Financial Analysis for Commercial Properties: Beyond Personal Credit

If you're a residential mortgage broker looking to break into commercial real estate lending, you're about to experience one of the biggest mindset shifts in your career: forgetting almost everything you know about qualifying borrowers.

In residential lending, you're used to scrutinizing personal credit scores, checking debt-to-income ratios, and verifying employment history. But in commercial real estate? Those factors usually take a backseat to what really matters — the property itself and its ability to generate income.

Property Over Person: The Big Mindset Shift

In residential lending, the property is essentially collateral for a loan that's approved based on the borrower's ability to repay. In commercial lending, this relationship flips. The property isn't just collateral — it's the primary source of repayment.

Think about it: When someone buys a home, they typically pay the mortgage from their employment income. But when someone buys an apartment building or office complex, the property itself generates the cash that pays the mortgage through rental income.

This fundamental difference changes everything about how deals are evaluated. Your commercial lending success won't depend on finding borrowers with 750+ credit scores and solid W-2 income. Instead, it's about finding properties with strong income potential and stable cash flow.

Don't get me wrong — borrower qualifications still matter (for most types of loans, anyway). Commercial lenders will look at the borrower's experience managing similar properties and their overall financial strength. But these factors support the property analysis rather than driving it.

Key Metrics You Need to Master

Once you understand this shift in focus, you need to learn the metrics that matter in commercial lending. Three of the most important are DSCR, LTV, and capitalization rates.

Debt Service Coverage Ratio (DSCR)

This might be the single most important metric in commercial real estate lending. DSCR measures whether a property generates enough income to cover its debt payments, and by how much.

The formula is simple: Net Operating Income (NOI) divided by Annual Debt Service. (You can also use this helpful calculator to run the numbers in seconds.)

Let's get an example. If a property has an NOI of $100,000 and the annual loan payments would be $80,000, the DSCR is 1.25x. This means the property generates 25% more income than needed to make the loan payments.

Most commercial lenders want to see a DSCR of at least 1.25x, though this will vary by property type and market conditions. Some might go as low as 1.15x for very strong borrowers (or when using a HUD multifamily loan), while others might require 1.30x or higher for riskier properties.

Loan-to-Value Ratio (LTV)

You're already familiar with LTV from residential lending, but commercial LTVs tend to be more conservative. While residential loans might go up to 95% or even 97% LTV, commercial loans typically max out at 65% to 80% depending on the property type.

Multifamily properties often get the highest LTVs (up to 80% with some lenders), while office, retail, and industrial might be capped at 65% or 75%. Special-purpose properties like hotels or churches might be limited even further to 60% to 65% LTV.

The lower LTVs reflect the higher risk and volatility in commercial real estate. They also mean your borrowers need to come up with larger down payments — typically 20% to 35% of the purchase price, compared to the 3% to 5% that's common in residential.

Capitalization Rates

"Cap rates" are something you rarely encounter in residential lending but use constantly in commercial. The cap rate is the rate of return expected on a real estate investment property based on the income it's expected to generate.

The formula is: Net Operating Income ÷ Property Value × 100%. We've got a calculator you can use for this one, too.

As an example, if a property generates $200,000 in NOI and is valued at $2.5 million, the cap rate is 8%.

Cap rates vary widely by property type, location, and market conditions. As of early 2025, typical cap rates include:

• Multifamily: 4% to 6%
• Office: 5% to 8%
• Retail: 6% to 10%
• Industrial: 4% to 7%

Higher cap rates generally indicate higher perceived risk (and thus higher potential returns). Lower cap rates suggest a safer investment but with lower returns.

Cap rates are useful for both valuation and comparing investment opportunities. They're also a key factor in how commercial lenders evaluate deals.

Reading Commercial Property Financials

To calculate the metrics we just discussed, you need to understand commercial property financial statements. The most important concept here is Net Operating Income (NOI).

NOI is calculated by taking the property's gross potential income, subtracting vacancy and credit losses, and then subtracting operating expenses. Operating expenses include things like property management, maintenance, utilities, insurance, and property taxes.

