Tax Return Analysis For Improved Loan Closings!

So where do you begin?

Tax return analysis is the key to getting any of your commercial loans financed.  When reviewing a 1040, 1120, or 1065 it is very important that you understand the information that is being presented.  By understanding cash flow you will help sell your deal to an underwriter who will appreciate your due diligence in the loan presentation.  Instead of just packing a file and submitting it to your lender and hoping that the file will get approved you need to make sure that the loan fits within the box.  If you do you will gain a reputation as being a solid loan originator and it will open doors for you with lenders throughout the country.  The alternative if you do not do your homework is you will gain a reputation of being a file pusher and once you submit your loan request it will automatically be put into the declination folder and you do not want that. Only work on good loans and you will earn a very comfortable living at “selling money.”

All Tax Returns Are Basically The Same

Remember all tax returns are basically the same.  A 1040 is for a sole proprietor and should include a Schedule C if self-employed, an 1120 is for a C-Corp, and a 1065 is for a LLC or partnership. All of the income, expenses, personal debt will help you determine the Personal Net Cash Flow (PNCF) of the individual borrower. Once you know the (PCNF) and you determine Business Debts (line of credit, other items on the balance sheet) that are being paid by borrower and you factor in the new loan that he/she is applying for you can determine the individuals DCR for their loan request. And the DCR or debt service ratio will help you figure out if your client can get financed. Let me give you an example on how to figure this out.

Typical Loan Scenario We See Every Day!

You have a borrower that wants to buy an office building for $540,000.  He has 20% for his down payment and you ask him for three years of his personal tax returns. You look at their tax return and you notice that their income continues to rise every year and that is a good thing.  If your borrowers tax return income declines year after year then you probably won’t get the file financed through conventional or SBA financing. You are better off trying for a private hard money loan.  Anyway you review the information and determine the following:

You add all the figures and his total income if $175,300 for the year. You then review his deductions and determine the following:

• $30,000 in living expenses
• $22,498 in federal income tax
• $1219 in state income tax
• $3850 in property/ other taxes.

You add all the deductions and the figure is $57,657. Now you look at his personal debts and they are:

• $12,800 mortgage payments
• $24,600 investment mortgage

You calculate the information and his personal debts are $37,400.

So now you take his total income ($175,330) subtract deductions($57,567) subtract personal debts($37,400) and calculate his Real Personal Net Cash Flow ($80,353).  Wow a big difference from $175,330! You are almost done.

From the borrowers balance sheet and/or REO debt schedule you notice that he has $17,400 in debt that he has to make monthly payments on.  So now you take your financial calculator and determine that you can offer your client a $450,000 mortgage at 6% with a 30 year amortization and you calculate that the yearly mortgage payment is $32,375.  Now you add the $17,400 and $32,375 and you calculate your borrowers total debt service which is $49,775.

With that information you now divide Personal Net Cash Flow ($80,363) by Total Debt Service ($49,775) and you calculate that your clients DCR is 1.62. You look at your lender matrix and realize that for a owner occupied property your property is required to have a debt service coverage ratio of 1.25 and now by demonstrating that your client’s personal DCR is at 1.62 you minimize the investors risk and guess what you can get your client financed.  Even if this were a Non Owner Occupied property with a DSCR requirement of 1.25 you are still showing your lender that the client has more than enough cash flow to pay for the property if something goes wrong and this always helps in selling your deal.

Now please understand we have over 15 years of commercial lending experience so if you are interested in have access to the information that we have send us an email at info@wisemancapitalgroup.com and for $99 we will provide you the forms necessary so you can analyze tax returns like a commercial pro. We accept PayPal for all orders.