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"FLASH" of Lightning )
Financial Brokers for Business & Commercial Loans March 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 the exciting area of Hotels and Motels.

    This area is HOT today. Once again the need for hospitality is growing beyond belief. the key to financing any Hotel Property is whether the property is considered Flag or Non Flag. A Flag is a well known chain of Hotels with a sophisticated reservation system. A Non Flagged property is a Mom and Pop operation, which is much more difficult to find funds for.

    Hotel Loans come under the same underwriting guidelines as other commercial properties, except that there are usually additional service income that are part of the net operations.

    To properly underwrite a hotel loan, the lender must first categorize the hotel based on product type, amenities and location. After further analysis of the financial statements the true profitability will become clear, allowing the underwriter to compare similar products to determine the proper pricing structure.

    For example a franchise or flag property will underwrite more aggressively, than a non-flagged property. Aggressive underwriting translates into lower rates, fees, and longer terms.


    Therefore, it all comes down to the consolidated operating statement of all the various departments of the hotel. Each individual department will demonstrate their profitability by taking all revenue for that department, applying all allowable expenses; including cost of goods or services sold, yielding true net operating income for that department.

    Market and Location

    The property should be easily accessible and visible from the highway or major roadway. Business-oriented hotels will provide ready access to downtown business areas,corporate parks and airports. Vacation-oriented hotels will be highly visible from major roadways and be in close proximity to recreational amenities.

    Property Condition and Characteristics

    The property should exhibit sufficient parking capacity to adequately accommodate a range of services and location. A stable historical operation is critical. A property with a history fof our or less years should be reviewed carefully.The property should have established an ongoing refurbishment program for both hard and soft goods.

    Franchise affiliated hotels of Flagged Properties as they are known are preferable, with franchise agreements extending beyond the term of the proposed loan.

    Full Service, Limited Service Hotels & Extended Stays Cater primarily to business, government and vacation travelers

    Minimum acceptable occupancy (annualized for properties with seasonal fluctuations) is typically 60%; the average occupancy over the last 3 years should be at least 60%.
    Maximum LOAN TO VALUE – 65% to 70%
    Maximum Amortization – 20 to 25 years
    Minimum DSCR - 1.40x for full service & 1.45% for limited service
    Minimum Occupancy – 60% over the past three years
    Maximum Occupancy when calculating Room Revenue – 75% Minimum Furniture, Fixtures and Equipment (FF&E) - the greater of actual or 5% of Total Revenue
    Minimum Franchise Fee – the greater of actual or 5% of Total Revenue
    Minimum Maintenance Fee – the greater of actual or 4.5% of Total Revenue
    Capitalization Rate – use market-driven capitalization rate; typically 10% to 13%
    Food & Beverage (F&B) contribution should be less than 40%

    Key Commercial Loan Rates

    Key Commercial Loan Indexes

    Fed Prime Rate 8.250 %

    10-Year CMT 4.500%

    30-Year CMT 4.620%

    USD 6 MOS LIBOR 5.372%

    As of February 28, 2007

    Four Points to Consider for any Real Estate Transaction

    Now for the conclusion of the Four Points to Consider before purchasing any property. This one article will deal with both SBA Loans as well as commercial loans, as the points shared definitely pertain to both arenas.

    Point #3: Knowing when to shop, and knowing when to stop shopping.

    Remember, with commercial loans even if you are a great borrower-you may still get turned down by your local bank.


    The property may not be good. By that we mean that the bank may have a required debt service coverage ratio, and your deals cash flow does not meet that lenders requirement; they may have filled their quota for the month on commercial loans, or they may just not like to loan on the certain type of property you are buying.

    Don’t take it personally.

    Almost as bad as just going to one bank and putting all your eggs in that basket is shopping around and getting a commitment at terms you like that make the deal profitable and meet your goals and then CONTINUING TO SHOP!

    If you get what you wanted-don’t be greedy. Wall Street has a saying, “Bulls and bears make money, Pigs get slaughtered”.

    HELPFUL TIP: Don’t look a gift horse in the mouth. If you know the profitability you wanted and the lender is agreeing to your deal offer up any reasonable requested commitment fee, and let the broker or lender do their job to close that loan for you.

    Point #4: Emotions -Loving the deal and ignoring economic sense.

    I have seen people try to buy a piece of property and lender after lender turns it down because the value is not justified or something. Yet, instead of realizing that smart financial people are telling you the deal is bad they persist to keep trying to buy it.

    Sometimes even getting hard private money at exorbitant rates that will never generate a profit for you. Remember,banks and lenders are in the business of lending you money. They want to lend money on deals that make sense.

    If EVERYONE says your deal does not make sense LISTEN TO THEM.

    Get out of the deal, or partner with someone who knows how to make it work. Don’t resort to ridiculous interest rates because you believe you HAVE to have this property. Again, heed advice and be smart.

    HELPFUL TIP: Besides speaking to an expert BEFORE buying- put pen to paper and make sure the deal makes economic sense, not just emotional sense. In commercial property purchases its economics that must rule, not emotions.

    I trust that these four points will put YOU more in control when making your next buying decision for purchasing investment real estate. .

    Ask the Broker?

    I'm an empty nester and have been reading your articles over the last few months. I recently remember that there was a question regarding Cap Rates and how it effects the down payment needed to get a loan. We are thinking about investing in a retail strip center and our Realtor suggested that the seller could carry back paper to help us with our down payment. Will this work?

    Carly, Petaluma

    Carly, It depends on how the Seller Carry Back is structured. If the seller is requiring you to make immediate payment on the note he or she holds this will not help you at all. This is because the underwriter / lender will have to add back the payment on the seller note to the existing debt service and you again will be over the required debt service coverage ratio. Some lenders will however allow you to demonstrate to them that you can make up the difference by outside means, but that is on a case by case scenario.

    Another alternative is to have the seller hold the paper but not require any payments for two years. After two years the lender does not need to calculate the required payments on the seller note. Their rationale for this two year period is that the property should have appreciated enough, and or you have been able to raise rents to secure the additional new payment to the seller. Lastly you could have a note outside of escrow between you and the seller. Since it is outside of the escrow a lender will not calculate the payments in the required debt service coverage ratio calculation

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