Broker Learning Center - 24/7
Welcome to the Broker Learning Center, the official location for Mortgage Broker training. Each "Section" below is designed to provide you with all the information concerning the small-balance commercial lending industry. While other Mortgage Lenders only offer these tools for "members", we feel it is important to provide this essential information for your continued education.
Feel free to retutrn as much as you'd like and remember to bookmark this page for future reference.
Presentations
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Learning Resources
Glossary of Terms
Amortization -The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.
Appraisal/Appraisal Value - A written estimate of a property’s current market value based on factors such as: (1) rental income, expenses and capitalization rate, (2) recent sales information for similar properties, (3) cash equivalency value (see definition below), (4) the condition of the property, and (5) the neighborhood’s impact on marketability. Metwest Commercial Lender Department reviews all appraisals for quality control and final determination of value.
Bankruptcy – A proceeding in a federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability. Traditional institutions under serve borrowers whose credit history includes a bankruptcy or foreclosure. Metwest’s unique lending approach allows for the inclusion of borrowers with these types of credit challenges on an individual case basis.
Blanket Mortgage – A mortgage for which two to five properties (with similar uses)
Serve as collateral for the loan.
Borrower (or Mortgagor) – An individual or legal entity applying for and receiving a loan secured by a mortgage with the intention of repaying the loan in full.
Borrower/Applicant Income – Total income from all applicable sources (i.e. base income/bonuses, net rental income, commissions, etc.)
Cash Equivalent value – This is a method of calculating the appraised value of a property that considers comparable properties selling at different financing terms when evaluating comparable properties.
Cash Out – A refinance for funds in excess of the balance of the current mortgage. The excess money taken out reduces the borrower’s equity.
Combined-Loan-To-Value (CLTV) – The percentage of the property purchase price borrowed through a combination of more than one loan. (For example, first mortgage and seller take back 2nd mortgage or line-of-credit.) Mathematically, the combined loan amounts divided by property purchase price equals Combined-Loan-To-Value-Ratio. Metwest allows a CLTV of 90%.
Conduit – An entity that serves as intermediary between the lender(s) origination loans and the ultimate investor.
Corporation – A business entity owned by stockholders: considered an artificial person under law.
Debt Service – The annual principal and interest payment on the mortgage (loan).
Debt Service Coverage Ratio (DSCR) –This compares the net operating income (NOI) that a property can generate and compares it to the annual debt. The NOI should exceed the annual debt, or the investment potential of the property is questionable.
Debt-To-Income Ratio – A mathematical representation of the comparison between the recurring (more than 12 payments remaining) debt payments borrowers are obligated to make and their income. Derived by dividing a borrower’s monthly financial obligations by his/her gross monthly income. Also know as Expense-To-Income Ratio or Back-End Ratio.
Expenses – All of the expenses generated in a property (i.e. management, maintenance, garbage, taxes, insurance, etc.) Please note that expenses can range from 35%-45% of the total Gross Income, depending on the market area, the amount of units, etc. *Vacancy factor is typically 5%.
Expense Reimbursements – Operating expenses paid by the landlord but reimbursed by the tenant. Also called recoveries, reimbursements, billable or pass-throughs.
Gross Effective Income – Gross or Potential Gross Income minus the vacancy factor.
Gross Lease – A Lease in which the leassor (owner) is responsible for all costs and expenses of the property.
Gross or Potential Gross Income – Total income generated by a property (rental income).
Industrial Property – This building classification includes facilities used for Light manufacturing businesses, and auto-related businesses. Funeral homes, rooming houses, and marinas are included as well by Metwest.
Limited Liability Company (LLC) – A type of company, authorized only in certain states, whose owners and managers receive the limited liability and (usually) tax benefits of a partnership.
Limited Partnership – A form of business ownership that consists of one or more General partners who manage the business and assume legal debts and obligations, and one or more limited partners who are liable only for the amount of their investments. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.
Loan-To-Value (LTV) Ratio – The percentage of the property value borrowed (loan amount divided by property value = Loan-To-Value Ratio).
Mixed-Use – Property type with two or more harmonious uses, such as a building with retail shops on lower floors and apartments on upper floors.
Mobile Home Park – A contiguous parcel of privately owned land which is used for the accommodation of ten or more mobile homes occupied for year-round
living.
Multi-Family – Apartment properties with five or more units.
Net Operating Income (NOI) – The amount remaining after total operating expenses (excluding interest payments) are deducted from effective gross income.
