What are CAP rates (and why should I care)?

Commercial real estate owners and buyers are always confronted with the same question: “How do I determine the value of a commercial real estate property?”  Homeowners and homebuyers rely on the market data approach which simply looks at comparable sales in the market to determine value.  Commercial properties rely more heavily on the income approach or the income capitalization method to determining value.  The income approach requires an understanding of CAP rates or capitalization rates.

In order to begin the analysis, we need to determine the net operating income of the subject property.  The NOI is defined as the net cash flow of the property and is determined by taking the gross income and subtracting the operating expenses.  Gross income includes rents, common charges, parking income, and all other income sources.  Operating expenses are all of the costs associated with running the property, and include: vacancy allowance, management fees, real estate taxes, utilities, repairs and maintenance, etc.  The bottom line figure is the net operating income or net cash flow.  This NOI figure is what we will use to determine property value.

Investors have many options when it comes to investing their money.  They could deposit their funds in a bank account and these days earn 1-2% return on their money.  They could buy stocks and bonds with the hope of earning higher (but uncertain) returns.  Many choose to invest in real estate instead.  Let’s say an investor wants to earn a 5% return on his money and buys a property that generates annual NOI of $50,000.  That 5% return on investment is defined as the CAP rate.  In this case, the property would need to sell for $1,000,000 to yield $50,000/year at 5% return ($1,000,000 times 5% equals $50,000.  If the investor demanded a 6% return on his investment, the property would need to sell for $833,333 ($833,333 times 6% equals $50,000).  From this basic example you can see that a property value will change based on the rate that an investor will expect to earn on his investment.  In times when bank interest rates are high, real estate prices generally go down, as investors will expect to earn returns that exceed bank deposits.  When bank interest rates are low, real estate prices typically increase, as investors are willing to earn a lower return on their real estate investments.

Since September 2018, we have been seeing an increase in market interest rates.  If this continues and rates continue to rise, we could expect to see downward pressure on commercial real estate prices.

What to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders

I constantly receive phone calls and emails from borrowers who ask me what to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders.  Here are some thoughts:


These days, lenders look very closely at the borrower’s qualifications before extending credit.  The borrower should have good credit, with FICO scores of 680 and higher.  Lower credit scores may be acceptable with solid, written explanations.  If your credit contains any foreclosures, bankruptcies, judgements or short sales, be prepared to offer full disclosure upfront and have proof that everything has been settled.  Next, lenders will look at the borrower’s total net worth and liquidity.  They will expect to see a financial statement with net worth equal to the loan amount and at least six months of cash reserves to cover debt service.  If a borrower expects a commercial mortgage loan of $1,000,000 or more, they have to show the lender that they have the financial statement to back up the loan.  Equally important to the lender is experience.  Do you have experience owning and/or managing similar properties?  If not, are you willing to hire a professional management company to manage the property for you?  Lenders need to secure their investment and will not lend to a borrower that does not have a proven track record.  Last, a lender will look at the size of your down payment.  Gone are the days when banks and other lenders will offer 100% financing or other very low down payment loans.  Lenders will expect to see a owner that is vested in the project.


Next, a lender will look at the property.  They will expect to see a well run property in good condition.  They will look at the demographics of the neighborhood and local crime statistics.  Properties that are run down, poorly managed, or in very rural areas will be highly scrutinized.  These properties might require a short term bridge loan or private money loan until they will qualify for regular bank financing.  Another very important factor to consider is the past and current use of the property.  Properties that are, or could be, environmentally hazardous will require extensive environmental testing.  Properties like gas stations, dry cleaners, and industrial properties with onsite chemicals will be very hard to finance.  These days, retail properties with marijuana based tenants will almost certainly cause problems for a lender.  It is very important for a lender to review the tenant base and the types of businesses located at the property upfront.

Financial Numbers

After a lender is comfortable with the borrower and the property type, they will then delve into the numbers.  First, they will look at the rent roll to make sure that the vacancy and rental rates are acceptable.  They will look at how long the tenants have been in occupancy and how long the leases are.  Properties with constant turnover and poor leases will cause problems for a lender.  Next, a lender will look at 2-3 years of operating statements and look at the income, expenses, and net cash flow.  They will expect to see properties that have a proven ability to generate rental income, reasonable expense ratios, and net income that is sufficient to cover the mortgage payments.  They will calculate loan-to-value ratios, debt service coverage ratios, and debt yields.  Lenders have internal guidelines for all of these calculations that must be met.

