IT IS NOT ABOUT YOU … IT IS ABOUT THE LENDER!

Most commercial real estate investors think the loan application is all about them — credit worthiness, college degree, property ownership experience, etc. This is the wrong mindset when applying for a loan. In reality the loan application is all about the lender — what they are looking for in a borrower. Here are a few questions you need to ask yourself when making your application for a commercial real estate loan:

1. Does my project meet the lenders loan criteria (type of property, Loan-to-Value Ratio, source of down payment, property grade (A, B, C, or D) relevant experience, geographic location, grade of property, area demographics, property value, debt coverage ratio, etc.)
2. Will my loan application and package attract the lender’s attention. Remember you are competing with hundreds of other applicants for loan approval. Properly packaging your loan will make or break it for you!
3. What is the lender’s sweet spot? Put another way, what does the lender prefer to lend on? Most lenders prefer certain niches or property types and grade of properties.
4. Will the property provide sufficient cash flow over the next five years to meet the Lender’s debt coverage ratio minimum?
5. Do I really have the expertise to manage the investment profitably? If not who can I partner with to compensate for my lack of expertise? Don’t be afraid to swallow a little pride here if you really want the investment to succeed.

Asking yourself these questions and being honest with the response will greatly improve your chance of successfully financing your next commercial real estate investment.

Commercial Real Estate Finance Consultants
Spectracom Holdings
Jim McCune
877-660-2895
http://www.SpectracomHoldings.com

Prepayment Penalties

In today’s financial market funding is difficult to obtain, so the reflex of most commercial real estate loan applicants is to jump at the first loan offer they receive.

While we understand such reactions to a loan offer, it is advisable, however,  to scrutinize all loan offers.   Most borrowers will consider the annual interest rate and term of the loan, but they often ignore a critical component of the loan offer– prepayment penalties.

Whether you are seeking a commercial hard money or conventional loan, pay close attention to the prepayment penalty terms, if any in the loan offer.

Most commercial real estate hard money loans do not have a prepayment penalty, but beware of those that do have a prepayment penalty.   If your hard money lender has a prepayment penalty we advise you to keep shopping for a more reasonable lender.   Hard money is already an expensive financing alternative, don’t add to it with a prepayment penalty on top of the steep origination points and other fees.

Prepayment penalties are more common with conventional loans. Prepayment penalties can be as much as 10% of the outstanding balance, to as little as 1% of the outstanding balance of the loan.   Or, better yet, in some cases a loan may have no prepayment penalty.

There are variations of how the prepayment penalty is structured, but one of the most common structures is a: 5, 4, 3, 2, 1 prepayment penalty.   What this means is that if there are five years remaining on the prepayment period you would have to pay 5% of the outstanding balance; or, if there is 4 years left of the in prepayment period, then you would pay 4% of the outstanding loan balance; and so forth down to 1 year remaining in the prepayment period you would pay 1% of the outstanding loan balance.   After the prepayment period expires, there is no prepaymeent penalty.

You may also elect to buy down the prepayment penalty, with higher interest rate.  Typically, the longer the prepayment period, the lower your annual percentage rate will be on the loan.

Careful consideration and negotiation of the prepayment penalty can save you thousands of dollars on your loan payment.

Spectracom Holdings
“Helping Commercial Real Estate Owners and Investors Obtain Their Financing Objectives”
Tel: 877-660-2895
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Hard Money Loans – Today’s Terms

In today’s economy borrowers and lenders alike approach transactions with much more caution than they have over the past several years. Borrowers want to know that their project will be able to service the debt, especially should the economic conditions continue to worsen. Lenders want to know that property values are sustainable and that borrowers are credit worthy.

Even equity driven lenders are now taking a closer look at a borrowers credit in assessing loan approval and loan terms. Below is a comparison of how hard money loan terms have changed over the past year:

1. Annual Percentage Rate: from a median 8.5% to 12% (some now charge as high as 18%APR).

2. Points: 3% to 6% (some charge as much as 10%).

3. Prepayment Penalty: Still most hard money lenders will not charge a prepayment penalty, but some now charge up to 1%.

4. Term: Still some hard money lenders will extend terms up to 60 months.

5. Loan-to-Value Ratio: from 65% to 40%.  This criteria has experienced the biggest change over the past year.  Some hard money lenders will go as high as 70% in some cases.

6. Geographic Location of Property: while there are still many hard money lenders that will extend loans nationally, many hard money lenders have now become more geograpically niched, since they better understand the dynamics of their chosen market area.

7. Loan Amount: no change in the amounts hard money lenders will lend generally between $250,000 to $5,000,000.

With these changes in loan criteria and terms borrowers should approach their projects with caution and analyze their opportunities with care to determine whether or not a hard money loan will help them meet their financial objectives, not just in the short-term, but also in the long term.

