Increase Your Chances For Obtaining Financing

Too often we see commercial loan applicants that are ill prepared to obtain financing for their project.  The following is a brief discussion of key areas that will increase your chances of obtaining funding.  It  is not meant to be comprehensive, but it serves as a general guide that will help you be more successful in your effort to obtain the funds you need for your commercial project.

Credit Score – While having poor credit will not rule you out from obtaining funding, having poor credit limits the type of lenders that will entertain your application (mainly hard money and bridge lenders). 

There are things you can do to prepare for financing and improve your credit score.  First) Eliminate too many revolving credit accounts.  Second) Pay loans on time or early.  Third) Do not shop your loan to too many lenders, each review of your credit report (except if you pull the credit report yourself) counts against your score.  Fourth) Dispute incorrect derrogatories on your account.  Fifth) If you have a ligitimate derrogatory on your account provide a letter to the reporting bureau explaining the situation, such as a medical situation that resulted in loss of work or time away from work that resulted in several late pays.

Exit Strategy/Repayment – All lenders want to see a well defined exit strategy or repayment plan.  This is one area you will want to spend considerable preparation and home work prior to applying for funding.  If a lender sees you are professional in your approach to the project, it will increase your chances of funding, even if you have less than perfect credit.  Be accurate and thorough in your analysis and explanation of budgets and forecasts.  A mistake here will kill your deal before it starts.

Equity- In todays credit market lenders are looking for projects that have significant equity in the project.  Significant equity is considered on a case-by-case basis, depending on the type and nature of the project and can range from 10% t0 60%.  So, the more equity you can put in to the project, the better.  If you do not have sufficient equity into the current project, consider cross-collaterizing the project with other commercial property you own.

Lender Criteria - Before you ever fill out an application with a lender do a little research on the lender and find out what types of projects they prefer funding, as well as other lending criteria.  Look at some of the projects they have recently funded.  Lenders sometimes will change their basic criteria as market conditions change, so stay abreast of these changes.  This is an essential step, do not wast your time or the lender’s time if your project does not meet their underwriting criteria.

Package Preparation -  Now that you know what the lender’s criteria is you can begin compiling and preparing a loan package that will satisfy their underwriting and due diligence review. 

During this step do not try and hide negative aspects of the project or your own credit worthiness!  It is far better to deal with negative aspects of the project or personal credit up front and offer solutions to the situation than to have the lender and broker discover them during due diligence. 

Be very thorough and complete in your package preparation it will save you a lot of time and increase your chances of getting the funding you are seeking.

Land Acquisition and Development

An experienced commercial loan officer will ask two key questions for every land acquisition and development project. Here are the questions you should be prepared to answer -

1. How much money do you, the borrower, have invested into the project? This is an important question for our lenders and influences who we will ultimately present the project to. Since the lender will ask to see documentation during the closing process, you should expect us to ask for documentation that substantiates your investment.

2. Is the property fully entitled? If not, what will it take to get the property fully entitled. Once again, the lender will ask for documentation to substantiate the entitlement. Please expect us to also ask for documentation.

Yesterday, I posted our first commercial real estate loan tip – Be honest. Remember lenders will discover the answer to these two questions during closing. If the project has been honestly documented, your chances for success are much greater for successfully funding the transaction.

Commercial Real Estate Loan Tip #1

I plan to offer a few tips on securing commercial real estate loans over the next few months. Hopefully, this will provide our commercial real estate investors some handy tips for obtaining a commercial real estate loan.

Commercial real estate tip number 1 – Be honest. This is, by far, the most important tip I could ever provide to a commercial borrower. I cannot count the number of times a commercial borrower has misrepresented some element of a transaction. For example, misrepresenting the gross rental income of a property or overstating their personal income is a huge mistake. Please understand, every commercial financing transaction has warts. It is the job of your commercial broker to get you financing – in spite of the warts and problems. As a company, we do not work on a financing project that does not have a reasonable prospect of securing the financing.

