Commercial and Specialized Lending
Commercial Underwriting
Understand that commercial lending is driven by the property's income and the borrower's business, not just personal credit. Know the key metrics: net operating income, capitalization rate, debt service coverage ratio, and loan-to-value. Understand the difference between owner-occupied and investment property, the treatment of leases and rent rolls, and the importance of environmental and structural due diligence. Recognize specialized products: construction and land development loans with draws and holdbacks, bridge loans, mezzanine and second-charge lending, equipment and receivables financing, and agricultural lending.
Documentation and Risk
Commercial files require financial statements, tax returns, leases, estoppel certificates, environmental reports, and often personal guarantees and covenants. Understand that commercial terms are negotiable and highly lender-specific, and that the loan may be structured with interest-only periods, balloon payments, or rate swaps.
Traps in Exam Questions
Watch for use of gross rent rather than net operating income, forgetting vacancy and management allowances, and applying residential debt service ratios to commercial deals. Another trap is ignoring environmental liability or assuming a personal guarantee is always required or never required. Also watch for confusion between a bridge loan and a construction loan.
Rule of Thumb
DSCR = net operating income ÷ annual debt service; most commercial lenders look for a cushion above 1.0, commonly around 1.2 or higher.
Worked example: NOI $120,000, annual debt service $90,000 gives DSCR of 1.33. At a 6.5% cap rate, value is roughly $1.85 million, and a 70% LTV caps the loan near $1.29 million - the lower constraint governs.