Jim McCune

Spectracom Holdings

Tel: 877-660-2895

Email: jim@spectracomholdings.com

Website: www.SpectracomHoldings.com

Professional Profile on LinkedIn.com: http://www.linkedin.com/pub/12/a54/1a4

Other Services: Business Valuations

Commercial Financing In Today’s Market … Reality Check

While the media is screaming the sky is falling all around the mortgage industry, the truth be told.  However, there is still a lot of money out there that needs to be placed with worthy projects. 

The only thing that has really changed in the commercial mortgage industry is that underwriting criteria has become tighter, making less than “good” projects more difficult to finance.  We just completed a conventional loan with a regional bank for $2.3 million in just 38 days from start to finish, including the time to conduct the appraisal and environmental report. 

 While it was not the easiest project to finance it was financed based on the strength of the project, excellent cash flow, and credit worthiness of the borrower.  But, the thing that aided the most in getting this difficult project funded was how it was packaged for the lender.  The lender admitted that they would not have considered the project if it had not been packaged to the extent that it was for them.  The package really sold them on the feasibility of the borrower’s ability to service the debt and how the project met all of the lender’s underwriting criteria.

Remember, don’t just throw documents at the lender and hope they will finance your project.  Prepare a package that will sell them on the project.  Proper presentation is essential in a tight mortgage market.

 So, are we in a robust mortgage market? No.  But, there is still a lot of money available from aggressive lenders at attract terms, if you present your project properly showing how your project meets their underwriting criteria.

For more information on commercial loans please visit our website at:  www.SpectracomHoldings.com or call us at 877-660-2895.

Great time to Refinance Commercial Property

The indexes have been dropping and right now is a great time to refinance your commercial property. In fact, one of our clients is refinancing a supermarket and pleasantly saw his interest rate drop prior to closing.

The easiest refinance loan today is a rate and term refi. A rate and term refi does not permit cash to be withdrawn from the equity of a property; however, commercial property owners may benefit from lower payments by extending the loan period or by lowering the interest rate on their mortgage. Both of these situations may be possible at the present time.

A commercial loan that disperses cash from the equity of the property is called a “cash out refi.” Depending upon the equity in a property, now may also be a good time to get a cash out refi. Give us a call or complete a commercial mortgage application to see if refinancing your commercial property would be a wise decision for you.

DO I NEED AN APPRAISAL FOR A HARD MONEY LOAN?

We are frequently asked, “Do I need to have an appraisal done for a hard money loan? Absolutely. Hard money lenders are primarily asset based lenders, rather than credit driven lenders; therefore, the value of the commercial property is key to a hard money lender’s consideration when conducting due diligence on a property.

But, before your race out and engage an appraiser. You will need to know if the lender you are applying to will accept an appraisal performed by someone you choose or prefers their own appraiser to conduct the appraisal. In addition, you will need to know what type of appraisal will be acceptable to the lender. You should not expect a lender to accept a residential style appraisal for commercial property. In most cases, the lender will want to see a “stand alone” commercial appraisal and it must be performed by a MAI certified appraiser. This type of appraisal is more expensive ($2,500 to $7,500 or more).

We had one client refuse to pay a lender a due diligence fee to cover the cost an appraisal, insisting the lender use a residential style appraisal that he had already obtained. Consequently, the lender dropped the loan and the client lost the opportunity to purchase property he wanted to acquire.

The cost of appraisal is money well spent to achieve your objectives.

Commercial Real Estate Loan Tip #4

When applying for a commercial mortgage, only work with one commercial mortgage broker. We recommend interviewing several brokers at the outset of your project, but a borrower should only hire one broker to secure funding for your commercial project. Do not fall prey to the pleadings of a broker to let them simultaneously search for commercial financing on the side – no matter how appealing their promises sound.

At Spectracom, we do not work with borrowers who work with another commercial mortgage broker. The only exception to this policy is when another mortgage broker asks us to assist them with securing commercial financing. This happens when a broker is not able to find financing for a client or they are a residential broker. This actually represents a substantial percentage of our business. However, this circumstance must be disclosed at the outset of a transaction.

Other than our single exception, we withdraw from commercial financing projects when we discover that a client is using another broker. You might ask why? First of all, we just do not have time to work with uncommitted borrowers. We represent a large number of committed borrowers at any given time. Our time is best spent helping a committed borrower to be successful. When we represent uncommitted borrowers, our time is wasted with fruitless efforts and we neglect our serious, committed clients. We also find that uncommitted borrowers will ultimately not take action on important steps in the lending process until it is too late. When we observe this happening, we just simply terminate our brokerage relationship.

