Briefings Financing

Improving Loan Packages

A lot of detail goes into an ideal loan package, but securing favorable terms can pay off for decades.

Every business, including the business of owning and operating commercial real estate properties, requires operators to become skilled in various aspects of a commercial operation to be successful, such as customer service, marketing, operations, and management. Commercial real estate ownership also requires operators to understand and ideally excel in managing property and obtaining favorable mortgage financing terms, adding a new dimension of necessary experience. While this complexity can allow commercial real estate owners to be creative and add value to their business, it can also be overwhelming.

CRE owners must be proficient in the specific but critical business application of putting together a great loan package for lenders ⁠— one that will not only get approved, but also help achieve the best possible mortgage financing terms. No activity during the CRE ownership cycle will impact an owner's cash-on-cash returns more profoundly than securing the loan terms, including the interest rate and amortization schedule. In addition, many CRE owners don't realize the wide range of available loan terms. For example, a CRE operator may decide that a 25-year amortization schedule offered by local commercial banks is the norm ⁠— but in reality, 30-year amortization schedules are widely available for “full” loans (even partial or full-term interest-only schedules are available for loans less than 70 percent loan-to-value). You just need to know where to look and which lenders to approach. This is important because a commercial real estate owner will not only need to obtain a mortgage at the time of property acquisition, but unless the owner obtains a rarely offered long-term, self-amortizing loan (similar to residential home loans), commercial real estate operators will also need to refinance their loan balloon three to five times during their ownership cycle before it is fully paid off. Furthermore, many CRE owners have recognized the benefits of utilizing CMBS loan financing to obtain a cash-out refinance mortgage as a unique way to harvest the equity they have created to buy or build additional commercial properties without having to sell assets and pay capital gains taxes. In that case, the need to refinance their loan balloon every 5 to 10 years continues into perpetuity.

A professional and effective loan package includes an offering memorandum and a description of the property's annual financial results (or cash flows). The offering memorandum sometimes includes a table or image of the financial results; other times a separate Excel-based sizing or underwriting model is prepared and submitted to the loan officer. The offering memorandum provides the loan officer with a narrative description of the property, history of ownership, current business plan, demographic information, competitive market information, a description of the owner/borrower, and ⁠— most importantly ⁠— the loan request. 

Pictures. Bright, attractive pictures are one of the easiest, most powerful ways to create a loan package that will not only get approved, but also improve your mortgage loan terms. After all, commercial real estate is a business that you can touch and see.

 No activity during the CRE ownership cycle will impact an owner's cash-on-cash returns more profoundly than securing the mortgage loan terms.

Description. Behind the photo on the cover, the loan package should include the address of the property as well as a description including the total number of units, square footage, and occupancy. You will also want to describe the acreage and any amenities the property offers customers. The loan package should also have the loan proceeds you are seeking along with the associated loan-to-value based on what you think the property is worth.

Loan Ask. Sometimes owners feel apprehensive to include a loan ask, but loan officers appreciate having a sense of what you are looking for. In terms of the estimated appraised value you present in your offering memorandum, generally, I would haircut a recent broker opinion of value by 10 percent because you don't want to set a hurdle so high that it's not realistic. You also don't want to either give the impression that your facility is worth less than what a loan officer would assume or present a loan-to-value that's too high.

Narrative. If you already own the property, an ownership history narrative lets you describe the year (and, ideally, the month and year) that you acquired the property and the purchase price. Describe all the major capital improvement projects completed with a timeline or schedule. This illustrates to the loan officer that you have made ongoing financial investments to your property to increase its long-term value. Make sure you provide a total cost basis (or your capitalized interest in the facility which would be located as your basis in your tax returns after you add back depreciation) and spend the time to include any material capital improvements. You should also describe the non-capital ways you have added value (that is, sweat equity). Describing your business plan along with your tenancy will provide the lender with the confidence that you understand how to operate a commercial real estate facility. Lastly, include any strengths you know of. Keep in mind that a loan officer is focused on term risk (or the possibility of default during the term of the loan) and balloon risk (or the possibility of default at loan maturity).

Market Information. Whether you are seeking financing terms from a local lender that understands your immediate market well or a Wall Street CMBS lender that provides 10-year fixed rate non-recourse mortgages but may not know your market, you want to describe the demographics and demand drivers for your property. This includes important items like median household income, population growth, and current population. Furthermore, it is important to describe the top employers in your town, city, or county. Also, describing any new developments (for example, a newly built hospital 3.2 miles north of your facility or a new townhome development 1.6 miles south) will help the lender understand the current commercial real estate and economic activity.

 Describing your business plan along with your tenancy will provide the lender with the comfort that you understand how to operate a commercial real estate facility.

Additionally, you will want to outline how your commercial real estate facility fares within its competitive submarket, including how your rent levels are relative to the market ⁠— particularly if there is upside in revenue.

Be sure to provide a description of the ownership and sponsorship information, including a full breakdown of everyone with an ownership interest, their respective interests, and managing members (presumably you and possibly others). You will want to provide a resume focused on your commercial real estate ownership and management experience with all the commercial real estate properties you own and manage, the locations, and total number of units and square footage. Your financial wherewithal is important for lenders to consider your proposal, but an approximate net worth and your approximate liquidity are enough. Remember the adage to “underpromise and overdeliver.” Be conservative if you are giving estimates.

If you have any credit blemishes such as foreclosures, deeds in lieu, bankruptcies, or significant litigation, proactively disclose this to your loan officer. Be sure to describe the applicable mitigants or circumstances. Be transparent ⁠— lenders tend to find more than you think. Finally, a low credit or FICO score is important to local commercial lenders, so you will want to describe the circumstances relating to a low score.

Along with a narrative offering memorandum, you will want to include an underwriting cash flow that includes historical (i.e., multiple years) financial performance, your next-year budget, and an underwritten cash flow. An underwritten cash flow represents a lender's annual estimate of your facility's next-year financial performance. Lastly, you should include cash flow notes, which explain year-over-year variations like any significant variation in a specific line item and the basis for your underwritten revenue and expense line items. If providing an underwritten cash flow is beyond your current capabilities, you can provide three years of historical operating statements with a current rent roll along with the offering memorandum. With these tips, you should be on your way to improving the quality of your mortgage loan terms.

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