Introduction to Commercial Mortgage Financing

Understanding how LTV and DSCR determine how much you can borrow. The LTV is very important in determining the amount of capital that can be obtained to finance a given property. LTV relates the principle portion of a mortgage to the appraised value of a property. This LTV is very similar to collateral discounting as it serves to protect the lender's debt stake in the property.

LTV = Amount of Loan / Value of Property

The lender will determine an LTV value based on factors such a financial history of the business, credit scores, length of loan, etc. After which, the lender will multiply the LTV by the appraised property value to determine the maximum loan amount that can be given to a borrower.

Amount of Loan = Value of Property * LTV

Clearly, without other considerations the borrower benefits from a higher LTV ratio.

The DSCR approaches the mortgage picture from an entirely different angle than the LTV. Where the LTV determines the loan amount based on the value of the property, the DSCR bases upon the cash flow of the property and/or borrower.

DSCR = Debt Service / Cash flow

The debt service is usually taken as an annual figure that includes both repayment of principle and interest payments for a given year. Cash flow is calculated by taking adding noncash expenses back to net income such as depreciation.

Once again, the lender will use factors such as business credit, industry risk, etc. to call a figure for DSCR. Usually this will be around 1.20. After which, the total debt service is calculated and a total loan amount derived from it.

Debt Service = Cash Flow * DSCR

Without other considerations the borrower can benefit from a lower DSCR ratio, but remember a borrower will usually feel the pain of an under calculated DSCR (Not being able to pay the monthly mortgage!) before that of an LTV.

There are many places now online to apply for commercial mortgages. Some lenders have accept a broad range of proposals while others are niche focused.

If you aren't sure what type of financing to pursue or you want access to more than one commercial lender, then try a financing consultancy. Or you like, email me for further question.