Commercial Mortgages - NOI - Net Operating Income

In this episode of the Close More Deals Podcast, host Scott Dillingham breaks down one of the most critical calculations in commercial real estate financing: net operating income (NOI). Whether your clients are purchasing a business, acquiring commercial property, or investing in real estate, understanding NOI can mean the difference between loan approval and rejection. Scott explains how this fundamental metric helps lenders determine maximum loan amounts and why working with a specialized commercial mortgage team can dramatically increase approval success rates.

Net operating income is calculated by taking a property or business's total income and subtracting all operating expenses. This straightforward formula becomes the foundation for determining debt service coverage ratio (DSCR), which most commercial lenders require to be at least 1.2 or 20% surplus over expenses. Scott walks through exactly how lenders use this coverage ratio to calculate the maximum loan amount a borrower can qualify for when purchasing a business or commercial building.

One of the most valuable insights Scott shares involves how amortization periods dramatically impact loan sizing. Using a real client example involving a trucking facility purchase approaching four million dollars, Scott demonstrates how one bank offering only a 15-year amortization could not provide enough funding for the deal to work. However, another lender offering a 25-year amortization on the same property with the same DSCR requirement resulted in a significantly larger loan amount that made the acquisition possible. This real-world example highlights why comparing multiple lenders is essential for commercial transactions.

Scott emphasizes the importance of pre-qualifying deals before investing significant time in offers and showings. For realtors working with commercial buyers, having clients consult with a dedicated commercial lending team first can save countless hours and dramatically improve close rates. The LendCity commercial team offers complimentary phone consultations where they run NOI calculations in real-time, giving buyers immediate clarity on maximum loan amounts for specific properties or businesses.

Beyond the numbers, Scott addresses the emotional component of commercial purchases. Some buyers become attached to properties that simply do not make financial sense based on their NOI analysis. The debt coverage ratio requirement acts as a protective filter, preventing buyers from acquiring underperforming businesses or properties that could become financial burdens. This disciplined approach to commercial lending ultimately protects both the borrower and the lender.

For real estate professionals, understanding how commercial lenders evaluate deals provides a significant competitive advantage. By incorporating NOI analysis into your client consultation process, you position yourself as a knowledgeable advisor who helps clients make informed investment decisions rather than emotional purchases that may not qualify for financing.

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