Almost everybody understands what 90%, 80%, 70%, 65% or 50% LTV means. It means the loan granted cannot exceed the applicable loan percentage relative to the property's appraised value.

But how is the appraised value determined in the present market where commercial property values have fallen?

The answer is that the lenders, who are still lending, have gone back to the historic norm of capitalization rates (Cap Rates) based upon the property's present adjusted net cash flow. Comparable sales and cost to replace are generally useless in this market.

The good news is Cap Rates seem to have peaked and are now starting to get more borrower friendly.

To illustrate, if the property's Net Operating Income (NOI), adjusted for mandatory reserves, is $100,000, then the property's value a year ago would probably have to appraise in the neighborhood of ten times adjusted NOI (a 10% Cap Rate) or $1,000,000.

Back in the boom years, say 2006, Cap Rates would be between 5% in California and about 7% elsewhere. A lower Cap Rate raises property value. Using the example above with an adjusted NOI of $100,000, the property value at a 7% Cap Rate would be $1,428,571. (Divide the NOI by .07)

After the Lehman crash, the commercial mortgage market adjusted property values downward by demanding higher Cap Rates and 10% to 12% became the norm until the market sorted itself out. Today, I am happy to say, Cap Rates are dropping back to a range of 8.5% to 10% depending upon borrower strength and the property's location within a State. In the Northeast, typical Cap Rates on deals that actually close seem to be around 9% to 9.5% .

The take away:

If you know the adjusted NOI of a property, you can divide it by .095 to get a feel for where the property might appraise.

If you don't know what the adjusted NOI is, call me and I'll teach you what numbers we need so I can calculate it for you. Working together in this way will save you valuable time with a refinance and particularly to help you sort out the good properties from bad, if you are looking at properties to purchase.

Unfortunately, many Bank loan officers and lender representatives really do not fully understand the present trend in Cap Rates. They still just just look at DSCR only, disappointing both loan officer, and the borrower, when the loan request gets to the credit committee where the loan request either gets denied or the appraisal comes in too low and the deal dies there.

Although the commercial lending market is still tight, it remains very competitive between the lenders that are truly lending. The reason so many good commercial loans are not being funded is because the borrower brought their loan request to a lender that is not, or can not, lend in this market. When you use a commercial mortgage broker like me, your loan proposal will only be submitted to proven, willing and ready lenders that specialize in your type of property. Bottom line, I can save you lots of time and frustration and probably get you a better deal than you could get otherwise.

Remember, 80% of our closed loans were denied elsewhere!

I am happy to report, that I am closing purchase, refinance and cash out commercial loans at a record pace in 2013. I have no up front fees and always take a friendly and consultative approach with each inquiry that comes into my office. I only get paid when your commercial loan closes and will bend over backwards to get you funded at the best terms and conditions ASAP. Act now while rates remain at generational lows.

I am always here to share my 35 years experience in business consulting and commercial lending. Don't be shy. Call me, there has never been a better time to lock in historically low commercial rates.

Sincerely,
Arthur L Pepperman II
Business Consultant & Commercial Lender
860-946-6637 or 800-381-9827 Fax 866-610-7414
alpii@lr.net info@cms-funding.com