Consultants can help borrowers secure favorable loan terms.
While some commercial real estate investors secure financing through deals with their existing banks, most investors, developers, and owners derive the best terms when lenders compete for their business.
Creating a competitive situation is the role of a commercial financing resource. By researching and comparing lenders’ various underwriting guidelines, financing resource professionals can select the terms that best meet clients’ individual funding needs.
Sorting Out the Players
A financing resource is not a mortgage broker or a lender; rather, these professionals offer a mix of the best features of both. Like a broker, the financing resource works between the borrower and the lender. Unlike a broker, however, the financing resource has a sophisticated knowledge base fueled by a substantial proprietary database of lenders far more diverse and extensive than the average mortgage broker. Financing resources typically engage licensed real estate brokers, loan underwriters, and strategic real estate professionals to structure optimum loan transactions.
A financing resource’s database is its intellectual property that contains hundreds of potential lenders nationwide, and in some cases worldwide, across a wide spectrum of categories. This database is regularly updated with current information about lenders’ terms and financing trends. Because of this enhanced, up-to-date data, the financing resource is in a much better position and has greater latitude than a direct lender for developing a financing package that best addresses a borrower’s specific needs and credit profile. Additionally, as indicated by its systematic infrastructure, the financing resource’s role is much broader in terms of service than either a lender or broker.
Financing resources secure loans in dollar amounts ranging from hundreds of thousands to tens of millions for diverse commercial projects, such as office buildings, industrial facilities, restaurants, shopping centers, recreational facilities, healthcare centers, and multifamily projects. Land acquisition and construction of commercial projects can be simplified with the assistance of a financing resource.
For example, a Long Island-based financing resource secured a $14 million acquisition and development loan for an 18-month term on behalf of Metroplex on the Atlantic, LLC, a planned luxury waterfront condominium project in Far Rockaway, N.Y.
Smaller transactions can benefit from financing resources’ services as well. A financing resource recently helped an auto mechanic secure a $550,000 loan transaction to establish an automotive service and repair center in Bridgeport, Conn. The transaction included the purchase of one lot with three buildings and represented a high loan-to-value ratio with 90 percent of the property’s appraised value financed.
Working directly with borrowers or through mortgage brokers, the financing resource audits the borrower’s needs and other required financial information to perform an initial preliminary underwriting analysis. A proprietary database of lenders including commercial banks, savings and loans, credit unions, private lenders, mezzanine financiers, the Small Business Administration, and mortgage-backed securities is queried for matching parameters. From there, a detailed analysis of the various lenders’ programs is conducted and considered within the context of the borrower’s needs and profile.
Also included are risk tolerance, geographic preferences, and debt-service coverage ratio guidelines. For example, some lenders will not finance a special-use property such as a gas station, restaurant, or day-care center. Often, the best alternative in such cases is an SBA-
When individuals and not entities such as corporations or partnerships are the borrowers, lenders’ underwriting criteria take into account the borrower’s credit history. When the borrower is a business, some lenders stipulate specific terms and/or a willingness to provide financing that directly is linked to the tenure of the business as well as a company’s profit picture. Even if a business had five great years, if the sixth year presented poor financials, some lenders would consider the loan too risky. A financing resource has that information and knows the dispositions of different lenders regarding these factors and others, such as a borrower’s ability to build, market, and manage a property effectively.
Other key underwriting criteria lenders consider include:
- a business’ net operating income;
- the value of the land (financing provided for 50 percent of the existing value); and
- the value of the building (financing provided for up to 70 percent).
Different lenders’ policies regarding market trends also are assessed by financing resources. For instance, in an overbuilt condominium market, certain lenders will not provide financing to new condo projects regardless of the builder’s reputation or the location. Similarly, lenders more carefully scrutinize loan applications for office buildings in regions where a glut of office space exists. Trends that emanate from the lenders directly also affect financing terms. The recent popularity of interest-only loans — and the possible fallout — now is causing many lenders to withdraw this option.
Ultimately, financing resources narrow down the number of lenders to those who best match the borrower’s profile, the project, and relevant market conditions.
Loan request packages prepared by financing resources include comprehensive information that enables lenders to make loan commitments. They present the borrower’s story in a compelling manner to help sell the project to potential lenders. Loan request packages include an executive summary that contains the rationale for the loan, a comprehensive underwriting analysis, and a detailed loan request. It is followed by information about the borrower, such as tax returns, financial statements, and credit reports. The package also includes information about the property, such as tenant improvements, leasing commission analyses, property photographs, recent appraisals, environmental statements, property tax information, and other relevant due diligence documentation that helps the lender better evaluate the request and facilitate approvals.
After sending the loan request packages to the most suitable lenders, the financing resource waits for the approvals. With multiple approvals, the stage is set for the financing resource to leverage the varying rates or terms between lenders. Through this process, optimal financing and terms are secured for the borrower.
A financing resource’s fees are based upon a project’s complexity. Industry standards currently require borrowers to pay about 1 percent of the loan value to the financing resource for straightforward loans. More sophisticated or complex loan requests generally command fees within the 2 percent to 4 percent range.