Commercial Construction Loans: The Ultimate Guide

You’ve reached the point in your business when it’s time to expand. Maybe you’re renting your office space and you’ve decided that it’s time to build your own office building.

Perhaps you’ve outgrown your property and you want to add on to your existing space. Your scenario could be completely different: you’re a new business just getting off the ground and you want to build your property from the ground up.

No matter what the circumstances, many businesses face a situation where real estate construction or improvements are the next steps for business expansion. Of course, this expansion comes at a very high cost – a cost that many businesses can’t afford to pay up front. This is when it’s time to consider taking out a commercial construction loan.

As with any other type of financing, it’s important to understand the mechanics behind a commercial construction loan.

Read on to learn more about commercial loans, when you should consider applying, and what to expect throughout the application process.

What Is A Commercial Construction Loan?

A commercial construction loan is a type of loan that is used to finance the costs associated with the construction or renovation of a commercial building. The funds from a construction loan can be used to pay for labor and materials for the construction of a new property, the purchase and development of land for a new commercial property, or the renovations of existing properties.

Why Take Out A Commercial Construction Loan?

Business owners who plan to purchase existing commercial properties can get a loan known as a commercial mortgage. However, if you plan to renovate your existing space or construct a new building from the ground up, you’ll need to apply for a commercial construction loan.

New construction and renovations can be expensive — think hundreds of thousands or even millions of dollars. Most growing businesses don’t have this type of cash on hand, so instead, they turn to a commercial construction loan. With commercial construction loans, lenders provide funds throughout the construction process to pay for labor, materials, and land development so you don’t have to cover the costs yourself.

How Commercial Construction Loans Work

Commercial construction loans are different from other loans. Most loans are structured so that the borrower receives the full amount of the loan as one lump sum. Once the loan is received, the borrower begins to pay back the loan through scheduled payments over a set period of time. Commercial mortgages, for example, often have a monthly repayment schedule over 10 years or longer.

With commercial construction loans, the full amount of the loan is not received up front. Instead, the borrower will work with the lender to create a draw schedule. This means that partial amounts of the loan will be released as the project hits new milestones. For example, the first draw will be for the clearing and development of land. The next draw may then occur when the foundation is poured. Another draw will be released when the building has been framed, and so on.

As each milestone is completed, a lender will typically require an inspector to confirm that the work is completed before releasing the next draw. This will continue until all milestones have been completed and the full amount of the loan has been distributed.

With a commercial construction loan, you will only pay interest on the portion of the loan proceeds that have been received. If the total cost of your new construction is $500,000 but the lender has released just $100,000, you will pay interest on $100,000.

Typically, a commercial construction loan is structured so that the borrower pays only the interest until the loan has been fully disbursed. Borrowers can then pay off the principle in one lump sum at the end of the construction project.

But once the project is done and the full amount of the loan is due, what does a borrower do next? Instead of having to make one large payment, the borrower now can receive a commercial mortgage. The property will serve as collateral, and the borrower will use the funds from the commercial mortgage to pay back the commercial construction loan. With the new mortgage, the lender will now be locked into more affordable monthly payments over a longer period of time.

Other commercial construction loans like the Small Business Administration CDC/504 loan provides more long-term options so an additional loan following the completion of the project will not be needed.

Interest Rates

For commercial construction loans, borrowers should expect to pay interest rates between 4% and 12%. Borrowers with the best credit scores will receive the lowest interest rates. The type of lender you work with is also a factor. A commercial construction loan from a bank will typically have the lowest interest rate, while hard money lenders charge more interest for their loans.

Fees

There are several fees that may be associated with taking out a commercial construction loan. The fee types and amounts vary by lender. Some fees you may have to pay for this type of loan include:

Guarantee Fees

Processing Fees

Documentation Fees

Project review Fees

Fund control Fees

Down Payment

Because a commercial construction loan is a high-risk loan, a down payment is required. By paying a down payment, the borrower takes some of the risk off of the lender. Typically, down payment requirements are 10% to 30% of the total project cost. Rarely will a lender fund 100% of the costs of a commercial construction project.

Conventional lenders use a calculation known as loan-to-cost for commercial construction loans. The loan-to-cost ratio is calculated by dividing the total amount of the loan requested by the total project cost. Let’s say, for example, a business is requesting a loan of $190,000 for a project with a total cost of $200,000. The loan-to-cost in this example would be 95%.

