Commercial real estate financing the right way.
Commercial real estate financing is held to a much higher standard. Lenders' considerations and requirements differ considerably. For starters, lenders asked to finance a commercial property will do so based on the property's appraised value, which is tightly associated with the net operating income, and not the buyer's purchase price as in the case of a residential mortgage request.
Therefore, the office building with a 50% vacancy and consequently a lower appraised value will be viewed differently for financing than one which is 90% occupied--even if the building is identical in every other way. Some borrowers might be well-served to have a real estate broker lease up the building before they consider a purchase and concurrent application for a mortgage.
All lenders, regardless of whether they are a commercial bank, savings and loan, credit union, insurance company, institutional investor or governmental agency, will be sensitive to market conditions.
If the co-op market is struggling, a loan application for this type of property will be analyzed differently than if this market was in a buoyant stage. Similarly, loan applications for office buildings in regions where a glut of office space exists will be more carefully scrutinized than loan requests for commercial properties in markets with low vacancy rates and therefore high demand.
Trends that emanate from the lenders themselves also affect financing terms. For instance, the recent popularity of interest-only loans is making many lenders pull-back on this option for fear of becoming vulnerable. Actions by the Fed and interest rate fluctuations also factor into a lender's loan approvals and financing decisions.
Still, lenders are in the business of lending money and they do want the opportunity to finance projects. In fact, the best thing a borrower can do is to put their loan request in play before a number of potential lenders.
Of course, this is easier said than done and requires the insights and network of an experienced financing brokerage firm. This financing professional will turn to a sophisticated database including hundreds of different lenders with specific profiles relating to their individual underwriting requirements.
These underwriting requirements will vary from the types of projects a lender is willing to finance to the amount being financed and the associated interest rate. For example, some lenders will not finance a "special use" property such as a gas station, restaurant or day care center.
Often, their best alternative is an SBA-guaranteed loan. The financing professional will consider these variables in the context of the prospective borrowers' project, financing needs as well as the short- and/or long-term investment goals of the principals. Then, several suitable matches will be made.
The financial professional will create comprehensive loan application packages on behalf of the borrower and submit these applications to the selected lenders. Using advanced online tracking technology, the financial professional will help expedite "Letters of Interest" from the lenders. The stage is now set for those lenders who do want this business to compete for the loan.
When considering a loan's potential terms, a lending institution will consider several criteria. Where individuals are the borrowers, their credit history will be reviewed comparable to the credit check performed in a residential mortgage application. If a business is the borrower, the lender will consider whether it is a start-up company or one in operation under three years. Additionally, the company's profit picture will be considered. Even if the business had five great years, if the last one presented poor financials, the lender may consider this loan to be risky.
The lender will also scrutinize the property for which the mortgage is being sought in terms of its current or potential cash flow. As part of this consideration, the lender will assess the property owner's ability to manage the asset properly in order to secure the optimum revenues from that investment. Borrowers will be expected to demonstrate their property management expertise as well as to present accurate cash flow projections during the expected period of ownership. The terms a borrower will ultimately receive will be a direct function of both the financial professional's capabilities and the borrower's due diligence.
Unfortunately, even the borrower with the best credit history, a high performing property and the documentation to demonstrate a property's continued profitability under the intended buyer's management won't secure the best financing if the borrower falls prey to mistakes:
* Believing their current bank is the best source for a loan and not exploring other lending sources. Often it is not and, more importantly, by having appropriate lenders compete for the loan ensures that the borrower will secure the best terms.
* Placing their loan request with multiple mortgage brokers. This sets up the stage for the loan to be placed by multiple brokers with the same lender which creates confusion on the parts of the lenders who, as a result, tend not to focus on the application.
* Attempting to negotiate directly with a lender for optimum terms. This requires more knowledge and ongoing experience in this area which most borrowers do not possess.
* Failing to use professionals to assist in the process, including a financing professional and an experienced commercial property real estate attorney.
Financing professionals have broad networks with hundreds of lenders and a detailed profile of each lender's underwriting criteria.
Commercial real estate attorneys will serve the borrower's best interest, keep costs down by handling the transaction efficiently and avoid unnecessary fees and penalties which often result when a general practitioner and/or a residential closing attorney gets involved.
BY ROBERT LEIGHTON, PRESIDENT, DOUG MAYER, VICE PRESIDENT OF COMPLIANCE AND REPORTING APEX COMMERCIAL REAL ESTATE SOLUTIONS, INC.
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|Publication:||Real Estate Weekly|
|Date:||Oct 11, 2006|
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