This is best illustrated by a recent transaction on which we worked. We represented a client that was trying to refinance a mobile home park. We explained our policy of client loyalty, but discovered that our client was not acting in good faith. After getting a commercial lender interested in the project and issuing a letter of intent, the lender called us one day to inform us that they received another loan application from our client through a different channel of the company and … represented by another broker.

Because of our relationships, our commercial lender simply refused the second application and assured us of their loyalty. Unfortunately, receiving a second loan application did not look good to the lender. They questioned how serious and committed the buyer was. In their mind, they also do not want to waste a lot of time, effort, and money in due diligence. As a brokerage, we had the same questions and concerns. Commercial lenders have pulled a term sheet or a letter of intent when they discover situations of dual brokerage. Fortunately, our lender gave us time to put this situation right.

You need to know that the commercial mortgage industry is a narrow niche with substantially fewer lenders than residential loans. When we submit a commercial loan application, we submit the application to the only lenders likely to fund the project. That usually represents a small population of lenders when you take into account all of the commercial underwriting criteria that must be considered. When a borrower uses two or more brokers, the chances that the brokers (and lenders) involved will discover the dual agency is extremely high.

In this case, the lender gave us the benefit of doubt and the time to determine the facts and circumstance of the situation. We called the borrower, who represented that the application was submitted by a former broker whom they had fired a few months prior. The borrower assured us that we were their only broker and committed to inform the other broker to cease all brokerage activities in their behalf. Coincidentally, the borrower had not disclosed to us that she had previously used the services of another commercial broker.

After deciding to continue representing our client, we proceeded with the due diligence process with the lender. Unfortunately, the client began to engage in stall tactics and did not keep their commitments. This was a major red flag. In fact, the client failed to sign an important document. We needed the signed document to proceed with the transaction. Because time is of the essence in commercial mortgage transactions, we immediately jumped on the phone to determine where we were. Our client promised to fax the signed document to us that evening. Unfortunately, we had to clearly communicate the consequences of failing to fax a signed document that evening. Guess what, no faxed document came that evening. We left a voice mail the next day, but failed to get a return call. At the end of the day, we simply notified the client that we were terminating the brokerage agreement.

We usually know what’s going on behind the scenes and our keen sense of instinct told us that the client had not terminated the other broker. Why you might ask? Experience tells us that the other broker will make unrealistic promises and countersell against us until they ultimately fail to deliver. By then, the situation is usually bleak.

In this case, the client suddenly appeared 10 days later … pleading with us to help them. They are now facing a balloon payment that may pass and trigger foreclosure proceedings. They now also do not qualify for the original mortgage that we had secured. What a tragedy! This did not have to happen. This was a waste of everyone’s time and money and a sad situation for the owner of a great income property. We don’t yet know how things will turn out, but we’ll hope for the best.

In conclusion, when borrowers engage in dual or multiple brokerage relationships, they jeopardize their transaction and limit the effectiveness of their commercial mortgage broker. Why do we require single agency? In a nutshell, “we would rather turn you down than let you down.” Our best advice is only hire ONE commercial mortgage broker.

If you want us to consider your commercial project, please submit an application. We now have a link at the top of the page on the right side of the page for submitting a commercial mortgage application. Best wishes to you and your families during this Thanksgiving holiday.

Commercial Real Estate Loan Tip #3

Have a sense of urgency about the commercial mortgage process.

If we provide a letter of intent or a term sheet for your project, please make a fast decision. Just because you have a 30 million dollar project that looks good on paper doesn’t mean the lender won’t pull the deal. We see lenders pull deals all the time because the borrower cannot make a simple decision. Lenders like decisive-action-taking borrowers. Think about it. Lenders are confident in borrowers when they see the borrower confident about making a decision.

Commercial mortgages are not like residential mortgages. We’ve had clients mistakenly assume that just because one lender approves a mortgage or is interested in funding the transaction that there is another company out there willing to fund the mortgage with better terms. This is a big mistake.

Because of our relationship with lenders, we sometimes receive calls that our client has submitted a mortgage application through another broker – whether or not the lender approved our original application. We call this “shopping the loan.” We have even had another broker call us about a transaction that we are actively working. Unfortunately, when this happens, the damage is done. Even though our lenders are loyal to us and will not accept the second application, we recognize that a breach of trust has occurred. Most of the time, we terminate our broker agreement with the client. We choose to work with clients that are loyal to our services. We have found that we best serve our clients when there is mutual trust. We have too many mortgage clients that are loyal to our services to waste time with an uncommitted, unloyal client.

