Have you applied for a commercial loan lately? Most banks are not doing commercial loans and others just wait forever to give you an answer. They don’t want to lose you as a customer and they really don’t want to fund your project.
Commercial loan brokers are aware of the painfully long process of closing a loan for commercial real estate. The process will take several months to complete. It can be even longer for construction loans or business loans that are not tied to commercial assets. For example, HUD loans can take 18 months to fund. Recently, a borrower in Honolulu came to me to refinance an operating assisted living facility. He has been working with a local bank to refinance for 6 months and still does not have an answer.
Business Communications 101
Every commercial loan application starts with an executive summary. This is your opportunity to sell the deal to the lender. I have written several articles on this subject. Dozens of poorly written summaries enter my inbox every week, getting tossed aside because the borrower or agent did not put in the effort to answer simple questions in a narrative document. If the agent can’t handle the simple task of preparing an executive summary, how will he/she be able to understand and prepare the detailed documentation?
Business Communications Tips
- Proofread documents and emails before sending.
- Keep the number of photos to a minimum.
- Focus on FINANCE.
- Be brief and concise.
- Expect your correspondence to be forwarded to others. This is an opportunity to make a good impression.
- Prepare every email and document as a business letter. Avoid tweeting in business correspondence.
If it Were Easy…
A “real estate investor” at a networking event told me that as long as the property has good upside, funding is available. Not true. Most Commercial real estate loans are full recourse. Lenders ask for the guarantor’s net worth and liquidity. They ask for tax returns, proforma, appraisal, an exit strategy, and a down payment.
There are so many investors with no cash trying to buy commercial properties using other people’s money, seller financing, investment pools, etc. Legitimate lenders just don’t entertain these deals. If they say they do, watch out for a scam.
The First Month – Searching For a Lender
There are thousands of commercial loan brokers. They all have access to the same lenders. So why can’t they fund your project? The answer may be shocking. Many of them have NEVER closed a commercial loan and don’t know the process.
Ask questions, but don’t expect them to reveal their sources. Ask for a resume; ask about fees, when and how they are paid, ask about consulting or commitment fees. Most loans should not require upfront fees. They may ask you to sign an exclusive fee agreement and NCNDA. Ask for a list of what will be required to fund your loan and the expected timeframe.
The Broker will send your executive summary to one or more lending sources. This part of the process can take two or three weeks before finding a direct lender who is willing to do the deal. Expect some rejection from lenders and/or brokers. Some brokers just don’t respond. Seriously, I’m not joking.
The Chain of Death
Some lenders will send your loan out to other brokers. While this may be necessary to fund a Joint Venture or large construction loan, it does not make sense if your loan request meets typical soft money lending requirements. I recently had a loan request from a broker for a construction loan. There were 5 other brokers in the chain. Some of them were residential hard money guys asking for 5 Points! The total broker fees would have been 24%. The lenders were not willing to fund a loan with excessive fees. We were able to reduce fees and get the deal done.
Buyers are Liars
Every real estate agent has experienced driving a buyer around for weeks or months, only to have them go direct to a seller’s agent or make a deal with a seller. This business is no different. We often waste time working with borrowers who don’t have any sense of obligation or ethics.
We hired an investor who wanted to work with TOP 10 Funding as an agent. She wanted us fund her loan. I worked with her on the deal for several months, giving advice and editing her documentation. I submitted her deal to several lenders and setup conference calls. Even though she signed our code of conduct, she felt compelled to shop her loan with 15 other brokers. She said the competition would encourage us to work harder for her.
Lenders do not trust borrowers. It is a plain simple fact. They look for flaws in documents, conversations, and question every aspect of a deal. Borrowers should know where they stand going into the deal.
You will be asked to send “the package” to the lender once they accept your proposal in the executive summary. This means you will open your kimono and let it all hang out. Tax returns for 3 years, credit report, P&L, rent roles, proforma, feasibility report, pre-sales, marketing plan, resumes, and more. Be prepared for some serious investigating. Answer questions honestly and be prepared to explain any negatives.
You’re Almost There!
Once the lender has accepted the application and has starting underwriting, the process can take 60-90 days. This may seem like an eternity after preparing your information and searching for a competent broker. It is a process that takes patience and cooperation.
While private lenders may not have the huge resources of large banks to mitigate risk, they are very thorough. If there are issues with the property or the borrower, the lender will eventually find out. Some loans are rejected after weeks of due-diligence by the lender.
By this time you’re ready for therapy. You have developed very thick skin and can deal with serious interrogation. But hey, your project got funded and it only took 5 months!