A common surprise for first-time commercial borrowers: you send the bank a projection for your business with a mortgage payment in the expenses, and the bank sends it back. Not because the numbers are wrong, but because the structure is.
Most owner-occupied commercial deals close with two entities. A real estate entity owns the property and carries the loan. An operating company runs the business inside the building and pays rent to the real estate entity. The bank wants to see a separate projection for each, tied together by that rent.
Why banks insist on the split
Liability is the obvious reason: keeping the property outside the operating business protects it from the business’s risks. But the underwriting reason is just as important. The bank sizes its loan against the real estate entity, and that entity’s income is the rent. The operating company’s projection proves the rent is affordable. Two questions, two projections: can the building service the debt, and can the business afford the building?
A single projection with a mortgage line answers neither question cleanly, which is why files built that way get sent back.
How the rent number gets set, and how it should not
The right order is the reverse. Start from market rent for comparable space, confirm the operating projection supports it, then check the coverage it produces. If market-grounded rent covers the debt with a healthy margin, the deal works. The final lease terms are set by you and your attorney, and the executed lease is what the bank ultimately relies on.
What the finished package looks like
A complete two-entity package shows the operating company’s revenue and expenses with rent as a line item, the real estate entity collecting that rent and paying the debt, and a coverage ratio computed on each side, usually with a stress test showing the deal still covers if rates rise. The two projections must reconcile: the same rent, the same term, the same assumptions.
Our platform builds this pair automatically from the market study and the verified file, with the rent grounded in market levels rather than reverse-engineered from a target ratio. If you have been asked by a bank for a two-entity proforma and are not sure where to start, that is precisely the problem we built this to solve.