Opening: "I'm Laura Munoz and welcome to Let's Talk Commercial Real Estate a newly created video blog covering topics of interest for commercial brokers and borrowers sponsored by American Life Financial. We'll be chatting with members of the real estate community asking them questions that you use submit on social media."
Laura Munoz: "I'm Laura Munoz, welcome back to Let's Talk Commercial Real Estate. We have Joe, back from Everstream Capital visiting from Texas. Welcome back. You had some great advice for us that we could give to our borrowers on things that they should or should not do when they're trying to apply for a loan."
Joe Landin: "Right."
Laura Munoz: "We started with number one.
Joe landin: "Mm-hmm."
Laura Munoz: "Give us number two."
Joe Landin: "Number two is an improper understanding of what's called the 1.25 debt service coverage ratio.
Laura Munoz: "Okay."
Joe Landin: "Most business owners it gets them to even a lot of CPAs. So, remember we talked about how in the number one reason was a lack of profitability?"
Laura Munoz: "Yes."
Joe Landin: "Okay, well the debt service coverage ratio is a calculation that all banks do now. Here's what's important- they don't do it exactly but it is a calculation that is done similarly. Okay, if fundamentally what the underwriter does is they take the net profitability on your tax return divided by the annual payments on the loan and if that number is 1.25 or greater- cha-ching bank is gonna write you money if it comes in oh one point two zero or one point one zero oh gosh one then that's when the banker says I'm sorry we can't help you."
Laura Munoz: "Okay."
Joe Landin: "Yeah, so think in the Olympics the high jump you can't think in the Olympics you have to jump a minimum six and a half feet okay your loan has to jump a minimum one point two five ."
Laura Munoz: "Good analogy."
Joe Landin: "There you go,
Laura Munoz: "okay, all right. You have four- that was two. What’s three?"
Joe Landin: "Credit. So remember you asked me about having the show sometimes guests say that credit doesn't matter. Well in the world of alternative lending that is mostly true okay, but again people don't go to a hard money loan they immensely go oh I need a loan I'll go to my bank because that's where I have my deposit relationship. Bank’s credit is everything and I'll say one thing further the bigger the bank meaning the more states you operate the higher the credit minimums are required. So a few ways that credit is compromised is I see business owners getting disputes with vendors. Vendor provides a product or a service it was shoddy you say Oh ain't paying you the ten thousand I owe you vendor says yes you will then you ignore it don't pay them next thing you know it they fall a report against you and your 707 credit score just dropped to a 607 then you apply for a loan sorry you can't qualify because you don't have high enough credit and then another thing is it's possible to have credit scores in the low 700s and yet if you have one or two missed payments even if it was only like ten fifteen dollars late and you paid it the fact that that it shows up in that six to twelve month period can make an underwriter decide Oh instead of giving you a hundred thousand business line of credit you only get ten thousand I've actually seen that happen."
Laura Munoz: "Oh yuck."
Joe Landin: "Crazy but very important."
Laura Munoz: "You keep talking about alternate loans."
Joe Landin: "Correct, attorney to Lyndee.
Laura Munoz: "What does that mean?"
Joe Landin: "Well, Everstream Capital does a very good business with American Life Financial okay. So whenever we get customers that are light on credit or worse they violate rule number one- zero profitability on tax returns. But oh great, you own your building. What's the value eight hundred thousand? How much I need three hundred and fifty thousand? Then with alternative lenders they can do other forms of writing and the most common ones are either bank statement underwriting for cash flow on a bank statement versus tax return or collateral asset based lending as loans made on certain loan to value against your asset so that's when we use partners like American Life Financial whenever customers foolishly or intentionally write off other profitability on their corporate tax returns."
Laura Munoz: "Okay."
Closing: "Have topics or questions you'd like covered on let's talk commercial real estate? Or if you'd like to be a guest on Let's Talk Commercial Real Estate, please contact us at firstname.lastname@example.org. Like us, follow us and share us on social media."
Joe Landin CEO of Everstream Capital, returns to explain the unexplainable. He breaks down in the simplest terms, what 1.25 Debt Service Coverage Ratio really is and how it effects borrowers loan options.