A small balance commercial (SBC) loan is a loan for smaller scale commercial properties. Think loans of more than $200k and less than $5 million. Types of properties include small multi-family apartment complexes, mixed-use properties including residential and commercial space, office space, flex space, and mobile home parks. The commercial world is a whole different ballgame than the residential loan world and comes with its own terminology. Here are five commonly used SBC loan terms:
Net Operating Income (NOI)
- Refers to property income less property expenses. Income can include rental income, laundry and pet income, and expense reimbursements such as Common Area Maintenance or CAM charges. Expenses can vary widely based on lease type, but can include taxes, utility and electric bills, cleaning services, landscaping, management fees, etc.
Debt-Service Coverage Ratio (DSCR)
- A ratio that determines a mortgaged property’s ability to cover the annual debt payment. In the commercial world, it is calculated by taking the NOI and dividing it by the annual mortgage payment. A DSCR in excess of one means that the NOI at least covers the annual mortgage payment.
- Is expressed as a percentage and calculated by dividing the property NOI by the property value. For example, if the NOI is $100,000 and the property value is $1.2 million, then the cap rate is 8.33%. Cap rate is one indicator used to evaluate a property’s expected rate of return.
Capital Expenditures (CAPEX)
- Refers to money set aside for property improvements that cannot be immediately expensed as a current operating expense for tax purposes. Examples may include a new roof, tenant improvements, or parking lots.
- A property owner’s representation of rental income derived from an income producing real estate asset. Rent rolls typically include tenant names, unit size, and lease terms such as start date and lease-end date.
Did you know that Visio Lending now offers commercial loans? Learn more about our Commercial Loan Program.