Though requirements vary by lender, most require a loan-to-cost of 80% to 85%. For the example above, the lender would loan $160,000 at 80% and $170,000 at 85%.

If this occurs, what does the borrower do? While they may be forced to come up with the remaining costs out-of-pocket, there is another option — mezzanine loans — which we’ll discuss a little later.

Borrower Requirements: How Commercial Lenders Evaluate Eligibility

Not all construction projects are eligible for a commercial construction loan. There are several factors that a lender will consider in order to determine eligibility.

One of the first things that a lender will look at is your credit score. Because these are high-risk loans, lenders want to work with low-risk borrowers with high credit scores. Though credit requirements vary by lender, you should have a credit score at least in the high 600s before applying to qualify for loans such as the SBA CDC/504 loan. Other lenders may require a minimum score in the 700s. Business credit scores will also be evaluated.

The lender will also consider your debt-to-income ratio, also known as DTI. This ratio shows the relationship between the income and the debt of your business on a monthly basis. Typically, lenders look for a debt to income ratio of 43% or less, although some lenders may have stricter requirements. The lower your DTI, the higher your chances for approval. To calculate your DTI, use the following formula:

Total Monthly Debt Payments / Gross Monthly Income = DTI

Lenders will also consider your debt service coverage ratio, or DSCR. This shows the relationship between the income and debt of your business on an annual basis. To calculate for yourself, use the following formula:

Net Operating Income / Current Annual Debt Obligations = DSCR

The DSCR is a bit different from DTI because you want this number to be higher. This shows that your business is bringing in enough income to cover new debts. Most lenders look for a DSCR of 1.25 or higher, but again, requirements vary by lender. Learn more about calculating your DSCR.

The lender will also look at your industry experience and your current business financials to determine if you qualify for a loan. You’ll need to submit detailed construction plans for approval before a loan can be issued. In some cases, the plans may need to be altered based on any risks spotted by the lender, so your ability to be flexible in your plans is key.

Types Of Commercial Construction Loans

Now that you know more about the commercial construction loan process, it’s time to explore the different types of loans available.

SBA CDC/504 Loan Program

The Small Business Administration (SBA) CDC/504 loan is one of the most popular commercial construction loans. This is because these loans come with low down payments, competitive interest rates, and credit score requirements in the high 600s.

Borrowing Amount

No maximum, but the SBA will only fund up to $5 million

Term Lengths

10 or 20 years

Interest Rates

Fixed rate based on US Treasury rates

Borrowing Fees

CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)

Possible prepayment penalty

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral required; usually the real estate/equipment financed

Down Payment

10% – 30%

With this loan, an SBA-approved Certified Development Company will fund 40% of the costs to renovate existing facilities, build new facilities, or purchase/improve land. Up to $5 million is available for borrowers.

Another lender will need to provide 50% of the project costs, while the borrower will be responsible for the remaining 10%. In some cases, borrowers may be required to pay 20%. Repayment terms are available up to 20 years, and interest rates are based on the market rates of U.S. Treasury issues.

SBA 7(a) Loan Program

The SBA also has the 7(a) program, which can be used for the purchase or construction of commercial real estate.

Through this program, borrowers can receive up to $5 million with repayment terms up to 25 years. Interest rates are based on the prime rate plus a maximum of 2.75%. To qualify, borrowers should have a credit score in the high 600s and a down payment of 10% to 20%.

Here are the base rates and markups for a 7(a) loan from the SBA:

Loan Amount      Less Than Seven Years    More Than 7 Years

Up to $25,000

Base rate + 4.25%

Base rate + 4.75%

$25,000-$50,000

Base rate + 3.25%

Base rate + 3.75%

$50,000 or More

Base rate + 2.25%

Base rate + 2.75%

Bank Loans

A traditional commercial construction loan from a bank is another option for business owners. Rates, repayment terms, and down payment requirements vary. Generally, a minimum down payment of 10% is required, maximum repayment terms of 25 years are standard, and fixed and variable rates are available.

You can start your lender search by talking to your current financial institution about your financing needs. See our post on the best bank loans for small business if you’re interested in specific recommendations.

