Do you have Real Estate Ownership Experience?
Real Estate financing success depends upon many factors. The income generating capabilities of your property and it’s resultant value are important. A well located and well leased property, in good condition, will be attractive physical security for a loan. Underwriting a loan involves more than simply number crunching however. Your Lender wants to know whether you are an experienced Real Estate investor.
Despite the increased use by institutional lenders, of automated decision making tools, commercial real estate financing success revolves around the relationships created between lender and borrower (or broker). A lender can quickly determine whether your requested loan fits within their lending policy guidelines and ratios. What is more challenging for your lender is developing a degree of comfort that you, as a prospective borrower, have real estate experience or expertise, or failing that, sufficient management experience to successfully operate and optimize your real estate holdings.
Your Real Estate Lender will want to know:
1. Do you have Real Estate Ownership and Management Skills?
Ownership and management are complementary but distinct skill-sets. Real estate management generally infers an ability to apply skills to ownership as well. However one can own commercial real estate but have little in the way of real estate management skills.
It’s certainly possible to own commercial real estate without hands-on involvement. In fact for commercial real estate assets of substantial size, it makes a lot of sense to hire 3rd party management. A lender will however will derive considerable comfort if you demonstrate your ability to communicate with your property management firm. Your ability to provide direction in a manner that goes beyond simply hiring someone to “take care of the property” speaks volumes.
2. Can you Demonstrate the Ability to Manage Property, or to Direct those who do?
The effective management of commercial real estate involves:
- day-to-day oversight,
- rent optimization,
- expense curtailment,
- making capital investments/improvements,
- marketing vacant space; and
- having on-going positive interaction with tenants.
While some or all of these activities can be delivered by a 3rd party manager, it is advantageous for you to demonstrate your ability to direct strategic decisions and set clear expectations of 3rd party real estate asset managers. A complacent or inactive owner may be either disinterested, or naïve, but in either case this paints a picture to the lender of an individual who is inexperienced and is not optimizing the asset.
3. Can you Communicate your Ownership Strategy?
If employing 3rd party management, Lenders are looking for you to demonstrate the ability to strike a balance between control and management. How can you optimize an asset if you cannot intelligently discuss and communicate (with either their property manager or lender) ownership expectations, leasing strategies, capital expenditure plans, or understand financial reports or lease documentation? For example, why did you/do you want to buy this property? What are your plans for your property? How will you optimize your returns?
In situations of self-management (owner/management), the onus is on you to credibly demonstrate that you have the know-how, coupled with the resources and tools at your disposal to effectively and efficiently management the asset and maximize its potential. One example might be your proficiency with property management software.
4. Can you Demonstrate your Previous Successes?
In situations where you have owned and managed commercial real estate in the past, provide your lender with pertinent details.
- where were the properties located?
- how long did you own them?
- what did you do during your ownership, to maximize property values?
- did you realize a profit, if the assets were subsequently sold?
Demonstrate your competence and commitment to successful real estate ownership. It’s key to financing success!