Since the Great Recession, nonbank lenders have increasingly begun to resemble banks in their level of professionalism. In turn, commercial mortgage brokers have had to become more sophisticated in how they submit their projects for consideration.
Submissions that do not adhere to professional standards will most likely be passed over. The goal for a commercial mortgage broker should be to develop long-term relationships with lenders that respect your loan proposals, and to work with clients who consistently present feasible projects. The first step is to create a professional executive summary and a five-year pro forma document that summarizes the project’s key points and estimates its financial outcomes.
An executive summary has a specific structure and format. It should contain a table of contents and about six to 12 pages at most. Many initial submissions contain charts, graphs, drawings and diagrams, and may be as long as 60 pages or more — proposals that are almost guaranteed to be shredded or simply ignored.
The main reason for the rejection of these proposals is time. A capable lender may receive hundreds of project submissions per month. No one has the time to read thousands of pages to decide which transactions to pursue and which to eliminate. There is an old saying that “less is more.” In commercial real estate funding proposals, however, “much less is much more.”
The format and content of a professional executive summary depends on the nature of the project. Virtually every type of loan proposal will require an executive summary. Although commercial real estate projects come in many types — construction, acquisition, bridge lending and so on — there is ample information online that can provide a template for submitting a loan proposal. The points that each project type should cover can be found in various business journals and publications. There is no excuse for not submitting an impressive, compelling executive summary for truly worthwhile projects.
The objective of an executive summary is not to impress a lender with financial, mathematical, statistical or other quantitative analysis through charts, graphs, matrices or multiple pages of data. The initial decision to undertake a project is not based on these calculations or quantifications. The supporting data only becomes critically important once a project is accepted and a lender moves to the stage of validating your claims.
The executive summary is exactly that — a summary. The project’s principal should spell out the site’s feasibility, its contribution to the community and any other necessary reasons for its existence. The summary should include details about the principal borrowers and their management companies, including their past experiences and projects. It also should state the potential returns to the lender and investors.
The executive summary is not a stand-alone document. It should be accompanied by a five-year pro forma statement of the project’s projected revenue and expenses so that a debt-service-coverage ratio can be adequately calculated. This five-year forecast should lay out the potential revenues, expenses, taxes and debt-service-coverage availability to determine net operating profits. This information should be broken down on a monthly basis. A yearly analysis does not reveal potential problem months that may have a cascading effect on future performance.
There are essentially two types of financing — debt or a combination of debt and equity. Projects that are 100% equity financed are nearly nonexistent. And regardless of the size of a deal, debt financing will rarely exceed $200 million to $250 million. With debt financing, the principals are generally required to provide about 25% of the funds they need for their project, and the loan covers up to 75% of the needed amount. In some cases, the loan-to-value ratio may go as high as 85%, but that’s an anomaly reserved for tremendously strong proposals.
A combination of equity and debt financing can provide 100% of the necessary funds. Although this is known as 100% financing, the term is somewhat misleading. All loans place obligations and limitations on the borrowers. The principals must put significant capital or assets such as land at risk, or they must make legal entitlements or other contributions to the project. They also must pay for site visits and provide substantial good-faith deposits, which are usually refundable, to assure the lender that they will not simply walk away from the project before its completion.
Debt and equity financing can cover multibillion- dollar projects. The debt and equity portions will usually be handled by the same source, and can typically be obtained at fair and reasonable rates. The pro forma document will show how much debt service the project can cover. The remaining equity will be determined by how much capital the principals have already invested.
There are numerous ways to achieve financing for large-scale projects, but your clients must always place a significant amount of their own finances at risk. There are absolutely no free rides. Many people assume a free pass when they hear about 100% financing opportunities. This term merely means the investor can obtain all of the remaining funds needed to complete the project, but it doesn’t cover all of the project costs. In reality, the project’s principals usually need to invest at least 15% to 25% or more of the costs to obtain 100% financing.
There are numerous ways to achieve financing for large-scale projects, but your clients must always place a significant amount of their own finances at risk
A word should be said about building relationships. In taking on clients and lenders, you should always consider the long-term prospects of your business relationships, rather than focusing on short-term wins.
Your clients should be the developers or investors who can identify multiple successive projects, not just one. The same is true of your relationships with lenders. You should feel secure that your lender will respect your proposals. Lenders have the same goal because their business also is based on longevity.
Many of your clients may mistakenly believe they can submit a substandard proposal and then verbally convince the lender to fund their proposal in a meeting. This tactic almost never works. The nonbank lending industry has grown up.
The initial deal-submission documents are key to building successful relationships. In preparing the submission, you’ll need to avoid simply accepting whatever documentation the borrower presents. This is especially true when it consists of dozens of pages or is filled with charts, graphs, illustrations and renderings. Draw on your industry knowledge. Don’t allow the borrower to dictate what should be presented. In this arena, the commercial mortgage broker is the expert.