Notably, NOI does not include debt service (loan payments), capital expenditures, or depreciation. It's meant to show the property's inherent earning power, regardless of how it's financed.

When reviewing property financials, watch for these red flags:

• Unusually low operating expenses (often understated to make NOI look higher)
• Vacancy rates well below market averages
• One-time income sources included in recurring revenue
• Deferred maintenance not accounted for in expenses
• Major tenant leases expiring soon after the loan closes

Be skeptical of "pro forma" numbers that show what the property could earn rather than what it actually does earn. While pro forma projections have their place, most commercial lenders will base their decisions on actual historical performance.

Using Janover Pro to connect with experienced commercial lenders can help you learn to spot these red flags more effectively, as they can share insights on what they look for in property financials.

Cash Flow Analysis: Thinking Like a Commercial Lender

Beyond the basic metrics, commercial lenders think in terms of cash flow — both current and projected. This means looking at how the property's income and expenses might change over the loan term.

For example, when are major tenant leases set to expire? Are there scheduled rent increases built into existing leases? Are property taxes likely to increase significantly? Is the property fully stabilized or still in lease-up?

Commercial lenders also want to see how the property would perform under stress. What if vacancy increases by 5%? What if operating expenses rise faster than rents? What if a major tenant doesn't renew?

This kind of analysis helps lenders determine the property's risk profile and how much cushion they need in the DSCR. A property with long-term leases to creditworthy tenants might get approved with a lower DSCR than one with short-term leases or tenants in volatile industries.

Valuation Approaches for Commercial Properties

Determining the value of commercial properties is also different from residential. While residential appraisals focus heavily on comparable sales, commercial valuation often emphasizes income.

Comparable Sales Method

This approach is similar to residential appraisals, comparing the subject property to recent sales of similar properties. It's most useful for property types with plenty of comparable sales data, such as apartment buildings or standard retail spaces.

However, because commercial properties can vary so widely, finding truly comparable sales can be challenging. That's why other methods are often given more weight.

Income Capitalization Method

This approach values the property based on its income potential, using the formula:
Property Value = Net Operating Income ÷ Capitalization Rate

For example, if a property generates $300,000 in NOI and the appropriate cap rate is 6%, the indicated value would be $5 million ($300,000 ÷ 0.06).

This method is widely used for income-producing properties like apartments, offices, and retail centers.

Discounted Cash Flow (DCF) Analysis

This more sophisticated approach estimates the present value of future cash flows, accounting for changes in income, expenses, and property value over time. It's particularly useful for properties with significant expected changes, such as development projects or buildings needing major renovation.

DCF analysis requires projecting cash flows over several years and applying an appropriate discount rate to account for the time value of money and risk.

Most commercial property valuations use a combination of these methods, with the income approach typically getting the most weight for stabilized, income-producing properties.

Putting It All Together: From Analysis to Deal

As you transition to commercial lending, learning these analytical skills will be one of your biggest challenges — but also your biggest opportunity to add value.

Residential borrowers mostly need help finding the best rate and navigating the application process. Commercial borrowers often need help structuring deals that make financial sense and presenting them effectively to lenders.

Resources like the Mortgage Bankers Association (MBA) and the Commercial Real Estate Finance Council (CREFC) offer courses and resources specifically for brokers making this transition. Online courses from institutions like NYU's School of Professional Studies also provide valuable training in commercial real estate finance.

Technology platforms like Janover Pro can also accelerate your learning curve by helping you find lenders for specific deal types and seeing what terms they're offering in real time. This gives you practical insights into how different lenders evaluate deals and what metrics they prioritize.

Remember, this shift from borrower-focused to property-focused analysis doesn't happen overnight. Give yourself time to learn, leverage the resources available to you, and don't be afraid to ask questions. The commercial lenders you connect with through Janover Pro can be valuable sources of knowledge as you build your commercial lending expertise.

With practice, you'll develop the analytical skills that set successful commercial mortgage brokers apart and open the door to larger, more complex, and ultimately more profitable deals.