We recently had a client that misrepresented their deal. As always, both we and the lender discovered the client’s misrepresentation during the closing process. After all, closing is a process of discovery. In reality, we could have gotten the deal funded regardless of the borrower’s hidden problem. However, because the trust was lowered by discovering the borrower’s misrepresentation, the lender decided to change the loan amount and other terms. The lender explained this to us in a telephone call. At this point, we had a difficult time trying to persuade the lender to fund the transaction. Ultimately, we managed to negotiate good terms (in fact excellent terms), but our client was limited to a reduced loan amount – all because of a lie. In addition, the loan took much longer to fund nearly costing the client their property due to an impending balloon payment.

The moral of the story is … don’t lie! Share your difficulties and issues with your loan officer with complete integrity. Have the same confidence that you have with your commercial properties – regardless of the warts. The process will have a much greater likelihood of success. We appreciate honesty.

In closing, remember … commercial real estate loans are a unique area of specialization. Traditional loan officers are usually not experienced or trained to provide commercial services. More importantly, traditional loan officers usually lack the relationships with commercial lenders that are required to successfully finance commercial properties. We recommend that you seek the advise of a skilled commercial loan officer who is connected to numerous commercial lenders and has the experience to get your commercial project funded.

ALTERNATIVE COMMERCIAL FINANCING

Most investors seeking funding for commercial properties know of only once source of financing – the local bank.  While there are advantages of obtaining financing through a local bank, investors are overlooking a valuable source of funding for their commercial projects.  These other sources are sometimes referred to as, “alternative financing” or “non-conventional” lenders.

Alternative funding sources do not have the stringent funding guidelines that traditional banks do, so there underwriting criteria are usually more relaxed than conventional lenders.  Other advantages of alternative funding sources include competitive rates and terms, speed of funding (25 days to 45 days, as opposed to 30 to 90 days), and broader array of loan products and property types they will fund compared to conventional lenders. 

Apartment Loans

We recently began work on securing commercial mortgages for two different apartment complexes. When deciding to refinance or purchase an apartment, you’ll face a few decisions. First, borrowers need to decide whether to use conventional financing or some form of hard money. The typical considerations that factor into this decision involve the timing of the required funds, the borrower’s credit, and the loan to value ratio.

Hard money lenders and private lending are able to move with relative speed. Depending upon the fact and circumstances of the apartment loan, we have been able to secure financing and close within a few days for commercial hard money. In the current market, this may be desirable to commercial apartment owners due to an impending balloon payment or due to the difficulty in obtaining conventional commercial financing.

Another factor to consider is the borrowers credit. Over the past several months as a result of the chaos in the residential lending environment, commercial lenders have raised minimum credit scores as part of their underwriting criteria. This has created an unusual demand for commercial hard money. We expect the demand for commercial hard money to continue through 2008.

In circumstances where the credit score fails to meet conventional underwriting guidelines, the underlying property value is crucial to locating capital sources. Hard money lenders, like conventional lenders, have standards for their loan to value (LTV) ratios. LTV ratios are typically lower than conventional sources. Not surprisingly, this is due to the increased risk assumed by a hard money lender.

Fortunately, apartment complexes are considered good risks in the present market. Their values are readily established by market comparables, by comparing current rents with market rents, and by independent appraisal. As a result, apartments are great candidiates for both conventional and hard money loans. In addition, apartments have better liquidity as collateral than many other commercial properties.

At Spectracom, we are only commercial mortgage brokers. As a result, we have a variety of apartment lenders through which we secure commercial loans. If you have a need to finance or refinance an apartment complex, please give us a call.

HARD MONEY

If you are new to commercial financing you will come across the term, “Hard Money”.  So, what is hard money and does it have application for you?  Hard money is used in commercial financing (residential financing, too) as interim or bridge financing for projects that may have difficulty getting funded through conventional means due to credit issues or a conventional loan may take too long to obtain (30 to 90 days).Hard money, as its name implies, is more expensive (rates range from 9-1/2% to 16% or higher); with points taken out of the loan proceeds, ranging from 1% to 8%; short term (6 months to 36 months).  However, the advantage of using hard money is speed (3 days to 30 days to funding), easy qualifying, low documentation; and, typically, interest only.  Moreover, most hard money lenders are equity lenders, as opposed to credit lenders.  That is, they are more concerned about the amount of equity in the project, than what your credit score is.