When you want money, where do you go and who do you see? It’s not as easy as it was 90 days ago, and certainly not as easy as it was a year ago. Lenders are concerned about today’s markets. The sub-prime lending debacle in the residential industry is having a major effect on commercial real estate lending. The underwriting has changed dramatically, spreads have widened, debt-coverage ratios have increased, loan-to-values are not as aggressive, and interest-only transactions are almost nonexistent.
Today more than ever, it’s critical to understand the loan that you would like to make, who is willing to make it, and the exact underwriting circumstances involved. The key to getting a loan—besides having a potentially successful project—is a loan package that will identify who is going to build the project, the project’s strengths, location, when it will actually enter the market, who will compete with you after construction, and an explanation of why the transaction makes sense in today’s marketplace.
This article outlines the basic steps for providing a professional loan package that will get the attention of a lender, move you to the top of the list, and allow you the best opportunity for a successful placement for your debt or equity.
1. What documents will you need and why?
You’ll be creating a document package for one of several loan types: debt, equity, participation, permanent, construction, bridge and land. All of these loans are different yet similar in many ways. The issues are the financing and the execution of the borrower’s game plan.
There are many things to consider: Is the loan for new construction or a project underway without a loan? Is it a bridge loan for more than the value of the asset to be purchased, a build out of tenant improvements, or a permanent loan to put away the debt on a long-term basis? Perhaps you’re looking for equity capital or a participation loan for your transaction.
All of these loans have different nuances for the underwriting. Remember, you have to write your package for a particular audience. Think about the lender and what it may be looking for in a project. Discuss lending goals or parameters with the lender or equity provider. The basic underwriting guidelines will tell you what you need to put your package together and give you a sense of the direction to take as you begin to assemble the documents and write the story.
For an example of what a loan package might include, see the detailed sidebar at the end of this article.
2. To whom will you tell the story, and why will they listen?
Just because a lender is a lender does not mean the company has an interest in your deal. How can you qualify that issue of interest? If the lender is FDIC insured, it has a mandate to reinvest in the communities where it obtains deposits. However, it also has concentration issues with loans, regulations and lending limits; and if it cannot fund your loan, it may need to share it out prior to closing in some instances.
As a general recommendation, when a lender says it can make your loan, your next question should be: “Is your bank large enough to make the transaction, or do you need to participate this loan with another lender?” Your preference would be to have a lender large enough to fund your transaction internally, because if it has to participate the transaction, there will be an additional layer of approval to secure before your loan can be funded and closed.
You need a compelling story as to why the lender wants to do this deal. Everybody is very busy, and it’s easier to fund repeat customers than to create new business relationships. Your job is to inspire the new relationship with a successful project, or else why does the lender need you?
3. What are the objectives of the borrower?
All borrowers think they know what they want and how they want their loan to be structured. Some do know what they need, but others really don’t. Does your transaction require a participation loan, hard money or any way to get the deal done? You must figure out the best method to get the money needed.
4. Why does the lender want your loan?
The lender should want to provide your loan because it will make money from the transaction, obtain a new client and generate deposits to lend to others. If packaged properly, your request can get the lender’s attention and move to the head of the line. Lenders want to understand why the deal works—and not with 10 pounds of information. A quick, four-paragraph Executive Summary and photos can be sent via e-mail and will get the interest to set a meeting for a real loan presentation.
Deals that get done get done face to face, so if you have the opportunity to meet with the lender, do so. Lenders are real people, and they want to deal with real people. Loan packages sent over the Internet are nice for providing basic information, but there’s no substitute for a well-documented loan package that is well-written and presented eye-to-eye.
Everybody is very busy, and it’s easier to fund repeat customers than to create new business relationships. Your job is to inspire the new relationship with a successful project, or else why does the lender need you?
5. Where is the project, and does it matter?
Where the project is located does matter. Some lenders have geographic boundaries to their lending areas, while others will follow their clients all over the country. Some transactions can only be made by local lenders who know the lay of the land and believe the deal works. Lenders providing permanent loans from conduit funding do not have the same issues as construction or bridge lenders; their focus is on seeing the cash flow and debt-coverage ratio.
In the current finance environment, I suggest you look for a large regional or statewide lender that lends its own money. These are called portfolio lenders, and they can close the transaction with their own cash and not be concerned about selling the loan in the secondary market. With today’s underwriting, you’ll close faster and do so at a lower cost by using a portfolio lender rather than a conduit lender.
