Financing Fundamentals

These 5 tips help borrowers open the door to the right lender.

When selecting an investment, the aphorism “location, location, location” remains critical for today’s commercial real estate buyers and sellers. Likewise, when seeking a lender to finance deals in the current market, the mantra “execution, execution, execution” is more important than ever before. Though credit markets are thawing and lenders are loosening their purse strings, borrowers should take care to review these five fundamental principles to ensure their deals get funded. Multifamily lending is highlighted below, because of the demand in today’s market as well as the variety of properties within the sector. But, in general, the guidelines apply to evaluating lenders for any property type.

1. Ask the Right Questions

When searching for a lender, borrowers should ask several basic, yet important questions.

• How long has the lender been in business? Only consider lenders who have demonstrated the staying power to weather tough times as well as the ability to profit in boom years.

• What is the range of loan products the lender offers? Ensure the lender has a strong track record with the type of loan required.

• What is the lender’s reputation in the marketplace? The lender’s reputation should be sterling — and readily verifiable through multiple third-party sources and references.

• How much business does the lender do with an investor? Can it offer variety while remaining consistent with the execution? For example, in the multifamily sector, a direct lender and servicer for Fannie Mae that utilizes Freddie Mac and HUD/FHA programs expands the lender’s capacity to make loans tailored to the borrower’s needs. While Fannie Mae and HUD will lend on mobile home communities, Freddie Mac will not; neither Fannie Mae nor Freddie Mac makes loans for skilled nursing facilities or hospitals, but FHA does.

• Does the lender have the capacity to originate a large number of loans? Find out how deep the lender’s bench is and how much experience it has spanning various lending platforms.

• Is the lender well staffed? In busy markets, the lender’s bandwidth can be a make-or-break consideration.

• Is the lender up-to-date on what’s happening in the industry? Only consider lenders that are engaged in broader industry issues through active involvement in organizations such as Mortgage Bankers Association, and for multifamily lenders, the National Multi Housing Council, Federal Housing Council, and other industry associations. In addition, the lender should have strong relationships with third-party vendors.

2. Experience Matters

Once the pool of potential lenders has been narrowed, borrowers should dig deeper into a lender’s experience. For instance, the lender should be able to offer customers access to an established lending platform with proven execution. As mentioned, for multifamily lenders, this includes being a direct lender and servicer for Fannie Mae, Freddie Mac, and HUD/FHA programs. Being able to utilize programs such as Fannie Mae DUS and Freddie Mac Program Plus enables the lender to offer the most competitive financing available to property owners, investors, and developers. In addition, by understanding how to leverage FHA-insured mortgage programs, the lender will have access to an even broader range of multifamily and healthcare financing solutions for acquisitions, refinancing, substantial rehabs, and construction.

The lender also should be able to offer unique loan products that are tailored to borrowers’ specific needs. For example, borrowers seeking loans for unstabilized multifamily properties are restricted when it comes to traditional lending sources and the government sponsored enterprises, which focus on stabilized properties. Underperforming properties at which the occupancy level is below the minimum required by the GSEs have an urgent need for financing to make improvements or engage better management that will ultimately help to increase occupancy.

A bridge loan can give these types of borrowers time to work out the kinks of a venture that does not meet the qualification criteria for a permanent loan. This interim financing gives new buyers of underperforming properties the capital they need to make renovations and other improvements. Borrowers generally have 12 months to 24 months to pay back bridge loans, which gives them additional time to improve the property’s occupancy and cash flow in order to secure permanent financing. Another advantage of bridge financing is that it can be nonrecourse, which means that, except in certain circumstances, the lender cannot come after assets other than the property in the event of a default.

3. Creativity Counts

The lender should have a proven track record for creatively solving borrower and transaction issues. The lender should be able to offer loan programs with both fixed- and adjustable-rate loans as well as a number of more creative fixed/float combinations and interest-only executions. Early rate lock, small loans, and loans with flexible refinance and supplemental terms should also be available. In addition, a lender should have solid experience with specialty loan products including:

• structured transactions such as pools, credit facilities, and bulk delivery;

• forward commitments for permanent financing on both market rate and affordable housing properties; and

• affordable housing finance in the form of tax credit financing for multifamily affordable housing properties, including those that participate in the Low Income Housing Tax Credit program or are encumbered by a Housing Assistance Payment contract.

The lender also should be able to facilitate credit enhancement for fixed- or variable-rate tax-exempt housing bonds, a creative way to provide financing for new construction, refinance, acquisitions, or substantial rehabilitation of affordable housing properties.

Finally, the lender should have a strong track record in capital markets. This means the lender should be able to help clients develop and implement optimal capital structures for their real estate holdings using debt and equity across a range of asset classes.

4. Look for Speed + Execution

In commercial real estate lending, execution is a function of process, and each step must be executed properly to move on to the next. However, the speed at which the process moves is becoming a more critical factor in the transaction timeline.

For instance, in the loan application stage, success largely hinges on the speed at which the lender is able to gather the preliminary information. Speed is also essential during the underwriting stage to ensure that third-party reports are obtained on a timely basis and the mortgage credit items are collected.

At closing, when the lender deals directly with the borrower, execution takes on greater importance. It is critically important that this culminating experience with the borrower be a positive one. Therefore, proper communication between attorneys, swift resolution of any outstanding issues, and efficient preparation of documents required for closing are the keys to ensuring a thorough and satisfying closing.

5. Work With Deal Closers

When all is said and done, perhaps the most important factor is the lender’s ability to understand the assignment and the borrower’s needs. In today’s overheated marketplace, this aspect is often overlooked. Some lenders try to service loans as quickly as possible. For them, speed defines service. While speed is critical, if a surprise comes up that the lender failed to anticipate that either delays or even derails the loan application, any semblance of good service is out the window.

More than anything else, today’s borrowers need lenders who excel at listening to and understanding their needs. Armed with this insight, the lender is better able to solve borrower and transaction issues creatively and find a way to get the deal done.

Howard W. Smith is executive vice president, chief operating officer, and board member of Walker & Dunlop, in Bethesda, Md. Contact him at


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