One of the primary financial constraints lenders use to evaluate a company prior to loaning money for a real estate purchase is known as Debt Service Coverage Ratio (DSCR). This ratio is used to determine if the company is bringing in more than money than the rent of the property, typically this is around 125% more than the rent. Our video this week gave a great example of how to calculate what this would mean.

Simple math example is that if you're coming in and your mortgage payment is $1,000 a month, then what the lender would love to see is that you're actually bringing in more than 125% of that, which is $1,250 a month in rents (Suite, 2020).

When the business is bringing more than the mortgage payment through sales and rent the lender is more comfortable granting the loan to the business as they know if a portion of the building were to be vacant for some time the company could still afford their mortgage.

The next financial constraint the lender looks at before granting a loan is considered the loan-to-value (LTV). This means, that "most lenders will not loan more money than the value of the property securing the loan, unless the borrower also pledges additional collateral such as CDs or other property" (Editor, D.S.P.D.E.J., 2019, p 135).

The lender will request a down payment of collateral or personal money from 33% to 50% from the company. Before the lender can give the specific percentage of down payment due from the company the lender must know the value of the property. After the collateral or money is provided the lender will then grant the loan to the business. By having the collateral given towards the loan the lender is more confident that should the business be forced into foreclosure they are able to pay off the remainder of the loan. LTV also ensures the lender that the business is committed to the property as they have collateral alongside the loan.