Commercial Real Estate essay
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Financial sources for commercial real estate include mortgage banking firms, regional banks, insurance companies and private investors (Omugussi, 2). Business owners need to evaluate the type of loan conditions when being offered loans by lenders. The evaluation should be based on the needs of the business owner which should include the anticipated growth and the future. Despite the various types of financing and the types of real estate's lenders are primarily concerned with the level of risk they are taking therefore the following documents must be provided by the borrower (MBA1, p 24-26).Unlike residential real estate borrowing the lender is asked to pay one to two percent of the terms of the loan to show commitment (Omugussi, p 2). This commitment fee is usually refundable. The lender then presents a commitment letter to the borrower. This commitment latter usually contains the closing conditions, owner occupancy requirements, affirmative and negative covenants regarding what the borrower does and does not agree to, representation and warranties.Commercial loans are underwritten based on the lenders policy and guidelines. Most commercial lenders were banks and insurance companies or insurance company. The basis of approval back then approval was done based on the specific project type and delinquencies and other similar projects in the region. Commercial lending has become more main stream. The process of underwriting is handled by a third party so that the review is fair genuine and accurate. The process basically involves
The net operating income is one of the methods for calculating the value of the property. The NOI is used with a cap rate. Sound investments must have the capacity to generate enough income to cater for debt service and the equity requirements of the investors. The following is the procedure of calculating the NOI (Hall, p 46-52)
NOI = PGI -VBD x PGI -OEWhere: NOI = Net Operating IncomePGI = Potential Gross IncomeVBD = Vacancy and Bad Debt AllowanceOE = Operating ExpensesPGI -VBD x PGI = EGIEGI = Effective Gross Income.It should be note that the NOI is very important and mistakes in its calculation are not acceptable because they could result to overcharging the client (Omugussi, p2). The use of NOI has enabled lenders and clients establish the feasibility of the project.Risks refer to the potential variance between realizations and expectations. Risks can either be static or dynamic. Static risks are external to the organisation and are therefore difficult to control (MBA2, p, 54). These always result to losses because they are not anticipated and their magnitude cannot be predicted. Examples include political events and natural calamities such as earth quakes. The second types of risks are called the dynamic risks which are controllable and can either produce a loss or profit (MBA2, p 54). These are usually controlled through contracts by inclusion of triple net lease, escalation clause; index leases percentage leases, acceleration clause and due on sale clause.The lender may experience interest rate risks because it is often difficult to determine because the time for acquisition and construction of commercial estates can be long. The lender may also face a construction risks just in case the constructor defaults, business risks, financial risks. Liquidity risks, purchasing power risks, legislative risks and environmental risks (MBA2, p 53-58).