Commercial LTV...a little confused. - Posted by Estevie

Posted by Patrick S. Lawson on July 11, 2007 at 17:23:32:

You were on the right track with the first poster. They use comp sales, income and replacement. Lenders are most concerned with income (NOI, CAPS, etc.).

Commercial LTV…a little confused. - Posted by Estevie

Posted by Estevie on July 10, 2007 at 06:59:42:

Hi all, I have a quick question: When a commercial lender says that they require a particular LTV, what are they using to calculate it? The cash flow? Not comparable sales right? It’s confusing to me that if the value of a property is the NOI divided by a cap rate and the cap rate is subjective, how does anyone come up with a standard value from which calculate the loan?

I’m sure there is a simple answer, I just can’t come up with it…

Thanks in advance for your help.

Re: Commercial LTV…a little confused. - Posted by Pete-NC

Posted by Pete-NC on July 10, 2007 at 21:05:58:

>>what are they using to calculate it? The cash flow? Not >>comparable sales right?

Banks do a lot of CYA, they look at both. For cash flow they need a debt to coverage ratio usually 20-25% ask. So if you have a payment of 1000 they expect you to have 1250 in earnings to cover it. Guess what this effects cap rates. The appraiser will use the prevailing cap rate for type of property your buying.

Re: Commercial LTV…a little confused. - Posted by Penny

Posted by Penny on July 10, 2007 at 10:01:24:

The value used is typically the lower of the purchase price or appraised price.

Re: Commercial LTV…a little confused. - Posted by Estevie

Posted by Estevie on July 11, 2007 at 05:40:18:

Thanks Pete,

So if I understand this correctly, appraisers and banks are going to use the cap rates of what other comparable properties in the area are trading for to come up with a value and then a loan-to-value?

I think I understand now.

Sorry, still confused… - Posted by Estevie…

Posted by Estevie… on July 10, 2007 at 14:20:37:

Then what is the appraisal based on?

My confusion is this:

It seems to me as if the calculations of value I know are subjective.

If this is so, how does one estimate what value the bank will use to calculate LTV?

Thanks again.

Re: Commercial LTV…a little confused. - Posted by Penny

Posted by Penny on July 12, 2007 at 20:56:20:

See Ray’s article on determining what the property is worth to you - it will help clarify the math.