The Pre-Qualification - Pre-Approval Process
Sellers of Bed and Breakfast/Inn Properties often request that a potential buyer become Pre-Qualified or Pre-Approved by a lender prior to divulging confidential income/tax information as sellers naturally want to avoid wasting time with un-qualified shoppers who lack sufficient assets or credit to consummate a transaction.
Aspiring Innkeepers on the other hand, need to determine what financing programs are generally available so that they can make sure the income from the inn will be sufficient to service the loan, pay all expenses and produce an acceptable bottom line profit. A buyer and their advisors need to evaluate the businesses financials and tax returns to determine how much they can afford to pay for the property prior to entering into an “Offer to Purchase” or a “Contract of Sale”. The Pre-Qualification/Pre-Approval Process has two parts:
Part One: Pre-Qualification
Commercial Real Estate Financings are generally presumed to be serviced by the income from commercial property and not by income from the individual. That said, the borrower’s credentials, income, assets and credit are very important when underwriting a file and will also be necessary before we can issue a Pre-Qualification Letter that may be presented to a seller:
1. Borrower's Application 2. Verifiable Assets to be applied to down payment and reserves i.e.
4. Resumes for all principals 5. Borrower's Financial Statement's 6. Borrower's Credit Report's |
|---|
The Pre-Qualification process evaluates the borrower’s credit, assets and resume's to generally determine the level of financing they would qualify for assuming the property produces a positive cash flow.
It is important to note, that the borrowers credit and income are rarely adequate to qualify for a commercial mortgage on a bed & breakfast/inn; it is therefore necessary to obtain financial records on the inn as well so that a combined picture is presented to our Commercial Underwriters.
Part Two: Preliminary Pre-Approval
A Conditional Loan Pre-Approval may only be issued after all data from the borrower's and the subject property is compiled and analyzed by one of our Commercial Loan Underwriters.
Financial records on the business/property being acquired will be needed to determine that the Debt Service Coverage Ratio (DSCR) will comply with our general underwriting guidelines after items such as depreciation, officer’s salaries, mortgage interest and certain non-re-occurring expenses are added back to the net profit/loss.
The following items will be required on the subject property before a Preliminary Pre-Approval can be issued:
1. Two years of business tax returns 2. Year to Date Balance Sheet/P&L 3. A detailed list of capital improvements made within the last five years 4. A list of “One Time” non-re-occurring expenses 5. Photos of the property or Web Address |
|---|
Note: The asking'selling price must be supported by comparable sales and good hard financial data otherwise the property may not appraise for the anticipated value.
A large percentage of all inns are operated by one partner who runs the inn and another or others who will maintain his or her own career's. Innkeepers with smaller inns use this additional income to enhance their financial picture. The Aspiring Innkeeper however, may actually need income from other sources to make ends meet; on the other hand the additional income may be necessary to offset paper losses shown on the inns tax returns when underwriting a loan request.
The Bad News… Most lenders find it difficult or impossible to finance an inn that shows modest profits or paper losses on the businesses tax return's.
The Good News !!! Commercial Capital’s unique approach to underwriting a bed & breakfast/inn property combines the revenue from the inn with income all partners and all sources when underwriting the loan; these sources most commonly include: salaries from all partners, investment income, retirement, Social Security, disability and so on. We feel that a global Debt to Income Ratio (DTI) is a fairer way to evaluate the merits of a loan request for bed & breakfast/inn properties; we also rely very heavily on the appraisal as the value will be divided into the proposed loan amount to establish a Loan to Value (LTV)
Conditional Loan Pre-Approvals are issued within 48 to 72 hours of receiving the information on the borrower's and the property. The Pre-Approval will specify the rate and terms and will also lists certain due-diligence items still needed before our loan file is ready for final underwriting and closing.
For further information click the appropriate box below:
