| Residential real estate has a lot of sweetheart terms due to government subsidies, especially in the US. That is why you don’t see 30 year fixed rates anywhere else, and 0% down loans anywhere else. The DSCR equivalent for residential real estate is debt-to-income ratio. In a free market, it is conceivable that lenders offer lower interest rates for borrowers who periodically prove their DTI is sufficient. That is basically what refinancing is, and what people with adjustable rates mortgages have to do. > residential real estate is based on tons of pricing effects, and appraisals are much more "feels" than "reals", If you have looked at a residential real estate appraisal, there is a very real process of gathering comps, evaluating the structure, discounting for wear and tear of major maintenance items such as roof, HVAC, etc. If anything, because residential real estate sales volume is so much higher than commercial, residential is more “reals” than “feels”. > if you will (how people feel about the area, how they feel about the tower the previous owner added, how they feel about the location, etc). Who are these “people”? Because if we are talking about appraisers, this should disqualify their license to appraise. Appraisers should be mostly looking at competitive sale prices, per sq ft construction costs of major house components, and other objective criteria. Why else would a lender pay them to evaluate a property? >Commercial real estate valuations are almost entirely a mathematical formula based on rents, current, whether they're collecting them or no This is not true. Try calling up a lender and asking to borrow money without showing them cash flow, and they will hang up on you. > And if the rents drop (e.g., you start renting it at a lower square foot rate) the valuation drops, which can require recollateralization (e.g., unlike your house, the banks require that the loan NEVER be more than 50% LTV or something) They literally do this, via DSCR. If you stop renting space, your operating income goes down, which causes the DSCR to go down, which triggers a default, which means the lender can negotiate new terms, which could involve the borrower putting up more money, extended loan terms, change in interest rate, anything. The alternative to a loan with a DSCR is usually a 5 year adjustable rate mortgage, which usually has a higher interest rate and then in 5 years, you still have to use your cash flow to qualify for another loan, so eventually someone will want to see income for the property This is a good guide: https://www.occ.gov/publications-and-resources/publications/... On page 21, for underwriting standards: > Effective CRE lending policies generally reflect the following for each type of loan or
property: >• Minimum standards for borrower or project net worth, support provided by guarantees (if
applicable), borrower and guarantor cash flow, and debt-service coverage ratio (DSCR). |