The 4 C's.

Commercial Real Estate Loans

Five years ago, I wrote this article for  I am rehashing it today because it still holds true. Commercial lending basics remain the same today as yesterday.  It is amazing to me, how so many people understand the requirements for residential mortgage loans. Yet, as many people, if not more, do not have the same understanding of commercial mortgage lending. The reasons are that it is new to them and it is usually not explained by the lenders to their customers. Therefore, people are not usually so comfortable with the process and do not know what to expect.

Below is a general guideline for small and medium-sized businesses looking for commercial, owner-occupied real estate financing. Not only does this policy help you get commercial mortgages, but it also provides you with a platform to analyze your business.

A lender analyzes a combination or form of the 4 “C” of commercial lending to determine if and how much it is willing to lend for a particular project.

•                    COLLATERAL

•                    CASH FLOW

•                    CREDIT/FINANCIAL ANALYSIS

•                    CHARACTER/MANAGEMENT


By evaluating each of these areas, a lender will determine at what level each “C” is satisfied compared to its requirements.

Our discussion and description of these areas is intended to provide a general overview and is for informational purposes only. Each lender is unique, and although most commercial mortgage lenders value projects using the main criteria described herein, a lender may organize criteria other than those described and have satisfaction requirements other than those described herein. Also, various lenders determine their importance for a particular area to determine their interest in a financing project. Different lenders can also allow for strength in one area to fully or partially offset one shortage in another. In addition to the 4 “C’s” of commercial lending, a lender may also include other factors in their decision-making processes, such as: For example, his return on a project, industry-specific requirements, or the industry of a company.




COLLATERAL is defined as an asset used to provide collateral security for a lender. Collateral may be seized and sold by a lender to assist repayment of a loan in the event of default by a borrower. In commercial mortgage credit, collateral typically consists of the commercial real estate and improvements, including land, buildings and furnishings that the company buys and refinances. Depending on the project and the type of collateral offered, a lender is willing to grant a maximum loan of 50% to 90% of the value of the security for a mortgage loan (50% to 90% loanable)).

The value of collateral for a loan is a key component in determining how much money a company can borrow. In the case of a new purchase of real estate, the value of the collateral is usually determined using the lower of cost or the estimated value. However, if you already own a property that is being funded, a lender can use the estimated value of the property to determine the maximum amount of a loan. A lender’s willingness to do so usually depends on your holding period and is permitted with a holding of at least one to five years. Different lenders will have their assessment requirements. Before you hire an appraiser, you should always contact your designated lender to ensure that his appraisal requirements are met.

In addition to their value, real estate securities are divided into two main categories:

  1. Multipurpose: A wide variety of companies can use this type of collateral without significant changes (eg office buildings, warehouses, etc.).
  2. Special Purpose: This is defined as property that can only be used by one or a few companies without major changes being made (eg petrol stations, car washes, hotels, etc.).


The categorization of collateral into one of the above ranges usually determines the maximum lending volume of a lender. The more specialized the property, the lower the maximum credit of a lender.


In addition to the above factors, there are other factors that may already be included in an estimate or security categorization that a lender can use to determine the maximum allowable credit value:


  • Location
  • Age
  • Condition
  • Type of Construction
  • Alternate Uses
  • Visual Inspection
  • Potential for or Presence of Environmental Contamination
  • Easements


At a minimum, each lender will typically use their unique combination of most or all of the areas discussed here to determine the maximum allowable loan value for your project.




CASH FLOW ANALYSIS is used by lenders to assess a company’s ability to repay debt at a comfortable margin. There are two main types of cash flow that a lender can analyze to determine this number, and a lender can use one or both ways to perform his analysis.


The first type is traditional cash flow. Traditional cash flow is calculated using the following formula from the annual income statement:


Earnings before taxes

 + Interest expense

 + Depreciation expense

 + Amortization expense

 + Other non-cash expense items

 + Any non-recurring expenses   

 = Traditional Cash Flow


An example of a one-time expense would be a rental payment if the business were moved from rented space to a self-occupied space. The resulting traditional cash flow is also referred to as earnings before interest, taxes, depreciation and amortization (EBITDA) plus other non-cash expenses and any one-off expenses.


The other type of cash flow that is analyzed by lenders is the actual cash flow. The actual cash flow is determined using the cash flow statement of a company. The item is referred to as cash flow from operating activities. However, in many cases, a cash flow statement is not produced by a Small Business Controller or a CPA. For this reason, many lenders use a company’s balance sheet and profit and loss account to prepare a cash flow statement and calculate “cash flow from operating activities”. In addition to the normal profit and loss statements, which affect the cash flow, balance sheet items may affect the calculation. This may include items such as inventory changes, trade receivables, trade payables, and so on. As with traditional cash flows, certain adjustments are made to cash flow from operations, including repayment:


Find out about the other 2 C’s and more on commercial mortgage lending, read the full article on here.