Some commercial mortgage brokers are under the false impression that nonbank private lenders, given their flexibility, will accept a breezy and second-rate presentation — that you can essentially talk your way into a multimillion-dollar loan. They don’t take nonbank private lenders as seriously as banks, assuming that the process will be easy.
These brokers also may think that you can be more relaxed and less professional in the preparation and presentation of the funding proposal. Nothing could be further from the truth. Although private lenders have room to be creative, you still need to hit all the right notes when making your loan pitch.
The game has changed in commercial real estate financing. It is true that banks are not lending anywhere near the amounts that they financed prior to the Great Recession. The more entrepreneurial nonbank and alternative lenders recognized the lucrative void created by the prohibitions placed on banks by domestic and international laws. Taken together, the Dodd-Frank Act legislation in the U.S., and Basel III and IV on the international level, have essentially tied banks’ hands regarding the funding of many major real estate projects. The rules have curbed bank-lending activities for speculative or risky undertakings, a category that most commercial real estate projects fall into.
Over the past few years, several new nonbanks replaced traditional banks as preferred sources of financing. They have brought additional flexibility to borrowers and project principals. The traditional box that banks required borrowers to fit into no longer exists. Private lenders have the freedom to alter requirements for qualifications on a case-by-case basis. Their loans also remained surprisingly affordable and competitive in pricing.
Today’s alternative lenders pride themselves on an ability to solve problems and develop alternative approaches to eliminate issues that once resulted in a rejection by a traditional bank. The cookie-cutter approach is no longer necessary, but you shouldn’t mistake this flexibility as a signal that it is OK to be free and loose in how you present a client’s proposal. Private lenders may be more flexible than traditional banks, but they must be taken as seriously as banks.
Present solid information
Mortgage brokers often fail to understand that a first-rate presentation is still necessary when submitting a proposal to a private lender. Compounding this error, the broker may adopt an arrogant attitude by trying to dictate how the transaction should be conducted. Needless to say, these brokers are wasting their time and representing their clients poorly. A shoddy presentation or an arrogant attitude can be extremely damaging to the broker’s image and reputation.
Any private lender will want to see certain basic information regardless of the loan size. You will need to present the evidence that a borrower has the ability to repay the loan at the interest rate required by the lender. The numbers need to be realistic and concrete, not speculative. The key numbers are usually presented in a five-year financial forecast, which shows all income sources, expenses, taxes and any extraordinary payments that may need to be made.
A private lender will need to be convinced that the asset will yield enough cash to service the debt. If you can establish that the project is financially viable, the lender will be interested in funding the project. If the odds are there won’t be enough income to cover the debt obligations, the lender will likely pass on the opportunity.
In this regard, many borrowers and brokers fail to present definite and clear information. Some investors will introduce hypothetical situations to improve the future outlook of the bottom line, such as telling the lender that the initial loan with higher rates can be refinanced with a traditional loan at a later date. Fuzzy details like this won’t impress the lender. Future markets and interest rates cannot be determined today. For various reasons, the borrower may not qualify for refinancing in the future.
Summarize your story
A financial analysis and other key information should be included as part of the project’s executive summary. The executive summary is the most important document in your presentation.
Many borrowers simply send 12 to 15 individual files containing different details about the project. This is another error. A lender is unlikely to review a stack of specific documents until convinced by an executive summary that the project is worthy of a closer look. Although this supporting information could ultimately be essential to the lender’s final decision, the overall concept should first be outlined in the summary, so that the lender knows what the completed project entails.
Lenders are initially interested in understanding a project as a whole. The Catch-22 is that, in the absence of a compelling and convincing executive summary, most lenders will pass on a project and there will be no need for due diligence. Lenders want to be able to quickly decide if they like the project, if the project is financially viable, if it is necessary for that particular community, and whether it is feasible in a specific location and environment. The executive summary provides the project’s back story. A convincing summary will review the competition, the potential demand for the project in that area, the population and traffic statistics, and industry trends.
The executive summary should be professionally formatted. There are numerous ways to present your document. A simple Google search will yield document formats for any conceivable project. The mortgage broker also can help the client greatly here. You should assist your clients in choosing the format that best describes the selling points, uniqueness, competitive advantages and other positive aspects of the project.
Get noticed quickly
In addition to the executive summary, the loan-request package should include a snapshot that provides answers to a lender’s frequently asked questions. This should be contained in a separate one- or two- page document designed to be a five- to 10-minute read that puts the lender in a position to decide whether the project appears financially viable. The answers also should present the project in a way that compels the lender to read your executive summary.
The snapshot can greatly assist you in getting your project immediate consideration as opposed to waiting in a first-come, first-served manner that is much like waiting in line at your local supermarket. This presentation methodology benefits both the borrower and broker. In many cases, a well-organized submission is given immediate consideration and priority by the lender, resulting in faster closing and quicker financing of the project.
By pursuing these strategies, you will develop a reputation for providing excellent submissions. This will establish you as a reliable and trusted source of appropriately documented projects. As word gets around, you can expect to get more immediate responses from lenders. The end result should be profitable, long-term relationships with lenders for different project types.
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Despite the relaxed standards and flexibility of nonbank lenders, commercial mortgage brokers must always approach these lenders in a serious, competent, complete and professional manner. The relaxed approach is not the right approach. It could result in your client’s deal getting rejected, and it could dim your prospects for doing future deals.