If another of the lender's requirements is that they will not loan in excess of 80% of the property's market value (a common criteria called the Loan to Value ratio [LTV]), then the maximum loan on this building ($543,000) would dictate a value for the property of $678,750 - from the lender's point of view. Interestingly, in this example, this would make the cap rate (NOI / Value = Cap Rate) 9.67%, a fairly high cap rate in today's investment world in Boulder County.

Obviously, if the lender's requirements for their DCR were only 1.10, as it sometimes is, then the amount they would be willing to loan would increase to $592,500 ($65,664 / 1.10 = $59,645 / 12 = $4,975 available for monthly payments. These payments will amortize a 9% interest loan of $592,500 in 25 years.) Again, using the 80% rule for the maximum LTV, this lender would loan $592,500 on a building with a value of not less than $740,625. This is a cap rate of 8.87%.

Why would a lender change his DCR requirements? One reason is supply and demand. As a lender finds himself with more money to loan and fewer quality projects in which to invest his funds, he varies his criteria to meet changing market conditions. Another reason is security. As a lender's risk changes he comes under pressure to alter his lending criteria. Another answer is profit. As a lender's perceived profit increases or decreases, from whatever cause, the greater his motivation to modify is his lending criteria.

Lenders constantly seek good, solid investment opportunities that have low risk and high profitability. Recognize these motivations? Sound like anyone you know? The closer you can synchronize your objectives with your lender's the more

successful - and the more profitable -will be your loan negotiations.

One more word for sellers. It is a given that your NOI is the critical factor, under your control, in maximizing the amount of loan a buyer will be able to get on your building. It is also a given that the more money a buyer can borrow to acquire your property the greater price he will be willing to pay.

In other articles I have pointed out the value of having your NOI as high as possible. This is but another example. To make the DCR work in your favor, maximize your NOI. -

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com