Presenting Your Loan Opportunity
Your lender is considering your loan request. Presenting your loan opportunity requires that you provide them comfort. They need to do the property generates enough income to repay the debt. They also need to confirm your financial capacity and credit worthiness. Real estate experience and expertise is very beneficial.
Critical to your lender is your ability to successfully own and operate the property.
Your commercial real estate expertise and experience should be well documented.
- Real estate assets currently and previously owned, built, and renovated.
- A listing of professional and industry affiliations.
- Note specific skills pertinent to commercial real estate ownership (perhaps construction or development skills, or a background in commercial Leasing, or real estate Law),
- A listing of current and previous business partners and associates, if appropriate in your specific circumstance.
While a strong balance sheet is important, lenders draw considerable comfort from the knowledge that you have experience.
Next is the presentation of your corporate and personal financial information.
When borrowing Corporately, Lender’s will typically require copies of the current and previous two years financial statements. This should accompany current and historical income and expense statements specific to the property being financed.
In respect of personal financial information, include:
- a balance sheet (to establish your net worth and liquidity),
- an income statement (to establish your total annual earnings),
- and a cash flow statement (to establish your cash flow).
While these personal statements can be Accountant/Auditor prepared, many banks and other institutional lenders have standard forms for such purposes.
Net Worth and Liquidity
Net worth, in simple terms, is the residual value of your assets after all liabilities are deducted. Discrepancies most often found in net worth statements appear, not surprisingly, on the asset side of the balance sheet.
A net worth statement which inaccurately inflates asset values will be underwritten in a manner which reflects the lender’s true assessment. A statement of net worth based upon inaccurate or exaggerated information will result in a size-able reduction in the presented net worth figure. The lender will be more guarded and circumspect when reviewing the balance of the loan submission. Do not make this mistake!
Understand your Lender’s Focus
Commercial real estate lenders will generally place greater emphasis on short term and tangible assets. Similarly, more emphasis will be placed on the value of real estate (vs. non real estate) assets. Why is this so? Cash flowing commercial real estate assets provides the lender with the comfort that the borrower has ready access to cash, vs. non-real estate items perhaps earmarked for ongoing operations of other business interests.
The importance of Asset Composition
The focus by your lender on real estate assets is not surprising. Their role is to assess lending opportunities, on the security of real estate. It’s the type of asset that they know and are comfortable with.
What are short term assets? They are generally cash, marketable securities, receivables, inventory, and prepaid expenses. Items which in the normal course, can be converted into cash, employed in the business operations, or sold, within a year or so. Tangible assets are those which have physical presence, such as equipment, real estate, vehicles, and inventory.
Commercial real estate lenders are generally more comfortable with Accountant prepared financial statements and particularly Accountant prepared balance sheets. It is often challenging for a commercial real estate lender, reviewing your financial statements, to determine the accurateness of your valuation of such things as marketable securities, accounts and notes receivable, goodwill, and equity in joint ventures or partnerships. These assets are difficult to liquidate and hard to value objectively. The bias of your real estate lender will be squarely on recognizing value for real estate, generally above all other assets.
Cash is King
This is not to say for a minute that intangible assets lack value. What is important to your lender however, is your ability to quickly turn assets into cash. Remember, cash is king! For that reason, non-real estate assets, particularly if intangible, are often excluded, or their value reduced (“written down”) in assessing a borrower’s net worth. Non real estate assets which real estate lenders do recognize and account for, include cash, term deposits, stocks in publicly held companies, bonds and monies or notes receivable, supported by real estate security.