Are you Borrowing Commercial Real Estate Funds?
Borrowing funds for your real estate project? Do you understand what your lender needs to know? Many investors I have had the pleasure of working with struggled to present their investment opportunities. They were not sure how to maximize their likelihood for success.
With an understanding of what your Lender needs to know, you can present your investment opportunities to your lender in a manner that would ensure a quick response, and favorable loan terms.
You need to tell your Story!
Though financial services is quickly automating, commercial mortgage lending is still an activity which requires personal interaction. Unlike single family residential mortgage applications, where significant reliance is placed on home value/price, and borrower strength and income, each commercial mortgage opportunity is unique. Property types differ dramatically, as does the income generating characteristics of each asset. Property demand, either by investors, or by tenants, will differ as well. There are of course certain “rules of thumb” applied to commercial mortgage lending, such as debt service coverage and loan-to-value ratios, but for the most part, a “story” needs to be told.
Clearly Articulate Your Loan Request
The initial requirement is for you to clearly indicate the loan amount required, ideally with the required term and amortization period you prefer. This is followed by a clearly articulated purpose for the funding. It is surprising how many potential borrowers find it difficult to articulate the precise purpose of the requested loan. As this is a fundamental aspect of your loan presentation, let’s consider the main reasons borrowers apply for a loan:
You intend to buy a property? If so, then provide answers to the following questions:
- Purchase price. What are you paying?
- Amount of equity. How much cash are you injecting?
- Loan to Purchase Price Ratio (loan amount divided by the purchase price).
- Amount Secondary financing if any. Is there a 2nd mortgage? What is the amount? What are the payments? When is it due?
- Purpose of acquisition. Are you a long term investor who intends to hold the property, or are you buying in order to perhaps renovate/re-lease and sell in the short term?
- Are repairs and renovations required?
- When is the anticipated closing date?
- When did the property last transact (sell)? For how much?
You intend to pay off another loan? If so, then answer the following questions:
- Purpose of refinance request. Is it to refinance an existing loan (maturing debt)? Is it to take out additional (new) money? Are you seeking to lower your interest rate, extend your mortgage term or modify the amortization period? Are you planning to pay for property improvements or renovations?
- What is the proposed Loan to Value ratio (loan amount divided by the estimated property value)?
- What amount of Equity is there (both originally and now/existing and proposed)? Equity is the amount of cash, or un-financed “value” in the property. If you have a property with an estimated value of $1,000,000, with a $600,000 mortgage balance, your equity is the difference, namely $400,000.
- Purpose of funds if equity is being released (i.e. new funds being “drawn out”). What will you be spending the new money on?
- Cost of repairs and renovations. How much will you be spending, and when?
You intend to construct a building? If so then answer the following questions:
- What is the cost of the land?
- If land already owned, is it owned free and clear (i.e. paid for and without any mortgage against it)? If not, provide details as to the debt against the land. What was originally paid for the land? When?
- What are the construction budget figures?
- Who is the contractor?
- Is the construction contract in place? Is it fixed-price, or?
- How much borrower equity (cash) is available?
- Is the property zoned to allow for the intended use?
- Has a building permit and other municipal approvals been obtained?
- Has the property been pre-sold or pre-leased?
- What is the estimated “as-completed” value?
- How will the construction loan be repaid? When?
You need a short term loan to make improvements to your property before getting permanent financing. If so then answer the following questions:
- What is the purpose of the loan? (i.e. what repositioning is planned? A re-zoning? Building repairs? Re-tenanting? Property conversion?)
- When was the property acquired? For how much?
- What are the construction cost details and program plan and timing?
- What is the Bridge loan exit (repayment) strategy?
In Part 2, we will discuss how to present the Sources and Uses of Funds. Don’t leave your lender guessing!