Once in a while, however, we have made the mistake to continue our broker relationship with a commercial borrower after discovering that they were using the services of another broker. As human beings, we also make mistakes. This usually comes after discovering that our original proposal was the best terms that the borrower was able to get. An apology by our client with a sincere plea for our assistance has pulled at our heart strings. Now we go back to the lender and strive to get the same terms as before. If we get the lender to respond, they will, at times, change their original terms. This usually happens because they don’t trust the client as much and change terms to reflect an inherently riskier transaction.

As a borrower, our clients can have confidence that we always submit a commercial mortgage application to multiple lenders. We are working to get our clients the best terms available in a very narrow market. We choose the original group of lenders based on our experience with the lenders and foreknowledge of their loan requirements. If we receive two letters of intent, we will provide our clients with both and consult with them on the merits of each proposal. If our client only receives one letter of intent, it’s probable that this is the only company that will fund and close their commercial loan.

Once you receive a letter of intent, it’s time for action. Most borrowers have about 2 to 3 days to make their decision. Lenders give borrowers time to review the letter of intent with their attorney or legal counsel, but not to play games or what we call “shop the deal.” If they discover that a borrower is “shopping the deal” or taking unnecessary time to sign a letter of intent, they will get uncomfortable with the transaction and sometimes pull the deal.

My best commercial real estate loan tip for this week is, take action.

Commercial Loan Processing Fees

One of the biggest hurdles we face when assisting borrowers for a commercial loan is not finding the money, it is getting them to pay a “processing fee” or “due diligence fee” to the lender after receipt of the Letter of Intent to Fund (LOI). 

Virtually every lender we have worked with over the last 16 years charges a processing fee.  This fee ranges from $2,500 to $10,000.  The fee is used by the lender to order third party reports — appraisal, environmental review, survey, etc., as well as to cover other due diligence costs.  

We realize the fee seems steep and, relative to residential loans, it is.  It has been our experience, however, working with many private funds for both conventional and hard money commercial loans the average fee ranges between $5,000 and $10,000, depending on the type of loan (hard money or conventional) and the type of property being funded.  

Some lenders we are aware of regularly charge even higher due diligence fees of $15,000, $25,000, $50,000, or an up front fee of 1% to 2% of the loan amount being requested.  That means for a $3 million loan a 1% processing fee would require the applicant to pay $30,000 before due diligence is completed and in most cases the fee is non-refundable.  (Note:  we don’t work with these types of lenders, such fees are excessive and in too many cases the lenders don’t perform, leaving the loan applicant high and dry).  

Nevertheless, a processing fee does cover legitimate costs of the lender and should be expected by commercial loan applicants for private funding.  As mentioned earlier, private money lenders for commercial loans charge between $2,500 and $10,000 for due diligence.  The range of the fee is dependent on whether or not the lender will use an existing appraisal and other third party reports rather than have their own appraiser or expert conduct a new report; or, in some cases the lender may not even require an appraisal or other third party reports, but will still charge a fee for other due diligence costs.

Generally speaking, hard money lenders charge higher due diligence fees than conventional private lenders.  The primary reason private hard money lenders charge  higher due diligence fees is that their costs are higher for conducting due diligence, since every third party document has to be ordered on an expedited basis.  For example, to complete an expedited appraisal (2 to 5 days from the date it is ordered vs.14 days to 30 days for a standard appraisal order) the appraiser charges a higher fee $5,500 to $7,500 or more for a commercial property appraisal.   

Also, as the loan amounts get larger, the risk for the private hard money lender rises, too, since they don’t do as much due diligence as conventional lenders, so their fees are higher to cover the additional risk. 

The reason these lenders charge due diligence fees, too, is sometimes the lender will complete all of the due diligence, open escrow; and, all the while the borrower has been shopping their loan with some else, then at the last moment refuses to sign the loan documents to close the loan for any reason.  The lender then has to eat the cost of the due diligence.

Market Rents vs. What the Market Will Bear

Some of our clients have found that they have been able to secure leases from their commercial tenants at lease rates above prevailing market rents in their area.  While this additional cash flow benefits the owner over the course of the lease term, it can be a detriment when trying to obtain a commercial loan.   Most lenders will adjust the inflated lease rates back to market rents, thus discounting the property value and, consequently, reducing the amount they will lend against on the subject property.

To borrowers this may not seem like fair treatment for their ability to obtain higher cash flow per square foot than comparable properties.  However, from the perspective of the lender, if the borrower defaults on the loan and the lender has to foreclose on the property, at what lease rate will the lender be able to charge to replace the tenants that have either left the property or whose leases have expired and a renewal of the lease must be renegotiated.

So, do not be surprised if your lender adjusts your above market rents when you apply for a commercial loan.  If the loan amount ends up being lower than you anticipated you may want to cross-collateralize other properties with the subject property and/or seek a second loan behind the first to achieve the total funding you require for your project.