6. How do you get the lender’s attention?
With a good-looking loan package that has lots of color. People retain 85 percent more information when it is presented in color rather than black and white. The loan package should be neat, crisp, professional and bound, not in a notebook. Make it attractive and keep it clean. No one wants to look at a loan package with the pencil marks of another lender who looked at the deal and turned it down. Everyone, including lenders, wants to believe they’re special, so treat them that way. Using the items from the “Loan Information Requested” list on page 66 will allow you to present the transaction in the best light for the deal.
7. Who are you in this transaction?
Are you the borrower and builder of this transaction, or do you represent the borrower? If you’re a broker, you need a written agreement to represent the borrower. The lender should ask you for a copy of this agreement when you present the loan request. It wants to know you have the legal right to represent the borrower and have all of the proprietary financial information in your possession.
8. Who do you represent?
If you’re a broker representing the borrower, it will be his funds that pay you through escrow in most commercial financing. If you’re the borrower representing yourself, the payment of fees will not be an issue unless you have a mortgage-company subsidiary through which you try to generate additional fees from your commercial development activity. If you’re an agent representing the borrower, present his project in the best light. Provide full disclosure of all the details that prove up the project and the reasons it should be financed by the lender.
I wish you good luck in packaging your loans. Remember, out of chaos comes opportunity with those who have focus.
Richard Hill Adams is the chairman and CEO of American Realty Capital Advisors Inc. (ARCA) of Laguna Hills, Calif. For the last 30 years, the company has provided sources of debt and equity financing for builders, developers and real estate investors, and has closed billions in real estate transactions nationwide. ARCA has financed every major property type with a plethora of loan structures. For more information, call 949.455.4100; visit www.arca-money.com.
Information Requested for Construction and Permanent Loans
Note: This is not to be construed as a complete list of all items required. There will be other items requested after review of the loan request.
- Loan request letter on company letterhead detailing loan request
- Detailed information on deposits, equity invested or expenses paid to date
- Narrative history of the project
- Maps of region, city and vicinity
- Pro forma on project (sales, expenses, net profit)
- Complete set of plans, with specifications
- Tentative tract map with Conditions of Approval
- Site and aerial photographs
- Final map, with plot plans if available
- Construction cost breakdown (2), off and on site
- Constructions sub-bids, including name, address and phone number
- Materials list, project-features list and construction schedule
- Project renderings and/or sales brochure if available
- Cash flow and schedule of construction (timeline estimate)
- People interested in renting or buying (interest list, leases, letters of intent)
Borrower and Any Guarantors
- Current personal financial statement dated within the last 90 days (executed)
- Current entity profit and loss statement dated within last 90 days (executed)
- Last two years personal returns (Federal), filed or extensions
- Last two years corporate returns (Federal), filed or extensions
- Last two years partnership or LLC returns (Federal), filed or extensions
- Current entity balance sheet dated within the last 90 days (executed corporate/partnership/LLC)
- Resume on applicants
- Articles of incorporation, bylaws or operating agreements all borrower and guarantor/entities
- Partnership agreement or operating agreement (executed)
- Recorded copy of statement of partnership or LLC certificate of partnership
- Any and all banking relationships (checking, savings, loans, including addresses and account numbers)
- List of three most current constructions loan lenders (branch locations, name of loan officer and phone number)
- Copy of fictitious business name filing statement and proof of publication
- Contractor’s financial statements with bank references
- Contractor's license number
- Resume on contractor with list and photos of prior projects
- Construction contract
- Feasibility analysis
- Appraisal: land, project, proposed project
- Environmental impact report, if required
- Soils report
- Recent preliminary title report (if ALTA, with survey)
- Department of Real Estate Public Report, pink or white
- Phase 1 toxic report or phase 2 report
- Land agreements, options and or escrow instructions
- Certified escrow instructions/grant deed/ certified closing statement
- Owner's association articles and bylaws, if applicable
- Copy of sales agreement or leasing agreements, or letters of intent
- Insurance agent's name, address and phone number, policy number for insurance carrier
- Copies of all leases
- Lease summary
- Rent roll
- Personal-property inventory
Source: American Realty Capital Advisors Inc.