One ‘ruler’ in commercial real estate transactions that defines the real estate deals for the bank or investor is the LTV Rate.
The LTV Rate compares the amount of financing to the sales price of the commercial real estate deal.
Commercial real estate loan rates are usually based on these current sale LTV numbers from the property deal under evaluation.
There are many types of commercial real estate loans, but they all share certain commonalities like the importance of the LTV rate. It does not matter if the commercial real estate is a strip mall, an office complex, a group of condo buildings, or some abandoned industrial site.
Each commercial real estate property has a selling price, the amount of the buyer’s down payment, and the amount of the requested mortgage.
It doesn’t matter if it is a marina or an apartment building. All normal commercial real estate transactions are either all cash or a mix of down payment and mortgage combination.
There are No Exceptions
There are no exceptions to this typical setup. All commercial real estate transactions describe the property, its selling price, any outstanding mortgages, and any new mortgages, among other important facts.
Evaluating the LTV
When a commercial real estate property deal is being structured, the buyer and the bank or investor determine how much of the selling price will be paid in as a cash down payment and how much of the balance of the selling price will require a first mortgage.
This first mortgage is called the ‘Senior Mortgage.’ Many times the other [Junior] Mortgages will be paid off, or at times even wrapped into the new first. In some cases these junior mortgages might even continue to exist, but this is not common.
Any expenses in the commercial real estate transaction are included in the deal, of course, but might be paid from cash or rolled into the new first mortgage, depending on the deal the buyer or investor creates.
The Loan To Value Configuration
Now that we understand that the LTV is determined by comparing the new loan amount to the selling price, income and expenses, let’s look at a commercial real estate sale below for example purpose only
Selling Price $1,000,000.00
– Down Payment $300,000.00
= Remaining $700,000.00
Loan To Value Rate 70%
LTV Rate = Selling Price – Down Payment = RemainderSelling Price
Now you see that every commercial real estate deal involves the same scenarios of a selling price, down payment, and any mortgages.
Once we fill in all of these numbers, we have a resulting desired mortgage [financed] amount. This resulting ratio [or percentage] puts all prospective commercial real estate deals on a level playing field for the bank or the investor – through the LTV Rate.
The LTV Rate is very important in commercial real estate transactions. It puts an important number on the value of the deal in simple, reliable, and consistent terms for the investor or bank.
The smaller the LTV Rate, the better the deal is for the investor or the bank. Now you know why these parties putting up the money are very interested in the LTV Rate. In fact, most banks set minimum LTV Rates before they’ll put up the funds for the commercial real estate deal, and the LTV Rate is one ruler in commercial real state deals.