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"FLASH" of Lightning )
Financial Brokers for Business & Commercial Loans February 2007
In this issue
  • Investment Real Estate - Where should I put my money?
  • Key Commercial Loan Rates
  • Four Points to Consider for any Real Estate Transaction
  • Ask the Broker?
  • Greetings Harlan,

    Welcome to "Flash" of Lightning, our monthly newsletter.

    We've written this brief newsletter to keep you, our friend and client abreast of the latest information regarding all areas of financing. We will share with you relevant articles that pertain to financing either commercial projects or business acquisitions.

    Harlan A. Friedman, President & Broker

    Investment Real Estate - Where should I put my money?

    As promised for the next series of newsletters we will be examining each individual investment type of real estate; from what it is, to lenders underwriting requirements to getting your loan approved.

    The key to any piece of commercial real estate as you know from my previous articles is cash flow. If there is no positive cash flow without a significant down payment it is not a "good" investment today. You may elect to hold an investment and hope for appreciation upon a future sale, but that is not going to give you cash today.

    The investment types that will be covered in this series of articles are all known as "cash cows". They typically return an investor a consistent cash flow and therefore a good cash on cash return. Todays topic will be multi-family units.

    Of all the loans that we are going to discuss the most common known is the multi-family unit, known as apartments or co-ops (on the east coast). Owners of these properties strictly buy them for their return on investment. Tenants occupy the space as renters and pay to the landlord a monthly rent. The objective of owning one of these properties is to generate enough monthly cash flow to at least cover the debt on the property and to hopefully make additional cash flow as well. Because of low cap rates today many properties do not cash flow sufficiently but owners still buy the property for their potential appreciation.

    Below you will find underwriting requirements for different types of multi-family units.


    Different Categories of Multi-Family Units
    Low-Rise Garden Apartments
    Mid-Rise Apartments
    Military Housing
    Townhouse Style
    Student / Military Housing
    Other Apartments

    The following are general underwriting requirements. For specific information on multi-family loans or further information click at the bottom of the page for a Complimentary Professional Loan Analysis

    Apartments and Apartment-Type
    Maximum Loan To Value - 80%
    Maximum Amortization – 25 to 30 years
    Minimum DSCR - 1.20x to 1.25x
    Min. Vacancy Reserve – the greater of actual or market vacancy; typically 3% to 10%
    Minimum Replacement Reserves - the greater of actual or $225 to $350 per unit
    Minimum Occupancy requirement – typically 85%
    Cap Rate – use market-driven capitalization rate; typically 7.5% to 10%

    Student / Military Housing
    Maximum Loan To Value - 75% to 80%
    Maximum Amortization – 25 years
    Minimum DSCR - 1.25x to 1.30x
    Minimum Vacancy Reserve – the greater of actual or market vacancy; typically 5% to 10%
    Lease expirations should not indicate 25% or greater of all units in any given month, 50% for any three- month period, and 75% for any six-month period.
    Adequate community services (such as fire, police, and school and health facilities) within a 10-mile radius.

    Key Commercial Loan Rates

    Key Commercial Loan Indexes

    Fed Prime Rate 8.250%

    10-Year CMT 4.880%

    30-Year CMT 4.980%

    USD 6 MOS LIBOR 5.401%

    As of January 31, 2007

    Four Points to Consider for any Real Estate Transaction

    I know if you are a faithful reader of "FLASH" you're expecting an article about selecting the right lender. Instead this month I want to deviate from the selection process and share the first of four points that you must be aware of when entering the real estate investment field or starting or expanding a business.

    This one article will deal with both SBA Loans as well as commercial loans, as the points shared definitely pertain to both arenas. Todays's article will share the first of the two points and we will conclude next month with the remaining two points,

    Point #1: You must have a clear goal for the property or small business that you are purchasing or acquiring.

    Incredibly, many people make investment decisions because someone told them about a great idea or opportunity. They never put pen to paper to even figure out if a profit is possible! Others buy property or investments and have no clear cut return they are shooting for or a game plan on how to get it.

    What is your goal for this purchase or acquisition of the business?
    What return are you looking for on a year basis? How many years are you planning to hold the property?
    Are you trying to buy a fixer-upper?
    Are you hoping to renovate it and fully rent it out and sell it?
    When do you expect to sell the business?
    What seller's discretionary cash flow are you expecting?

    As you can see there are a plethora of questions that you need to ask. Discussing the questions with your professional team is just as important as discussing the questions with your family, business partner and broker. When are you going to try to sell the property?

    The above are just starting points for you to start to inquire within yourself before you buy a piece of property, or acquire a business. The point is to never enter into a real estate transaction unless you know why you are investing, your expected return on your investment and your exit strategy for getting out of the deal with a profit.

    HELPFUL TIP: Before you go into contract, run your deal by a commercial mortgage professional, Get expert advice BEFORE you commit! They can alert you to the pitfalls and even bring creative financing strategies to the deal to maximize your return.

    Ask the Broker?

    I've just been approved for a construction loan and my lender told me that I have to use Fund Control to distribute all of the construction loan proceeds. Can you please tell me what Fund Control is and why its is useful for me?

    Lianna, Big Bear Lake

    Fund Control is a system of checks and balances a lender uses to manage the distribution of your loan proceeds. When you start a construction project the lender wants to make sure that the funds are being used for their intended purposes, and that the work you are paying for was indeed accomplished.

    The benefit to you is that one of the many controls the lender puts in place is that of requiring all mechanic lien releases to be filed and executed by the general contractor as well as the subcontractors. A mechanic lien releases removes any liability that you may have as the owner of the property regarding the fact that the general contractor has paid his subcontractors for the requested loan draw.

    Please email your questions to "Ask Your Financial Broker" at

    P.S. If you are interested in joining our company please contact either Harlan or David directly. We will be expanding this year and would like to have you join us. For those financially astute individuals we offer a proven system to build your commercial finance business along with comprehensive training.

    UP-Coming Seminars
    Call the Office at 858-592-0659 for upcoming topics, times and dates.

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    phone: 858-592-0659

    Lightning Commercial Funding, Inc. | 16486 Bernardo Center Drive | Suite 100 | San Diego | CA | 92128