Abegginers guide to lending terminology
Emil Ackerman and John Pyke-Nott have gained a lot of experience in the Australian private lending space. During the past sixteen years Emil Ackerman and John Pyke-Nott have identified that basic misunderstanding or the lack of understanding of lending terminology is the cause of most borrowers’ frustration.
Emil Ackerman and John Pyke-Nott will provide you with a background to the basic terminology in Lending process.
According to Emil Ackerman & John Pyke-Nott, Loan to Value ratio (LVR), this is the maximum percentage of the value of a security a lender will make available for a loan. Emil Ackerman and John-Pyke Nott say that this aspect of a loan application is one of the most crucial in assessing a loan.
According to Emil Ackerman and John-Pyke Nott, the Value of securities will be determined by a registered Valuer who will compile and provide a sworn Valuation of a proposed security for Emil Ackerman & John Pyke-Nott. Not only is the dollar Value of the security important, but according to Emil Ackerman and John Pyke-Nott, the commentary as contained in the body of the Valuation report is equally if not more important. Emil Ackerman and John Pyke-Nott always refer to the prudent lending clause which is contained in the report, as a guide when Emil Ackerman and John Pyke-Nott assess prospective loans. Emil Ackerman and John Pyke Nott say Most Valuations for construction and subdivisions contain a Value on an “as if complete” basis or according to Emil Ackerman and John Pyke-Nott the “as if complete” basis is commonly referred to as the Gross realisable Value (GRV).
Most private Lenders, according to Emil Ackerman and John Pyke Nott will use the GRV as a basis to determine how much they are prepared to lend on a particular development. Emil Ackerman and John Pyke-Nott say the rationale is to use the GRV excluding GST and multiply that with the applicable LVR. Emil Ackerman and John Pyke-Nott concur this provides an accurate loan amount.
Emil Ackerman and John Pyke-Nott always recommend applicants to use reputable brokers, over the years Emil Ackerman and John Pyke-Nott have established a broker network in excess of 800 brokers who continually provide good quality applications.
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Debt Yield ratio
Emil Ackerman John Pyke-Nott In commercial financing, CMBS lenders can be an extraordinarily cheap source of capital and non-recourse debt. It is important to recognize that these commercial lenders look closely at the debt yield ratio in order to determine a level of comfort when establishing the right commercial loan amount. Emil Ackerman John Pyke-Nott
Emil Ackerman John Pyke-Nott The debt yield ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100. For example, let's say that a commercial property has a NOI of $500,000 per year, and a CMBS lender has been asked to make a new first mortgage loan in the amount of $5,750,000. $500,000 divided by $5,750,000 is approximately 9.00% debt yield ratio. What this means is that the commercial lender would enjoy an approximately 9.00% cash-on-cash return on its money if it foreclosed on the commercial property. Not a bad return, right? Emil Ackerman John Pyke-Nott
Emil Ackerman John Pyke-Nott It is important to note that the debt yield does not take into account the capitalization rate used to assess the value of any one commercial property, nor does it consider the interest rate or amortization of the loan. The key thing that debt yields establish is how much the commercial lender is willing to advance on a commercial property compared to the property’s cash flow or NOI. If a commercial lender isn’t going to require a personal guaranty on a commercial loan, they need to get comfortable with the possibility that the asset is delivering a satisfactory return. Emil Ackerman John Pyke-Nott
Emil Ackerman John Pyke-Nott The next question to ask is: what is a desirable debt yield for most CMBS commercial lenders? This ratio changes based on the evolving risk appetite for commercial lenders in general; however, a typical rule of thumb is 10%, which may translate to a 60% to 70% Loan to Value. Emil Ackerman John Pyke-Nott
Emil Ackerman John Pyke-Nott Having said that, the market is changing and for the better. Case in point, commercial lenders are reducing their debt yields to sub 9% levels for Class A offices and even multifamily. It is not unusual to see debt yield in the mid 9% range, with commercial loan to values of 75% to 80%!! You will find that debt yields are the lowest in major MSAs like New York, DC, etc. Rates are ranging in the mid 3% range to low 4% range, presenting an excellent opportunity for real estate investors to take advantage of the low cost of borrowing. Emil Ackerman John Pyke-Nott
Emil Ackerman John Pyke-Nott CMBS lenders took a beating during the financial crisis and in an attempt to avoid mistakes made in the past, commercial lenders adopted the debt yield ratio as a benchmark to determine the appropriate amount of commercial loan dollars for any one project. Emil Ackerman John Pyke-Nott
In excess of 30 years finance industry experience
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