Mezzanine Loans

Earlier in this post, we discussed loan-to-cost ratios. When a loan-to-cost ratio is lower and the borrower needs to come up with additional money, a mezzanine loan may be an option. This type of loan is secured with stock. If the borrower defaults, the lender can convert to an equity stake. With a mezzanine loan, the borrower has more leverage and can achieve a loan-to-cost ratio of up to 95%.

Where To Find Commercial Construction Loans

You know about the types of loans available to you, so where do you find a lender? This all depends on the type of loan you’re seeking.

An SBA-approved intermediary lender (which includes banks, credit unions, and private lenders) distributes 7(a) loans. For CDC/504 loans, an SBA-approved non-profit CDC provides this funding, although you’ll also have to find another lender to finance 50% of your project costs.

Banks and credit unions provide many commercial construction loan options, including SBA loans, traditional loans, and mezzanine loans.

Finally, commercial construction loans can be obtained through hard money lenders. These are private money lenders that provide short-term funding options for commercial construction projects. While there are a few benefits to working with these lenders, including minimal upfront costs and faster funding, these loans typically come with higher interest rates and fees than options from other lenders.

How To Apply For A Commercial Construction Loan

Once you’ve found a lender for your commercial construction loan, the next step is to begin the application process. During this process, the lender will evaluate your personal and business financials, your credit score, and other factors that will determine both whether you’re approved and what your interest rates and terms will be.

Because construction loans are considered high-risk, you will need to provide the lender with a detailed business plan. This should include an overview of what your business does, its financials to date, details about your current operations, and future projections.

You will also need to provide your lender with details about the project. This includes a complete plan with specs and designs. An expected project cost, including estimates for contractors, materials, and other expenses, must be provided with your application.

Personal and business financial documents will also need to be submitted during the application process. These include, but are not limited to, personal and business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules showing current debt obligations. Documentation requirements will vary by lender.

The lender will pull your credit score during the process. Remember, lenders are looking for scores in the high 600s. With some lenders, negative items such as bankruptcies, foreclosures, and past defaults on loans may automatically disqualify you from receiving a loan. For negative items on your credit report, an explanation to the lender may be required.

Because this is such a high-risk loan product, lenders will typically take at least a minimum of several weeks to go over your information. During this time, more documentation may be required or your lender may have questions, so make sure to make yourself available to expedite the process.

Once the lender underwrites and approves your loan, you’ll move into the closing process. This entails going over the loan agreement, which will include all dates and milestones throughout the process. Once all paperwork has been signed and the closing process is complete, you’ll be ready to begin the expansion of your business.

Final Thoughts

It’s always exciting to reach a point in your business when it’s time to expand, but getting the financing you need can be a challenge. If your future plans include constructing new facilities or upgrading your current building, getting a commercial construction loan doesn’t have to be stressful.

If you understand the types of loans and requirements and do some prep work ahead of time, you’ll be able to approach your lender with confidence and get through the lending process with ease.

Loan Agreements: Everything You Need to Know

Winston Rowe & Associates

A loan agreement is a very complex document that can protect the two parties involved. In most cases the lender creates the loan agreement, which means the burden of including all of the terms for the agreement falls on the lending party.

Unless you have created loan agreements before, you will likely want to make sure that you completely understand all of the components so you do not leave out anything that can protect you during the lifetime of the loan.

This guide can help you create a solid loan agreement and understand more about the mechanics behind it.

Why You Need a Loan Agreement

Before you lend anyone any money or provide services without payment, it is important to know if you need to have a loan agreement in place to protect you.

You never really want to loan out any money, goods, or services without having a loan agreement in place to ensure that you will be repaid or that you can take legal action in order to have your money recouped.

The purpose of a loan agreement is to detail what is being loaned and when the borrower has to pay it back as well as how. The loan agreement has specific terms that detail exactly what is given and what is expected in return.

Once it has been executed, it is essentially a promise to pay from the lender to the borrower.

Borrowing money is a big commitment no matter the amount, which is why it is important to protect both parties with a loan agreement in place. A loan agreement not only details the terms of the loan, but it also serves as proof that the money, goods, or services were not a gift to the borrower.

