Apartment Loans are evaluated by a commercial lender in a number of different ways.  The two most important factors are the Loan-to-Value (LTV) and Debt Service Ratio (DSR) or Debt Service Coverage Ratio (DSCR).  These factors provide the lender with a level of safety in both equity and cash flow to manage the property should the borrower default on the mortgage.   Here are the factors that commercial lenders look at in determining the interest rate and conditions in granting an apartment loan.      Apartments and Apartment-Type �� Includes Low-Rise Garden Apartments, Mid-Rise Apartments, Military Housing, Townhouse Style, Co-op, Other Apartments �� Max. LTV - 80% �� Max. Amortization – 25 to 30 years �� Min. DSCR - 1.20x to 1.25x �� Min. Vacancy Reserve – the greater of actual or market vacancy; typically 3% to 10% �� Min. Replacement Reserves - the greater of actual or $225 to $350 per unit �� Min. Occupancy requirement – typically 85% �� Capitalization Rate – use market-driven capitalization rate; typically 7.5% to 10%   Student / Military Housing �� Max. LTV - 75% to 80% �� Max. Amortization – 25 years �� Min. DSCR - 1.25x to 1.30x �� Min. Vacancy Reserve – the greater of actual or market vacancy; typically 5% to 10% �� Min. Replacement Reserves - the greater of actual or $300 to $400 per unit �� Min. Occupancy requirement – typically 85% �� Student leases must require 12 month terms, parental guarantee �� Capitalization Rate – use market-driven capitalization rate; typically 7.5% to 10%   Market and Location �� Adequate linkage factors to retail services (including food, drugstore and community shopping) within 3-mile radius �� Adequate community services (such as fire, police, school and health facilities) within a 10-mile radius �� Scrutinize properties located in economically depressed, seasonal or resort-oriented areas. �� Corporate rental leases in excess of 10% of all units must be justified with long-term corporate accounts, stable history, higher reserve amounts (due to    furniture rentals), and higher spreads. �� Lease expirations should not indicate 25% or greater of all units in any given month, 50% for any three-month period, and 75% for any six-month period.   General underwriting guidelines include   Property Condition and Characteristics �� Properties with over three stories should have elevator service. Exceptions for older buildings where “walkups” are common in the market and experiencing strong demand. �� Property should have an appropriate mix of units to remain competitive in its market. �� Property should have a minimum parking ratio for suburban markets of 1.0 spaces for studio/efficiency and 1 bedroom units, 1.5 spaces for 2 bedroom units and 2.0 spaces for 3 or more bedroom units. Urban areas require parking to be adequate for the property to successfully compete. �� Properties should exhibit acceptable aesthetic qualities to be competitive with market standards; inferior physical characteristics are less desirable and may require a higher interest rate spread and higher underwriting constraints and reserves.   Normalizing Income and Expense Considerations �� Calculate Potential Gross Income (PGI) by adding the annual In-Place revenue generated by the current tenants plus the annual income generated from vacant space at market rent. Then apply the appropriate Vacancy Reserve to calculate Effective Gross Income. �� Income is typically calculated based on the actual revenue collected during the most recent 12-month period or per a current rent roll certified by the borrower. �� Adjustments to the income may include: o Mark to Market any rents from leases that are written above or below market rent (e.g., if Tenant A pays $500/Unit/Month and market rent – for comparable properties - is $350/Unit/Month, consider adjusting the rental income to $350/Unit/Month). o Consider subtracting any rental income from any tenant who is 60 days or more delinquent. o Storage/Parking/Laundry/Other Income - The income should be consistent with the historical income generated by the property for the past two years.   �� Vacancy and Collection Loss - Calculate a vacancy and collection loss factor based on a review of the following: o Apply the greater of the current market or economic vacancy o Analyze actual collection losses at the property over the past two years o Analyze the creditworthiness of the existing tenant base o Analyze the number of short-term or month-to-month leases o Analyze any other factors which may affect the collectibility of future rents �� Historical Review – Analyze all income and expense trends; explain any significant increase or decrease over 5% per annum. �� Adjustments to the expenses may include: o Increasing, decreasing or normalizing the underwritten expenses based upon historical expense trends. o Apply the greater of the actual or market Management Fee whether the property is professionally managed or owner-managed; typically 3% to 5%. o Consider applying and Expense Growth Rate of 3% to represent escalation of expenses for the next 12 months. o Remove any insurance expense that is not specifically related to the real estate. o Remove any non-recurring expenses from the underwritten expenses. o Reallocate any capital expenses from Repairs & Maintenance to Capital Expenditures.