As summer comes to a close, you may be feeling more frustrated than usual with your lender partners. Given vacations and scheduling conflicts, the summer months are often one of the hardest times of the year to close quickly on a commercial real estate loan. Getting to the stage where a lender says “yes” to a deal, however, is a problem that all commercial mortgage brokers face, regardless of the season.
Lenders tend to ask for the same information over and over again. In the case of a hotel or resort, for example, the lender will typically want to know its operating history, its three-year occupancy rates, when the property was last refurbished and whether the project has a capital- improvement plan in place. Some of these questions may seem unnecessary, but you will close deals more quickly by cooperating with your lender.
Develop a checklist
The best way to approach a lender is with a plan. It is possible to anticipate a number of their questions and develop a checklist of items that the lender is likely to request when considering a funding proposal.
Regardless of the deal type, most commercial mortgage lenders will want to know how the borrower intends to repay the loan. In this regard, you should be open about your borrower. Tell the lender that the borrower historically has produced “X” amount of revenue based on real dollars that are available to service debt.
Also come prepared to estimate how many years it will take the borrower to repay the loan under an assumed interest rate and debt-service-coverage ratio. The lender will need this information to make a preliminary loan assessment. By having this information ready for them, a mortgage broker will appear professional and experienced. Be logical about your assumed interest rate, however. If your asset type is generally accompanied by rates of 6%, assume that rate for your debt-service calculation and let your lender know about this assumption. Resist the temptation to pencil in a 2% interest rate when the asset typically finances at a much higher rate.
Brokers always want to know if a lender can close quickly on their deals. The fact is, every lender wants to complete the loan, but they need to take several steps to do so. Lenders are not like equity investors who tend to be willing to take greater risks in exchange for greater returns. Most lenders want to receive a reasonable return with relatively low risk.
You may, for example, come to a lender with a recently completed appraisal in hand. Although that appraisal could be helpful in building your case that the loan should be funded, most lenders will do their own independent analysis of the asset value with their own approved third-party vendor. The lender’s independent analysis of the loan’s merits can take time, especially in the summer months when some mortgage professionals are on vacation, backlogged or otherwise unavailable.
One constant source of friction between mortgage brokers and lenders is over the fees charged on relatively small loans. Brokers need to understand, however, that lenders are running a business. Every lender has considerable fixed overhead costs for staff salaries, office leases, technology and equipment. It often takes roughly the same amount of time to underwrite a $10 million loan as a $1 million loan.
Lenders need essentially the same information for large and small loans — the same third-party reports, loan documents and appraisals. The only difference is that with the $10 million loan, the origination costs are lower on a percentage basis. This is why the fees on smaller loans appear to be so much higher than they do on larger loans.
Speed up the process
Commercial mortgage brokers can expedite the loan-closing process by bringing some basic information to the table. Lenders will typically require tax returns, as well as accountant-prepared financial statements for both the prior fiscal year and the most recent interim period. They also will want to see a logical business plan, the real profit-and-loss numbers and, of course, a clear statement telling the lender exactly what the borrower intends to do with the funds.
Still, even when you approach a lender armed with this information, the process will take time. Most commercial mortgages typically require four weeks to close if the borrower has all the documentation that the lender needs. The more information you can provide for a lender, however, the easier it typically is for your lender to close on the loan in a timely manner.
Lenders may ask for additional information when evaluating certain specialized assets, such as assisted-living facilities, golf courses or hospitality properties. With assisted-living facilities, for example, a lender will likely ask if the operations are primarily supported by private payments or by insurance and entitlements. The lender also will want to know the resident turnover rate and the operational focus, such as whether the facility’s residents tend to need psychiatric care or physiological care. Is it a condominium facility providing private residential care or a personal-care operation? Knowing these simple facts may well help the initial call with your lender and speed up the process.
Although mortgage brokers and lenders may seem more at odds during the waning days of summer, it is surprisingly easy to get to a point where you can close on a loan no matter the asset class. Assemble facts that the lender can review. Set a realistic time frame for the closing.
Communicate with your lender to ensure that you have delivered everything they need to make an expedited and favorable decision. Don’t be afraid to ask questions. You both have the same goal in mind of closing the loan.
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Just like you, each and every lender has a profit motive and each lender wants to close a loan. Lenders are not the enemy. They are your partners in getting any loan to the closing table.