Banks and other lenders got into lots of trouble during the last recession by making credit decisions too freely and without proper oversight.  Lenders today are required to be more careful so as to avoid the problems they encountered in the past.  At Select Commercial, we are well versed in preparing loan packages that make sense and address lenders’ concerns.  Let us know if we can help you!

How We Help Our Customers

Select Commercial specializes in commercial mortgage loans from $750,000 to $10 million and we lend nationwide.  Many people ask us why they should choose Select Commercial rather than their local bank.  In addition to great rates and terms, fast turnaround time and superior service, we have the ability to close loans that banks and other institutions often find difficult.  Here are some examples of loans that we have closed recently:

Albuquerque, New Mexico – our borrower owned an office/retail property with tenants that all had short term leases.  The borrower’s current bank was concerned that the tenants would not renew and the property would become vacant.  We were able to offer this borrower a 5 year fixed rate loan with a 5 year renewal option and a 25 year amortization.

Cape Coral, Florida – our borrower owned a small apartment complex in a small market.  The borrower lived in New York and local banks were uncomfortable lending to an out of state borrower.  We had no difficulty with this transaction.  We approved a refinance of a high rate loan and provided cash out as well for property improvements.

Brooklyn, New York – our borrower was looking to refinance a small apartment building, but had slow credit.  The local bank did not like the borrower’s credit score.  We liked the property and did not allow credit to get in the way of our approval.

Bensenville, Illinois – our borrower was purchasing an apartment complex and needed to close within 45 days.  His current bank could not work under that timing constraint.  We had no trouble closing quickly.

Byron, Georgia – our borrower owned a mobile home park and was looking for a 30 year fixed rate loan.  His local bank would only fix the rate for 5 years at a time.  We made a 30 year fixed rate loan at a great low rate.

Whatever your needs, Select Commercial has a loan program to suit your individual needs.  If you would like to review a loan scenario with us, please contact us today at 1-877-548-9454.

What Makes Us Different?

We often have people ask us why they should apply to Select Commercial rather than just going to their local bank for a commercial mortgage loan. Banks typically have one set of guidelines, and if your loan does not meet their guidelines they will probably not be able to accommodate your request. At Select Commercial, we have numerous loan programs to choose from and attempt to custom tailor a commercial mortgage loan that meets your individual needs. Many, if not most, of our successful loan approvals required us to overcome an obstacle that other lenders were not willing to do.

I would like to review a few of these situations that have recently been approved:

  • Our borrower owns an apartment property in Lowell Massachusetts. He was looking to refinance a high rate loan and obtain cash for property improvements. The property was older and needed renovation. The current property condition made the borrower’s bank nervous. We approved this loan at a rate that was lower than the bank. We also offered a long term fixed-rate loan and a long-term amortization. The term was also longer than the bank was offering.
  • An owner of a mixed-use property in Chicago Illinois approached us about refinancing his property. The owner had credit and income problems which his bank could not overcome. The borrower was also looking to minimize his monthly payment and was requesting an interest only loan. We were able to accommodate this borrower at a very attractive rate.
  • A co-op Corporation in New York City was looking to refinance the underlying loan on the cooperative building. Their current loan did not mature for six months and they did not want to pay a prepayment penalty. They were concerned that rates would rise if they waited for six months. We approved their loan and gave them an extended rate lock for six months. In addition, our rates and closing costs were lower than they could obtain on their own.
  • A borrower in Cleburne Texas owns a small un-flagged motel. They needed to pay off the seller who had taken back a mortgage upon purchase. Most lenders do not like loans in small towns and do not lend on motels that are not part of a major chain. We were able to prove this loan without a problem.
  • Another client of ours owns a student housing property in Gainesville Florida. They needed to refinance a very high rate loan and obtain cash to buy out partner. The former partner mismanaged the property resulting in lower than necessary income needed to qualify. We were able to look at pro forma income and approve a loan based on projections.

