Financing feasibility before a commercial purchase offer

Before committing to a purchase price, prepare a financing brief that distinguishes a plausible loan from an executable cash plan. The brief should state what is known, what is assumed, what evidence could change proceeds and how much equity remains available after closing. A lender conversation is most useful when the request can be tested against those facts.

The OCC commercial real estate handbook’s acquisition and underwriting discussion considers repayment capacity, collateral and borrower support. The pre-offer workflow below is original analysis. It does not establish lender approval or replace counsel’s review of an offer or purchase contract.

Define the request in cash terms

Assume an investor is considering an $8 million purchase. Accepted annual cash flow is provisionally $500,000. Hypothetical lending assumptions are 1.25 DSCR, an 8% annual debt constant and 65% of purchase price for the collateral limit. Closing costs are 3% of price, immediate repairs $300,000 and required reserves $100,000.

Cash-flow capacity is $5 million. The price-based collateral limit is $5.2 million, so the modeled gross loan is $5 million. Total uses are $8 million plus $240,000 costs, $300,000 repairs and $100,000 reserves, or $8.64 million. Required equity is $3.64 million.

If the investor has $3.3 million available, the request has a $340,000 gap before any additional contingency. The financing brief should state that gap directly. Calling the deal “65% financed” would obscure the binding cash-flow limit and the uses outside the price.

Reverse-solve price without freezing the wrong loan amount

A quick calculation might hold the $5 million loan constant and solve for a lower price: ($5 million + $3.3 million − $400,000 repairs and reserves) ÷ 1.03 = approximately $7,669,902.91. But at that lower price, 65% collateral capacity is only $4,985,436.89, below $5 million. The first calculation has violated its own leverage assumption.

When the collateral limit binds, required equity is 35% of price plus 3% closing costs plus $400,000. Setting that equal to $3.3 million gives a price of $7,631,578.95 and a loan of $4,960,526.32. The cash-flow test still passes because that loan is below $5 million.

This is an illustrative financing boundary, not a recommended offer or property valuation. It shows why price, financing and equity must be solved together rather than changing one input while leaving dependent outputs fixed.

Attach an evidence status to each major assumption

A useful brief names the document, its date and the party expected to resolve the question. Do not treat an agent’s marketing summary as lender-accepted underwriting evidence.

Separate preliminary feedback from a commitment

Ask prospective lenders to identify unresolved credit issues, intended cash-flow treatment, valuation basis, required sponsor evidence and anticipated decision steps. Record whether the response is an informal discussion, written indication, application acceptance or commitment, and what conditions attach to it.

A favorable response based on incomplete seller information should not be described as approval. If the lender has not reviewed tenant concentration, environmental history or ownership structure, keep those items open. The objective is to discover the uncertainties before contract deadlines make them expensive.

Use a limited downside case. If accepted cash flow falls from $500,000 to $450,000, modeled DSCR capacity falls from $5 million to $4.5 million. At the original $8 million price, equity rises to $4.14 million, $840,000 above available cash. That sensitivity identifies the importance of validating income early.

Translate the brief into transaction decisions

The investor and counsel can use the financing evidence to evaluate price, timing, diligence access, deposit exposure and any proposed financing conditions. This article does not prescribe contract language or assume a right to cancel. The contract’s actual terms determine those rights.

Before an offer is finalized, identify the decision owner for each unresolved item and the latest date it can be resolved without relying on an unapproved extension. Preserve a fallback that is financially supported rather than merely named: additional cash, a different structure or a revised transaction must have evidence of feasibility.

The completed pre-offer brief should contain the request, sources and uses, binding constraint, available equity, downside gap and evidence plan. It gives the investor a concrete basis for deciding whether the proposed purchase can be financed on acceptable terms before the price and deadlines become commitments.