Preparing Your Package
Once you’ve identified the lenders you’d like to approach for a loan quote, you’ll need to prepare a package for their review. Since many lenders have reduced staff, they’re not prepared to deal with large loan volumes. Your package must be professional in appearance and include all the pertinent information in a synthesized format so a lender can review it quickly to determine its interest. Packages should include:
- Trailing 12-month income and expense statements
- 2008, 2009 and 2010 year-end income and expense statements
- Trailing 12-month occupancy reports (physical and economic occupancy)
- Résumé including a schedule of real estate owned property
- Competitive market occupancy and rents
- One-, three- and five-mile demographics, including population, number of households, income, renter vs. owner, etc.
Negotiating the Loan
Once you’ve reviewed the varying loan terms and identified the best option for your business, focus on negotiating the loan application. Following are some of the items that should be part of your deal.
Contract wording. Negotiate the precise wording of recourse carve-outs to ensure they are as narrow as possible. This should occur at the application stage, when you have the most leverage. Many so-called non-recourse loans are not truly so since they contain recourse carve-out guarantees. For example, the loan documents may spell out certain situations in which the loan triggers recourse. These situations, normally called “bad-boy acts,” include fraud, waste, funds misapplication and voluntary bankruptcy filings.
However, the precise wording of these guarantees is crucial since you may be held fully liable for the loan. Be careful of the following language, which some lenders may identify in their recourse carve-out guaranty language:
- Borrower must maintain adequate capital to operate his business.
- Borrower must not admit in writing if he cannot pay his debts.
- Borrower shall be personally liable for unpaid real estate taxes and insurance premiums.
Prepayment penalties. Depending on the type of loan you’re requesting, the prepayment options can range from no penalty at all to defeasance, yield maintenance or a declining schedule. Most of the shorter-term floating-rate loans will provide less restrictive prepayment penalties.
Borrowing entity. Fully understand the requirements for your borrowing entity. Some lenders will require a “single-purpose entity,” which basically states the borrowing entity shall not own any property other than the subject property.
Impounds. Negotiate the impounds the lender will be requiring such as real estate taxes, insurance and capital improvements, and who will be receiving the interest in these accounts, lender or borrower.