Most commercial mortgage transactions require that a lender be willing to listen to the story and try to find a way to overlook the negatives associated with the deal. Good lenders will look for a reason to approve a loan, instead of saying “NO”. At Select Commercial, we are constantly looking to find a way to approve his many loans as we can. Please contact us if you would like to discuss a commercial mortgage loan transaction with us.

Interest Rates Expected to Rise

The Federal Reserve is expected to start raising interest rates as the labor market tightens.  According to reports, these rate hikes could start as early as September.  Please see the following article from yesterday’s New York Times: http://www.nytimes.com/2015/07/30/business/economy/federal-reserve-meeting-interest-rates.html

Why Should I Use Select Commercial?

Many of our customers have asked us why they should use Select Commercial instead of just going to their local bank to obtain a commercial mortgage loan. Select Commercial has the ability to close loans that other lending institutions can not close. Since we have numerous sources of capital available to us, we can offer better commercial mortgage terms than most other individual lenders.
We would like to share some examples with you:

1) One of our recent clients was looking to purchase an apartment building in Oklahoma. The client lived out of state. Their local bank would not approve this transaction. We approved and closed this deal and at a lower rate than their bank was charging for local customers! We lend nationwide and the fact that the borrower lived out of state did not concern us.

2) Another one of our clients owned a retail strip center in New York. He was looking to buy out his partner and needed cash. His local bank did not offer cash out refinances. We allowed him to cash out over $1,000,000 to help him acquire the property from his partner, and we offered a great rate as well.

3) We recently had a client in Colorado that owned and operated a restaurant. His current rate was very high. He wanted to lower his rate and withdraw cash to open a second location. His local banks were not interested in making loans to restaurants, and certainly could not offer cash out. We had no problem with either of these situations and closed the loan.

4) Another client was looking to purchase a trailer park in Maryland. This was his first property of this type and the location was somewhat remote. None of his local banks wanted to make this loan. Again, we were fine with this transaction and we closed this transaction with no hesitation.

5) We currently have a client looking to refinance a New York City co-operative mortgage loan. Their current loan matures in 2016 but they want to lock in today’s low rates. We offered them an extended rate lock option, allowing them to apply early, lock in the rate now, and close next year!

These are just a few examples of commercial mortgage transactions that we have offered our clients recently. If you would like to discuss a scenario, please call us today at 516-596-8537 or click here for a free quote.

Federal Reserve Announces Likely Rate Hikes

Since the economic crisis and financial meltdown in 2008, the Federal Reserve has kept the Fed Funds rate at very close to zero. The Fed Funds rate is the rate that the Federal Reserve charges to its member institutions. By keeping this rate very low, banks and other financial institutions have been able to keep the interest rates they charge to their customers at historically low rates. This has allowed individuals to buy homes, cars and other large items at very low rates – stimulating an economic recovery. Business customers and commercial real estate owners have likewise been able to buy and refinance commercial property at historically low rates. Most consumer and business loan rates are tied into the rates in the United States treasury market. Since the Fed funds rate has been so low, United States treasury securities have also been very low for the past seven years.

The Federal Reserve is starting to reassess their strategy and have announced that it is likely that rates will begin to rise between now and the end of this year. An increase from the Federal Reserve will cause an increase in the United States treasuries, which in turn will mean an increase in the rates charged to consumers and business owners. For more information on likely policy from the Federal Reserve, click this Washington Post article.

If you are considering purchasing a new commercial property, investment property, or refinancing the debt on your existing commercial mortgage loan, you should consider acting now before rates increase. For more information, please contact us at 1-877-548-9454 or visit our website at www.selectcommercial.com.

How to Find a Commercial Lender that Specializes in your Needs

Many of our applicants ask why they should do businesses with Select Commercial and not their local bank. Select Commercial is a commercial mortgage banker with access to capital from many different sources including Wall Street investment banks, insurance companies, national commercial banks, local savings institutions and many others. Accordingly, we are able to provide many different loan programs to meet in individual borrower’s needs. Whereas a local bank has a specific set of lending guidelines, we are not limited to any one institution.

