt service for the proposed loan, not the current. I often start with the lender’s required DCR and work backward into the loan amount.

  2. You’ll need the actual operating statements for the property. Most lenders require three years of past performance. The pro forma projection of future income should project three years of operation.

Percentage rent (also called overage) is based on the tenant’s sales. Once the tenant’s sales exceed a pre-agreed amount, a percentage of the amount of the sales over that amount is paid to the landlord as additional rent. Most lender’s will accept that income only if hisorical operations show the additional rent at a consistent level (which is one more reason you must have the actual historical operating data). More often, they will either discount the additional rent by some arbitrary factor, or disregard it entirely.

  1. I’m working on the book you are looking for as we speak!

ray

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Re: DCR and Pro Forma with Percentage Rents - Posted by Eric C

Posted by Eric C on July 11, 2001 at 13:02:24:

Hi Ray -

… about that number 3…

any word?

bug,bug,bug,bug,bug

Eric C

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Re: DCR and Pro Forma with Percentage Rents - Posted by Tom - WA

Posted by Tom - WA on July 05, 2001 at 12:45:55:

Thanks, Ray! If I may pursue the DCR question a bit further:

The borrower has a specific amount they need, say $3mil. You know from a databank search that the top lenders showing up want a DCR of, say, 1.2, and they’ll lend the $3mil at, say 9%. Do you then assume that you can quote that to the borrower?

And can you just put 1.2 on your Executive Summary in the loan package? I guess I’m confused when you say you “start with the lender’s required DCR and work backward into the loan amount,” because the borrower usually needs a specific amount, regardless.

Hurry up with that book! :slight_smile:

Thanks for the help,
Tom

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Re: DCR and Pro Forma with Percentage Rents - Posted by ray@lcorn

Posted by ray@lcorn on July 05, 2001 at 16:00:42:

Tom,

Evidently you are acting as a mortgage broker? If so, I will leave it to those in the business to answer whether you can rely on quotes from your lending sources. I would think you would want to verify the lender’s track record on closing loans at stated terms before making any such representation to a client.

Another note: 1.2 DCR is considered a high degree of leverage. There is little margin for error then in quoting loan terms… your deal could evaporate from seemingly minute changes… all the more reason to verify the lender’s closing record.

As to working backwards, I was referring to a shortcut to qualifying the maximum loan amount a property could carry. As Jim Rayner said below, start with the NOI, divide by the DCR, then figure the loan amount by plugging in the loan terms on whatever calculator you use… I use the goal seek function in Excel.

ray