Non-recourse Loan – The lender’s security is the real estate being financed; Lender is prohibited from attempting to recover against the borrower (personally) if the security value for the load falls bellow the amount required to repay the loan.
Prime Rate – Interest rate commercial banks charge their most creditworthy customers for short-term loans. Prime is a yardstick for trends in interest rates, and it is often a baseline for establishing interest rates (i.e., prime + x%).
Refinance – The payoff of one loan with proceeds from another, using the same property as security. Primarily used to lower the interest rate or receive “cash-out” (the difference between new mortgage amount and payoff balance).
Retail – Property types such as grocery, strip centers, outlet centers and small stores.
SBA Financing – Equity capital or long-term financing provided or guaranteed in part by the Small Business Administration; usually requires that the owner occupy at least 51% of the collateral property.
Self-Storage – Buildings in which consumers may lease personal storage space.
Strip Center, Unanchored – A property type occupied by multiple tenants of which none are well-known commercial retail businesses such as a national chain store or regional department store typical gross building area ranges from 50,000 to 100,000 square feet.
Trust – A fiduciary relationship whereby legal title to a property is transferred to a trustee with the intention that such property be administered by the trustee for the benefit of another, the beneficiary, who holds equitable title to such property.
Vacancy Factor – Used to analyze potential vacancy on a subject property (typically 5% of the total Gross Income of a property)
Variable Rate Mortgage (VRM) – A mortgage loan or deed of trust that allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception of the loan. Also called “adjustable rate Mortgage” (ARM).
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Metwest Real Estate Guidelines
APPRAISAL PROCEDURES FOR METWEST EXPRESS AND PLATINUM PROGRAMS
All Metwest Appraisal Reports must be ordered through Mercury Real Estate Services, LLC (Express) or Optimal Lenders Solutions (Platinum). Mercury Real Estate Services, LLC and Optimal Lenders Solutions are a division of the Real Estate Department.
- Prepare Your Borrower for Process and Collect Payment - Determine appropriate appraisal fee based on the fee schedule effective at time of pre-approval. Be sure the property type is appropriately classified. Acceptable methods of payment include credit card, check by phone, money order or certified check. (Difference in payment of actual fee will be reconciled at closing). Confirm your borrower is ready to proceed before you submit a request for an appraisal. Incorrect information and unprepared borrowers can cause delays in the ordering process.
The appraiser will require a copy of the sales agreement/land contract and leases for all commercial units (does not include apartments) as well as cell phone towers, billboards, etc. Multifamily properties with 10 or more units will require 1 representative lease. A rent roll will be accepted for properties with residential units.
The more information provided, the faster we will be able to engage an appraiser with reasonable terms. Incorrect or partial information may cause significant delay in the appraisal process.
- Mercury/Optimal will Contact Borrower – Mercury/Optimal will contact your borrower to confirm property information and the appraisal fee. Any questions regarding terms of the loan will be referred back to the Metwest loan officer.
- Mercury/Optimal will Select and Engage Appraiser – Mercury/Optimal will solicit multiple bids and select the best appraiser based on experience with Metwest Express. Mercury/Optimal will contact appraiser within 2 days from the time they receive the correct property information. Mercury/Optimal will conduct all necessary follow-ups with appraiser for delivery.
- The Appraiser will Contact the Borrower to Schedule the Appraisal – The appraiser will contact the borrower to conduct the appraisal within the time frame promised to Mercury/Optimal.
Limited Appraisal Report – When the appraisal is ordered through Mercury/Optimal, a “limited” appraisal report may be accepted.
RE may accept a Limited Summary appraisal for properties in Urban/Suburban areas based on the following guidelines.
* see attached
Useful Life of an Appraisal
An appraisal is valid for 6 months, rounded. The original appraisal should be reviewed before a new report is authorized and before a decision is made as the “limited” nature of the new report.
Example: an appraisal dated January 12 is six months old on July 12 but is still valid if the closing takes place on or before July 31. After July 31 a new appraisal is required.
PROPERTY CLASSIFICATIONS
The key determination of property classification: Who would buy it? How would they use it?