Some examples include:

Cash-Out Refinances – These days, we see a large number of requests from borrowers seeking to refinance their commercial properties and obtain cash out for other purposes, including reinvestment. Many local banks are very hesitant to allow these cash out refinances. Borrowers seeking cash out from their properties are often turned away. We have no hesitation making cash out refinances to commercial property owners. Just this week, Select Commercial provided a loan to a small property owner in which he took over $1 million of cash out from his property.

Property Types – Select Commercial lends on all types of commercial and apartment properties. We have programs for owner occupied properties as well as investor occupied properties. We have years of experience lending on specialty properties such as motels, gas stations, restaurants and many other property types traditionally shunned by other commercial lenders. No one single bank can possibly satisfy all of these requests.

Loan Terms – Many, if not all, banks like to limit their fixed-rate loans to five-year terms as they do not want to take on unnecessary long-term credit risk. At Select Commercial, we often make fixed-rate loans for 10, 15, 20, and even 30 years. We also offer longer term amortizations than most local banks.

Borrower Credit – Most banks require that their borrowers have perfect or excellent credit in order to qualify. In real life, borrowers often have minor blemishes or events that have caused a temporary setback. We are willing to listen to the story and lend despite past problems. As long as a borrower demonstrates that the problems have been corrected, we are willing to lend when other lenders are not.

Rates – Local bank’s rates are often high as they need to pay for deposits and to maintain their branches. By accessing the capital markets, we are often able to provide much more competitive pricing than these local institutions. Our Wall Street investment banks and insurance companies provide pricing on a national level and not based on any one local market.

Recourse – Almost every single local bank will require that a borrower sign the loan personally. Many borrowers do not wish to put their personal assets on the line for a commercial real estate investment. Very often, our investors will not require personal guarantees. This is a very important issue should not be overlooked.

Certainty of Closing – We have seen many examples of banks making promises, and then after months of processing, their loan committees change the terms of the loan approval. This often results in the borrower canceling or delaying the closing. We are proud of our reputation for delivering approvals on the same terms as originally quoted, and timely closings.

Application Fees – Most banks will collect an application fee in order to review your application. This fee is often nonrefundable even if you do not accept the terms the bank proposes. At Select Commercial, our application process is without cost or obligation. We will review your information, and if we like the transaction, we will issue a written letter of intent spelling out the terms of the approval upfront. We do not collect an application fee for this service. Should you choose not to proceed with our loan approval, you may cancel without cost or obligation.


If you have a specific transaction that you would like to discuss with us, please feel free to call 1-877-548-9454 or click here to request a free quote.

Recent Approvals from Select Commercial

Select Commercial’s Approvals This Week!

Here are examples of four loans that we approved this week.

If you are looking to lower your existing rate or need to take some cash out for any other purpose, please contact us before rates increase. Please call us at 877-548-9454 or fill out our Free Loan Request to see how we can help you.


Apartment – Retail – Refinance
Chicago, IL
Loan Amount $4,000,000

Apartment Building Purchase
Oklahoma City, OK
Loan Amount $1,116,000

Industrial Building – Refinance
Beckley, WV
Loan Amount $1,650,000

Mobile Home Park – Purchase
Woodbine, MD
Loan Amount $1,612,500

Select Commercial offers a very simplified application process with no upfront application fees and no processing fees. We will discuss you loan request with you during our initial phone conversation and have you provide some basic information about the property and the borrower. Written pre-approvals are generally provided within 24 hours with no absolutely cost or obligation. We always offer professional service with excellent rates and terms.

Select Commercial is focused on providing the best commercial mortgage financing solutions for each client’s needs. All details of the commercial mortgage lending process are meticulously managed from the beginning of the loan process to closing. We’ve worked hard to earn the reputation we’ve established with our clients and continue to look for ways to improve our service. We advise each individual client and try to find the perfect solution for his or her needs. How do we find the perfect solution?  We identify and screen lenders that best suit the needs of the client and ensure their ability to close on the terms provided.

