Fairview Commercial Lending Underwriting / Valuation FAQs
Do you have a question not answered below? Please e-mail us
> Click here to return to FAQs.
- Is your evaluation the same as an appraisal?
All underwriting is done in house by a staff of commercial real estate experts that evaluate hundreds of transactions per month. Our underwriting is based on both the income approach and sales comp approach. The value we place on the property is based on a 90-120 day sale period (not a fire sale, but a relatively quick sale of the property).
- How do you value a property?
One of our in house underwriters pulls and analyzes comparables (properties that have sold, properties that have leased, properties that are available for sale, and properties that are available for rent). We will evaluate properties based on the income approach (comparable leases) and the sales approach. In some cases only one of the approaches might be valid for determining the value.
- What is DSCR (debt service coverage ratio)?
Debt Service Coverage Ratio (DSCR) is the amount of cash flow available to meet annual interest and principal payments on debt.
- How is DSCR calculated?
It is calculated as net operating income/total debt service.
- Why is DSCR important?
Debt service coverage ratio is used by most lenders to ensure that the cash generated by the property is sufficient to cover the interest payments to the lender. Any number greater than one shows positive cash flow to cover the debt obligations. Any number less than one shows that the property’s cash flow is not sufficient to service the debt.
> Click here to return to FAQs.
- Does Fairview Commercial Lending require a debt service coverage ratio greater than one?
No, we do not require the debt service coverage ratio greater than one although if a property is not currently producing a positive cash flow, we typically set up an interest reserve to cover the payments until the property can fully cover the debt obligations. (see What if the property does not cash flow?)
- How is the debt service coverage ratio calculated for a fully owner occupied property?
Assumptions are made for market rents, expenses, vacancy, etc. to determine an estimated net operating income for the property.
- What if the property does not cash flow?
We are ok with properties that do not fully cash flow. We have done a number of loans of this type.
- How do you value a non-cash flow producing property?
We will look at the sale comparables approach (valuation) as well as make assumptions of market rents, vacancy factors, expense ratios, etc. to determine a possible value via the income approach.
- What is Cap Rate?
This is the rate of return that a reasonable investor would expect to receive as a result of their investment.
> Click here to return to FAQs.
- What Cap Rate do you utilize when valuing a property?
Each property and market is unique. There is no blanket cap rate used in our underwriting.
- How is cap rate utilized?
The cap rate is utilized in underwriting to determine the value of the property based on the income approach.
- What is the formula to calculate value based on the income approach?
One method to determine the value of the property is to take the net operating income/cap rate.
- How do you value a fully owner occupied property since there is not a rent roll?
We will make assumptions on market rents to back into a value via the income approach. We will also utilize the sales comparable approach (see Property valuation question).
- How are underwriting decisions made?
All underwriting decisions are made in house by one of the partners. There are no loan committees since we solely fund with our own money. (see valuation question)
> Click here to return to FAQs.
