Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders is a vital resource about the critical loan decision-making processes. Whether you need a quick answer or a full refresher course, the book includes all of the relevant formulas, worksheets, and guidelines you need to properly evaluate a loan.
You’ll go beyond the basics to get a thorough look at the quantitative and qualitative aspects of the loan analysis process. In addition to the numbers, you’ll also be exposed to the financial detective work that marks an exhaustive analysis. Designed for immediate, practical application, this manual supports both on-the-job training and real life analysis. This book is ideal for bankers of any degree of experience and institutions of any size. Commercial Loan Analysis takes a comprehensive look at a fundamental part of every lending operation.
Two of Ken Pirok's books, Commercial Loan Analysis and Managing Credit Department Functions are recommended reading for the Certified Lender Business Banker/CLBB designation. Make them part of your safe, sound, and strong lending practice.
Very often, the building where a business operates is owned separately from the business, itself. In many cases, the owner of the company will own the building personally or through a separate LLC and lease it to the business.
When performing a debt service coverage analysis, such rent paid to company-owners should usually be added back to cash available, and the debt service for the building should also be included as debt service for the company. The cash flows of the company are effectively paying the debt service on the property, regardless of the paper trail, so, to perform a proper debt service coverage analysis, you include the debt service on the mortgage in the denominator. At the same time, the rent is available to service this debt. (Remember, if you include one of either rent in the numerator or mortgage debt service in the denominator, then you must include the other.)
Sometimes it is only appropriate to add back a portion of the total rent:
Example 1: If the total rent is comprised of rents for various properties, you will only add back the rent portion for the properties also owned by the owner of the company since only that portion is included as debt service.
Example 2: The owner may effectively be distributing income to himself from the company through excessive rent. If the rent paid by the company is significantly more than the debt service for the given property, then it may be appropriate to add back only the amount of rent necessary for debt service for the property.
Example 3: If a portion of the rent includes cash expenses such as taxes or insurance, then the amounts of each of these expenses should not be added back. Do not add back rent unless you obtain a financial statement or lease or verify that the rent added back does not include such expenses.
Note also that you should add back rent paid to owners and consider the corresponding debt service even if the loan is from a different bank. You also add back rent when the company had been renting and is now buying a facility.