LOS ANGELES, CALIFORNIA: A general overall view of the downtown Los Angeles skyline in Los Angeles, California. (Photo by Kirby Lee/Getty Images)
Getty Images
Securing financing is one of the most important steps in a commercial real estate transaction. You may have found a strong opportunity and negotiated favorable terms. Keep in mind that before funding your acquisition, lenders will carry out their own version of due diligence. Their primary goal is to protect their downside. If you understand how they evaluate risk, you can position yourself to move through the process more efficiently and with fewer surprises.
Keep these factors in mind as you prepare to approach a lender.
They Evaluate the Strength of the Sponsor
Your track record will play a significant role in a lending decision. Lenders may check if you have successfully executed similar deals and if you have experience operating the asset type. If you are a first-time investor, they’ll want to know whether you are partnering with someone who brings credibility and experience to the transaction.
A lender will also want assurance that the business plan is realistic and that you have the capacity to execute it. If the property encounters challenges, they will look to your experience and financial strength as part of their protection. Be prepared to provide detailed information about prior transactions, operating results, and your partners.
They Focus on Cash Flow Stability
Commercial lenders care deeply about predictable income. Even if your long-term strategy involves repositioning or redevelopment, the lender will evaluate the property based on its current cash flow. They will likely review rent rolls, tenant leases, historical operating statements, and expense records.
Debt service coverage ratio (DSCR) is a key metric they’ll typically analyze. This measures whether the property generates enough income to comfortably cover loan payments. If coverage is tight, the lender may reduce leverage or require additional equity.
They Examine the Market and Regulatory Environment
In uncertain markets, lenders tend to underwrite conservatively. Rising interest rates and economic shifts often lead to lower loan-to-value ratios and stricter underwriting standards.
They will also consider local regulations that could impact rent growth, development potential, or operating costs. In heavily regulated markets, lenders may scrutinize Certificates of Occupancy, rent stabilization histories, zoning compliance, and building violations.
They Review the Capital Structure
Lenders will be interested in the layers of your capital stack. They will likely look at who is contributing equity and how much is being invested. They will want to know if there are preferred equity holders or mezzanine lenders involved.
Most lenders prefer to see meaningful sponsor equity in the deal. When you have “skin in the game,” lenders usually see this as favorable.
They Assess the Physical Condition of the Property
Beyond financial performance, lenders will likely examine the physical asset. They will typically review engineering reports, environmental assessments, and property condition inspections. They will also require a Phase I environmental report.
Deferred maintenance or structural issues may result in loan delays or requirements for repairs. In some cases, lenders will reduce loan proceeds to account for necessary improvements.
Providing complete and organized documentation early can streamline this review.
Protecting Your Financing
Understanding what lenders look for allows you to approach financing strategically. If you present a clear business plan, demonstrate relevant experience, provide organized documentation, and structure the deal conservatively, the underwriting process could go more smoothly.
Ultimately, securing financing involves demonstrating that you understand risk as well as opportunity. Lenders are evaluating whether the property can withstand market shifts, regulatory changes, and operational challenges. When you anticipate their concerns and address them early, you position yourself as a disciplined and credible borrower.
Commercial real estate rewards investors who think ahead. By understanding what lenders are looking for before they fund your deal, you place yourself in a stronger position. After closing one transaction, you can go on to build a portfolio with the right financial partners over time.