Mixed – Use
A Mixed Use classification must have a residential component
- The residential component (an apartment or a borderline uninhabitable dwelling) may be a very insignificant component of the property overall (warehouse, special purpose, etc…)
- Some property types outweigh the presence of a residential component (auto repair, restaurant, etc…)
Special Purpose
A special purpose property is suitable for only one use. Examples:
- Funeral Home, no data or sales for any other use
- Car Wash, no data or sales for any other use
Daycare, no data or sales for any other use
Restaurants are generally stand-alone, special use properties. “Storefront” restaurants (pizza, deli, bakery, etc…) that are located in urban locations are typically adaptable to an alternate commercial use and should be classified as retail or mixed use. Classification is based on the following:
- Typical Buyer Test - The pool of typical buyers would include uses of various types of retail sOptimal. If the property is reasonably adaptable to an alternative commercial use, the appraiser will provide data and analysis of various commercial uses.
- Income Test - If the property derives 65% or more of its income from a particular property type, that use may determine the property classification.
The appropriate test is determined by RE and Underwriting. If there is no clear data that indicates that a restaurant can be used for an alternative use, the classification will be a restaurant.
VALUATION GUIDELINES:
Apartments/Mixed-Use
Commercial use with a residential component
- 1- 9 units: owner oriented, sales approach is most applicable, income approach required.
- 10 + units: investment-oriented, sales comparison and income approaches are most applicable. Analysis of actual operating statements will be required.
Retail/Office
- Owner occupied: sales approach most applicable, income approach required.
- Investment: sales comparison and income approaches most applicable. Analysis of rent roll, leases and actual operating statements will be required.
Mobile Home Parks – ALL
The sales will be similar in size, occupancy, type, amenities and location. Analysis of rent roll, leases, and operating statements will be required. Trailers may be assigned value only if they are assessed as real estate.
For any type of Mobile Home Park, Residential/Agriculture zoning is not a factor except that the existing zoning must permit the Mobile Home use or the existing use must be a grand fathered use that predates the current zoning ordinance.
The marketability of a Mobile Home park will be affected by rural locations, lack of zoning, lack of recent sales, and land values. These factors affect market rental rates, vacancy rates and the ultimate value of the property.
Bed and Breakfast
The sales will be similar in occupancy, type and location. Apartment buildings and dwellings are not comparable. Income and Expenses will be based on actual operating statements and supported with market data. Occupancy levels will be market-based. Business value and FF&E will be reported separately.
Self Storage
The sales will be similar in size, occupancy, type and location. Income and Expense estimates will be based on actual operating statements and supported with market data. Occupancy levels and rental rates will be analyzed against competing properties.
Rooming House
Comparable sales will be similar in occupancy and type; apartment buildings and dwellings are not comparable. Projected income and occupancy levels will be based on documented operating history and supported with market data. An analysis of the rent roll and operating statements will be required. Business value and FF&E will be valued separately.
Auto Service
- Auto Repair – the sales approach will be primary, rentals will reflect auto repair or alternate use (industrial or commercial type) if viable and the cost to convert.
- Auto Dealerships – the sales approach will be primary, rentals will reflect similar uses
- Auto Sales (small buildings, high land-to-building ratio) – the sales approach will be primary; rentals will reflect alternate commercial uses if an alternate use is viable, and the cost to convert.
Hospitality (Hotel/Motel)
Sales will be similar in size, occupancy, type and location. Income will be based on the operating history of the property and supported with market-derived data. Analysis of daily rates (current/seasonal) and actual operating statements will be required. Franchise properties require Franchise Reports and a Trend Report. If the property is in question, the appraiser will ask for a Property Improvement Plan from the Franchise.
Funeral Homes
- Converted buildings – the sales approach will be primary, sales and rentals will reflect alternate commercial uses if the property can reasonably be put to an alternate use. The appraiser will adequately consider and deduct the renovation costs required to achieve a viable alternate use. If the most likely alternate use is residential, the property will not be considered for an Express loan.
- Special Purpose (no alternate use) – the sales approach will be the primary approach. Current licensing of the facility must be provided.
Industrial/Warehouse properties
Industrial properties are defined for lending purposes as buildings that include any area that is used for the manufacturing or processing of raw material or end products. Warehouses are defined for lending purposes as buildings that are used for distribution or storage.
For single use buildings the Sales Approach will be given primary emphasis while the Income Approach will be required for support. Comparable sales will be similar in size, age, construction, and location. The appraiser will consider current demand factors for warehouse/industrial type sOptimal in changing economic climates. For multi-tenant properties the Income Approach will be given additional emphasis.
