CRE Private Lending – A Performance Based Business

People from New Jersey sometimes have a unique way of getting their point across. In the commercial real estate and finance business, individuals are gruff and take crap from no one.

I grew up in Woodbridge, NJ, which is about 30 minutes by train to NYC. When my Mom was walking out the door, if we asked where she was going, her response was typically something like, “Up the pig’s ass for a ham sandwich. You wanna come?” I miss my Mom, she had a great way of getting her point across.

Negotiating is an Art

I recently had a conversation with Mike Paff, a real estate broker in the Northern NJ and New York City Metro area. Mike is has a wealth of experience and an excellent grasp of his market. We discussed the lending business and how all the players take a position and are not willing to budge. Buyer’s brokers end up contacting everyone they know to get the same answers. Some lenders will scrutinize a $10 million loan more than a $100 million loan with lower ROI. It is difficult to understand their position because they don’t publish their criteria. It’s all about negotiating and not losing your position because you overlooked some important information. According to Mike, “in the process of negotiating commercial real estate, everybody must be willing to lose the same number of fingers.”

It must be tough to be a piano playing CRE Broker in Jersey.

The negotiating process also means the parties must perform. We all want deals to close with everyone walking away a winner. To achieve success in a deal that works for everyone, there must be balance. Like a marriage in Utah, all parties must compromise. There are several parties in a CRE deal, so communication and management of information is crucial. Typically a deal can have a 6 or 8 interested parties:  the buyer, other guarantors, his real estate agent, the agent’s broker, the loan broker, the lender’s agent, the loan officer, and the bank or private lender. Sometimes borrowers put themselves in a position that requires a brokers’ chain, because of a weak deal.

Performance of the Buyer

There are many types of investors in the real estate industry. Some have started out in residential and moved into commercial others may have moved from other investment categories.  Then there are speculators, no-money-downers, non-profits, builders, and those looking to use the IRS 1031 exchange program work to their advantage. All of whom have different objectives, so they focus on what is needed to meet those objectives. A problem with buyers sometimes is that they lack expertise to make their loan presentable to a bank or private lender. Be prepared is the motto of the Boy Scouts of America. You expect your kid to do his homework and be prepared. That’s all lenders ask of borrowers. You are asking for money, so tell the lender why you are trustworthy, your credit score, how you will pay it back, what the property is worth, how much you want, why you want it, and what’s in it for the lender. The buyers’ digit is their cash down payment and/or equity. The lender wants your financial commitment.

Performance of the Buyer’s Broker

In commercial real estate buyers hire brokers to perform two functions – find a property and get funding for the project. This means they are taking the buyer’s position in terms of preparing documents, business plans, proforma sheets, and marketing materials. Many times the CRE Broker finds the property and a Commercial Loan Broker does the rest. They understand the CRE industry, lending, and the language of the lenders. Advice to these professionals – sit on the other side of the desk. Ask yourself, “Would you fund this?” Your link to the lender may be a loan officer or an agent for a private lender. They are the gatekeeper. They want to make the deal happen, but don’t want to lose their job and credibility in the process. The broker must make the numbers work for the lender and do their best to show risk, not hide it. What digits must they give up? Work hard for your client’s interest.  That means telling them the hard truth about a project that they may be emotionally invested in.

Performance of the Lender’s Agent or Loan Officer

Private lenders have an agent working for them to go out and find the deals. That means the agent get paid by the deals that close. Simple! Or is it? The agent is always in a tough spot, stepping on the gas and brake at the same time. The agent wants the buyer to get his loan but must take the position of the lender. His/her skill-set is constantly growing as he/she must establish expertise to make a variety of deals work and maintain credibility in the industry. Most of the applications submitted are scrutinized and never close. The buyer learns more about his position and adjusts his deal so it works with another lender. Someone else gets the deal, most likely with the same private lender, and the agent gets to go to stress therapy. In this business you must constantly adjust your attitude to remain positive. The agent’s digits are based on communication and humility.

Performance of the Lender

Consider yourself a lender. You have all this money that you want to work for you. The fact is the world is filled with greedy [insert cuss word here] who want to scam you for your money. That’s what most of us think about banks and private lenders. The truth is, they are in business to invest money and want to make loans with legitimate businesses. That means they must perform internally to their constituency and perform externally to protect their position. There is no room for emotion in this business, any doubt results in, “no, next file.”  Performance here is the ability to underwrite and fund in a timely manner. The lender’s digits are based on the amount of work and expense that goes into their process before the loan funds. Other parties can get emotional and walk away during the process.

The Stars Must Align

This process conjures up the image of a gangster movie. A meeting in the back of an Italian restaurant in Brooklyn, a thick neck guy named Nick, a pair of wire cutters, and fingers laying on the table.  It’s not that bad really; they can’t cut off your fingers if you’re telecommuting.

The process requires a huge effort and compromise from all parties. Having perspective by working in different areas at different points of your career also helps. If the economics conditions are right, the borrower is strong, and the risk is understood, then things are likely to go well… as long as the players don’t get emotional.

29 thoughts on “CRE Private Lending – A Performance Based Business

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