Commercial Mortgage Calculator

This commercial mortgage calculator makes it easy to determine the size of a loan using the LTV, DSCR, and debt yield approaches.

How to use the commercial mortgage calculator

There are three methods commercial real estate lenders and banks use in the credit approval process to determine the amount for a commercial real estate loan:

• The Loan to Value Ratio (LTV)
• The debt yield
• The Debt Service Coverage Ratio (DSCR)

The commercial loan amount will be calculated using each method, then the lowest of the three loan amounts will be used as the maximum loan amount. Let’s review each of these methods.

Loan to Value Ratio (LTV)

The first method lenders will use to determine a commercial mortgage amount is the loan to value ratio. The loan to value ratio is the loan amount divided by the value of a property. For example, if the value of a property is 1,000,000 and the loan amount is 800,000, then the loan to value ratio would be 800,000/1,000,000, or 80%.

A banks internal credit policy will define the maximum loan to value ratio that a loan cannot exceed. For example, the maximum LTV for an office building could be 75%. That means that if the value of a property is 1,200,000, then the maximum loan amount the bank could extend using the LTV method would be 1,200,000 x 75%, or 900,000.

The value of a property is determined by a bank ordered commercial real estate appraisal. The commercial real estate appraiser will come up with a market based cap rate that determines the property’s value. The cap rate is the ratio of net operating income to the property’s value. So, the appraiser will figure out what the net operating income is for a property and then apply a market based capitalization rate to determine the property’s value. For example, if the NOI for a property was 100,000 and the market based cap rate was 5%, then the property’s value would be 100,000/0.05 , or 2,000,000. This market based cap rate is what the lender would use as the underwritten cap rate for a property.

Debt Yield

Another method commercial lenders will use to determine calculate a commercial mortgage loan amount is the debt yield. The debt yield is the ratio of annual debt service divided by the loan amount. For example, if the annual debt service on a loan was 100,000 and the loan amount was 1,000,000, then the debt yield would be 100,000/1,000,000 or 10%.

The debt yield gives the lender a measure of risk that is independent of the interest rate, amortization period, and market value. The minimum debt yield can vary by property type and lender. However, the minimum debt yield is typically 10%.

Debt Service Coverage Ratio (DSCR)

Commercial mortgage lenders will also use the debt service coverage ratio is determine a commercial mortgage amount. The Debt Service Coverage Ratio (DSCR) is a property’s net operating income divided by the annual debt service for a loan. The NOI will be determined based on a property’s proforma and the DSCR will be based on a bank’s internal credit policy requirements and underwriting process. Once a bank has determined the appropriate debt service coverage ratio to use, then the required annual debt service can be calculated.

For example, if a bank has a DSCR requirement of 1.20x, and a property has an NOI of 100,000, then that means the required annual debt service would be 100,000/1.20, or 83,333. This is the maximum loan payment a loan could have in order to still have the required cushion between the debt service and the net operating income for a property.

The way a loan payment is calculated is based on the amortization period and interest rate. These factors are again defined by a bank’s internal credit policy and loan underwriting process. Typically commercial mortgage loans have an amortization period between 10 – 20 years, or 120 – 240 months. However, this could vary by property type and by lender.

Once you plug these values into our commercial mortgage calculator, then we will automatically calculated the loan amount for you based on the debt service coverage ratio.

Commercial mortgage calculator results

Once you enter the values required for each of the three methods above, then our commercial mortgage calculator will instantly display the calculations for each method. Finally, the commercial mortgage calculator will calculate the maximum commercial loan amount that the lender would extend based on the lesser of the three methods. Once you are finished with your analysis, you can copy and paste the sharable link to send a copy of the commercial mortgage calculator so you can share your results.

Commercial mortgage loan package

If you need to put together a commercial loan package to submit to a lender then you might consider using our Proforma software. Our Proforma app helps you create and share a multi-year commercial real estate proforma for simple and complex property types. We include functionality for complicated leases, reimbursement structures, market leasing profiles, inflation profiles, and lots more. Plus, you can not only calculate a maximum loan analysis, but also common financial ratios, an amortization schedule, loan draws for a construction loan, a discounted cash flow analysis, and more.