Daycare Properties
- Converted buildings – the sales approach is primary, sales and rentals will reflect alternate commercial uses if the property can reasonably be put to an alternate use. The appraiser will adequately consider and deduct the renovation costs required to achieve a viable alternate use. If the most likely alternate use is residential, the subject property will not be considered for an Express loan.
- Special purpose (no viable alternate use) – the sales approach will be the primary approach. Current licensing of the facility will be considered.
Education Facilities
- Converted buildings – the sales approach will be primary; sales and rentals will reflect alternate commercial uses if the property can reasonably be put to an alternate use. The appraiser will adequately consider and deduct the renovation costs required to achieve a viable alternate use.
- Special purpose (no viable alternate use) – the property will not be considered for an Express loan.
Campground/RV Parks
The sales will be similar in size, occupancy, type and location. Analysis of rent roll and historical operating statements will be required. Substantial depreciation of buildings is typical and will be reflected in the value estimate. Business income will not be included in the analysis. An estimate of a market-based rent may be applied to a facility (on-site restaurant or general store) that could generate income. The limited marketability of these types of facilities will be considered when estimating a market rent. An estimate of land value is required.
Restaurant
- Commercial buildings (urban location) – the sales approach will be primary; sales and rentals will reflect alternate commercial uses if an alternate use is viable. The appraiser will adequately consider and deduct the renovation costs required to achieve a viable alternate use.
- Special Purpose (no viable alternate use) – the appraiser will estimate value as if the subject building were vacant. No credit will be given to any FF & E, tenant improvements or specialized fixtures. The Sales Comparison Approach will be required. The Income Approach will be based on comparable rentals for similar type properties. The appraiser will make certain that comparable lease rates reflect consideration only for the real estate and that no business or other consideration will be included. The Cost Approach or land value estimate will be required.
Marinas
The sales will be similar in size, occupancy, type and location. Analysis of the rent roll and historical operating statements will be required. Substantial depreciation of buildings will be typical and will be reflected in the value estimate. An estimate of a market-based rent may be applied to any facility (on-site restaurant or general store) that could generate income. This estimate of rent will consider the limited marketability of the facility. Rental rates and occupancy levels will be compared against a detailed market analysis of competing properties. Value pertaining to the business, FF&E and going concern will be valued separately.
Houses with Commercial Zoning
The value will be determined by sales of converted dwellings that are used for commercial uses and are similar to subject layout or sales of similar dwellings that were sold for conversion to commercial use. The borrower must intend to use the property for commercial purposes.
Golf Courses
The appraiser must have sufficient experience with appraising golf courses in order to complete the assignment. Provided the highest and best use of the property is a golf course, the value reported will reflect the ongoing value but the business value and FF&E will be reflected separately. An analysis of historical operating statements and a detailed market analysis will be required to project the income and expense estimates. Particular attention will be paid to demand factors especially for older properties that may no longer compete with new or superior golf courses. The appraiser will be cautioned about projecting future levels of rounds-played that differs from historical trends, especially if new competition has entered the market. The appraiser will also consider the need for future expenditures necessary to maintain the course. If a continuation of a golf course is not the highest and best use then the appraiser will contact the client prior to completing the appraisal report
VOCABULARY
FF&E – Furniture, Fixtures and Equipment that have no permanent connection to the structure of the subject property. These items depreciate substantially, but are usually included in the value of a business. (Metwest does not include them in the value of the property)
Property Descriptions
EXCELLENT -New or like-new construction completed in a workmanlike manner.
GOOD - The effective age of the improvements can be considered less than their chronological age due to an ongoing maintenance, repair and rehabilitation program.
AVERAGE - The condition expected of a property given its age and utilization.
FAIR - The effective age of the improvements can be considered greater than their chronological age due to an absence of maintenance, repair and rehabilitation.
POOR - Improvements marginally contribute to the value of the underlying land due to dilapidation and neglect:
Location Descriptions:
URBAN- Describes a mature neighborhood with concentrations of population typically found within city limits or a neighborhood commonly identified with a city.
SUBURBAN – Describes a neighborhood that contains complementary properties with less concentrated population than is typically found in an urban neighborhood.
RURAL – Pertaining to the country as opposed to urban and suburban; land under an agriculture use; signifies areas that exhibit relatively slow growth with less than 25% development.
CBD – CENTRAL BUSINESS DISTRICT – The downtown core area of a city where the major retail, financial, governmental, professional, recreational and service activities of the community are concentrated.
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