Here are some of the loan types Select Commercial can help you with:

  • Office Building Loans – multi-tenant or single tenant, owner occupied or investor
  • Retail Building Loans – shopping centers, retail strip centers, or individual stores
  • Industrial Property Loans – warehouses, distribution centers, manufacturing facilities
  • Bridge Loans – short term loans to overcome short term problems
  • Single/Special Use Loans – motels, gas stations, restaurants, etc.
  • Apartment Building Loans – garden apartments, high-rises, cooperatives, etc.
  • Investment Property Loans – any income producing property

About Our President, Stephen A. Sobin

Stephen A. Sobin is the President and Founder of Select Commercial Funding LLC.  Mr. Sobin has over 30 years’ experience in mortgage lending.  Mr. Sobin is the past president of the mortgage lending division of a federally chartered Federal Savings Bank. He founded Select Commercial to provide commercial mortgage advisory services to his clients nationwide.

Commercial Mortgage Financing: Commercial Mortgage Broker or Your Local Bank?

One of the most common questions we hear is the following: “Why should I use a commercial mortgage broker like Select Commercial? Why shouldn’t I just go to my local bank?” There are many reasons why using a reputable commercial mortgage broker is preferable to limiting your commercial mortgage request to just your local bank. Here are some of the reasons why:

  • Rate: Many borrowers focus only on the interest rate when shopping for a commercial mortgage loan. A commercial mortgage broker should be able to negotiate great rates for you. In addition, they will be able to negotiate many other terms with which you may not be familiar or experienced.
  • Term: Most banks are only able to offer short term loans of 3-5 years at a fixed rate. After the initial fixed rate the loan will either mature or adjust to a new rate. This does not provide long-term interest rate stability for a borrower. Commercial mortgage brokers are often able to obtain 10-15 year fixed rates.
  • Amortization: Many local banks will limit their amortization period to 20 years. This creates a higher payment and lower cash flow for the borrower. Commercial mortgage brokers are often able to secure 25 year amortization periods on commercial mortgages and 30 year amortization periods on apartment mortgages.
  • Guarantees: All banks will require personal guarantees from the principals. Since commercial mortgage brokers represent many lending sources, they are often able to secure long-term fixed rate loans on a non-recourse basis.
  • Fees and closing costs: A commercial mortgage broker is very experienced in commercial mortgage transactions and will work to negotiate the lowest fees available. Good commercial mortgage brokers have wholesale or correspondent relationships with their lenders which allow them to keep fees to a minimum.
  • Experience: A commercial mortgage broker knows what each individual lender will require and which lender is most likely to approve a given loan request. This experience can save a potential borrower weeks and months of shopping for the best loan available in the market. Commercial mortgage brokers often handle much of the processing and underwriting functions which allow lenders to make quick and successful credit decisions.
  • Prepayment penalties: One of the hidden terms that many borrowers are not familiar with are the various repayment penalty options. These penalties often become very expensive if a borrower chooses to pay off his loan early. A commercial mortgage broker will help you negotiate the lowest prepayment penalties available.
  • Certainty of execution: Very often, a lender will issue preapproval terms to a borrower and then change terms prior to closing. A good commercial mortgage broker will work to ensure that the loan will close on the originally quoted terms.
  • Closing conditions: We often see loan requests that were preapproved by lenders and were not able to close because the borrower was unable to meet the conditions necessary for closing. A commercial mortgage broker will prevent these situations from occurring by understanding the transaction upfront and making sure that the conditions precedent to closing are obtainable. This alone saves headaches and many weeks of wasted time.
  • Loan amounts and LTV ratio: Because a commercial mortgage broker is an expert at properly packaging the loan request, they are often able to secure loan approvals with a higher offered loan amount and higher LTV than many borrowers are able to obtain on their own.
  • Negotiation experience: Many commercial mortgage borrowers negotiate commercial mortgage requests once every five years or so. They are often inexperienced at negotiating and dealing with lenders who negotiate loans every day. A commercial mortgage broker negotiates loan terms for a living, speaks the lender’s language, and is not intimidated by the process. Most borrowers are well served by allowing a professional to handle this transaction for them.

The President of Select Commercial, Stephen A. Sobin has over 30 years’ experience representing mortgage borrowers in their search for optimal financing solutions to their commercial borrowing requests. As the former President of mortgage lending division of a Federal Savings Bank, Stephen is well equipped to put his experience to work for you. If you would like to discuss a transaction with Stephen, please call him at 877 – 548 – 9454 or click here to complete a free loan quote form.