You are probably wondering what the title of this article has to do with the business of Private Lending for Commercial Real Estate. I was listening to the Tom Petty song and thought about the important attributes of commercial real estate brokers. In our business, success comes from being patient and understanding the timing of the process.
The Archbishop Fulton J. Sheen said, “Patience is power. Patience is not an absence of action; rather it is “timing” it waits on the right time to act, for the right principles and in the right way.”
Wayne Dyer teaches, “Infinite Patience Brings Immediate Results.” I think if you play golf, you can relate to this.
Timing is Everything
When I was learning to fly on instruments, my training focused on maintaining situational awareness. Being able to handle distractions, knowing your position at all times, how much fuel has burned, following instructions by air-traffic controllers, and interpreting the trends of instrument readouts. This awareness of time results in life-or-death decisions.
Timing is critical part of medicine, construction, comedy, career decisions, cooking, investment finance, sales, real estate, electronics, music, parenting, sports, and personal relationships and dating. For some of us the timing of the coffee maker in the morning sets the mood for the day.
Timing and Private Lending
Many times we can tell how a deal will play out by the timing of our communications. There is a natural flow to business relationships, especially when you are in business to help people achieve an objective. When the timing of the process is off, experienced professionals recognize the patterns of behaviors as they relate to borrowers, brokers, and lenders. For example, if your wife asks, “does this dress make me look fat?” Every man is aware of the timing of this response. It should never be longer than 50 milliseconds. Every millisecond of delay added will add hours of misery to your life. All kidding aside, business communication is often looked at this way.
We are Here to Help
When a borrower contacts us for a loan, the first communication is typically by email. We collect the initial documentation, such as a Loan Application and Executive Summary either online or by email. We then contact the borrower to discuss the details of the request. Most borrowers are very eager to provide a few sentences and pictures, expecting lenders to jump at the opportunity.
The critical timing comes with the response to the request for additional information to prepare the package. In order to provide a Quote from a Direct Lender, we need to prepare a loan package. This includes a Personal Financial Statement, Profit & Loss Statement for the Business Entity, 3 years’ Tax Returns, a signed Fee Agreement, and Historical Property Financial Information. Reluctance to provide any of these documents is a Red Flag. Borrower liquidity and property performance is a critical part of the evaluation process. Even non-recourse loans require a PFS from any borrower with 20% or more ownership. A strong borrower is more important than a marginally performing property.
Waiting for the LOI
After all of the above information is prepared in a package and presented to the lender, it should take no longer than one week to receive a Letter of Intent with a soft quote for the project. A delay in receiving the LOI indicates that the lender is not totally excited about the deal or is comparing other in-house deals. Often a conference call with the lender will help to resolve any issues with value, debt service ratio, or borrower liquidity. If the LOI is not received shortly after the call, it is not going to happen.
Some lenders will not give a rejection because they are concerned with how it will affect our broker relationship. The fact is, we are not particularly interested in working with difficult or indecisive lenders. We have many sources.
Due Diligence Deposit
This is where the trust part of the business relationship is tested. Most private lenders require a due-diligence deposit. Larger Private Lenders and Banks do not charge DD fees, but all lenders will charge for 3rd party costs. Borrowers seldom pay the deposit before the LOI expiration, and many try to use the LOI to negotiate a deal with someone else. They always come back. There are fee-takers out there, and borrowers should always check out lending sources. We check out our lenders and only work lenders verified to be DIRECT using public records of transactions. We can provide a lender report for borrowers when it’s time to engage with the lender.
I have heard many stories, always from developers that say they have lost money to lenders who kept the deposit. It is always $30k however, they never produce a copy of the wire transfer. The fact is, most developers do not have the liquidity to cover the costs.
Most delays in underwriting come from the borrower. Underwriters will request information to perform due-diligence on the loan and analyze the profitability of the deal. Some circumstances require help from an Attorney or Accountant or may involve a partnership buyout, probate, or other complication.
Of course, underwriting timing depends on the size of the project. Purchase or refinance typically takes 30 days. Construction projects are slightly longer. Much of the delay comes from 3rd parties, such as appraisers, inspectors, and attorneys.
Hurry Up and Wait
Underwriters typically do not provide status on loans. We get status updates from our internal contact and update our borrowers. Inexperienced brokers put stress on a deal when they don’t understand the Lending Process and are only concerned about getting paid. The fact is, they have no influence on the process and may irritate the lender with emails and calls. Because of a recent situation, we were forced to change our broker policy.
The fact is, all commercial lending deals are different. We work hard to solve problems and keep the process moving forward. Most issues can be resolved as long as the borrower provides honest, accurate information.
Speed Up The Process
The best way to speed up the process is to realize from the very beginning that small delays add up. Providing accurate documentation in the very beginning is going to help you to receive a quote and decide if you should agree to work with a lender or apply with someone else. We can help you with this process as we represent over 100 lenders. Another way to speed things up is to make yourself available and understand that Private Lenders are risk averse. Risk is determined by (1) strength of the borrower, (2) property value, (3) ability to service debt, and (4) exit strategy. Understanding this perspective in the beginning will help you to present the right information in a format that makes sense to a lender.