That is important because it prevents someone from trying to get out of repayment by claiming this, but it can also help you ensure that it is not an issue with the IRS later.

Even if you think you may not need a loan agreement with a friend or family member, it is always a good idea to have this in place just to make sure there are no issues or disagreements over the terms later that could ruin a valuable relationship.

If you are trying to determine whether you need a loan agreement, it is always better to be on the safe side and have one drafted.

If it is a large sum of money that will be repaid to you, as agreed upon by both parties, then taking the extra steps to ensure that the repayment takes place is well worth your time.

A loan agreement is designed to protect you so when in doubt, create a loan agreement and make sure you are protected no matter what happens.

There are several components of a loan agreement that you will need to include in order to make it enforceable. These are a few of those components that are true no matter what type of loan agreement it is.

To help explain how a loan agreement is broken down, we have divided it into sections that are easier to comprehend.

The Basic Information Needed

With every loan agreement, you need to have some basic information that is used to identify the parties that are agreeing to the terms.

You will have a section that details who the borrower is and who the lender is. In the borrower’s section, you will need to include all of the borrower’s information.

If they are an individual, this includes their full legal name. If they are not an individual but a business, you will need to include the business or entity designation, which must include “LLC” or “Inc.” in the name in order to provide detailed information.

You will also need to include their full address. If there is more than one borrower, you should include the information of both on the loan agreement.

The lender, sometimes also called the holder, is the person or business that will be providing the goods, money, or services to the borrower once the agreement has been agreed to and signed.

Just like you included the borrower’s information, you will need to include the lender’s information with just as much detail.

Additionally, you will need to include a section that details any guarantor information, if you have one. A guarantor is also known as a cosigner.

This individual or business agrees to pay back the loan in the case that the borrower defaults. You can add more than one guarantor to the loan agreement, but they must agree to all terms set forth in the loan just like the borrower.

Just like you included the borrower’s information, you will need to include the information of each guarantor, and they must sign the agreement. You will need to include their full legal name as well as their full address.

If you do not include a guarantor, you will not need to include this section as part of the loan agreement. Lastly, you will need to include a section that includes the date and location of the signing of the agreement.

In this section of the loan agreement, you will need to include various information such as the date the agreement is effective, the state where any legal proceedings are required to take place, and the specific county within that state.

This is important because it details when the loan agreement is active and will prevent you from having to travel to another place if there are any disputes or nonpayment on the agreement.

The Specific Loan Details

Once you have the information about the people involved in the loan agreement, you will need to outline the specifics surrounding the loan including the transaction information, payment information, and interest information.

In the transaction section, you will detail the exact amount that will be owed to the lender once the agreement has been executed. The amount will not include any interest that will accrue during the lifetime of the loan.

You will also detail what the borrower is getting in return for this sum of money that they are promising to pay to the lender. In the payment section, you will detail how the loan amount will be repaid, the frequency of the payments (e.g. monthly payments, due on demand, one lump sum, etc.), and information on the acceptable payment methods (e.g. cash, credit card, money order, wire transfer, debit payments, etc.). You will need to include exactly what you will accept as a form of payment so there is no question on the forms of payment allowed.

In the interest section, you will include information for any interest. If you are not charging interest, then you will not need to include this section.

However, if you are, you will need to detail the date when the interest on the loan will begin to accrue and whether the interest will be simple or compound in nature.

Simple interest is calculated on the unpaid principal amount while compound interest is calculated on the unpaid principal and any interest that is unpaid.

Another aspect of interest you will need to detail is if you will have a fixed or variable rate of interest.

A fixed rate interest loan means that the interest rate will stay the same during the lifetime of the loan, whereas a variable rate loan means that the interest rate can change over time based on certain factors or events.

You may also want to include information about prepayment in case the borrower is interested in paying the loan off early. Many borrowers are concerned about prepayment and you would be wise to include a clause in your loan agreement that talks about prepayment options, if any.

If you are allowing prepayment, you will need to include this information and detail if they are allowed to prepay the entire amount or only a partial amount, and if you will be requiring a prepayment fee if they choose to do so. If you are requiring a prepayment fee, you will need to detail how much that will be.

Traditionally, lenders require that a percentage of the principal is paid early before they can pay the remaining balance. If you are not allowing prepayment, then you will need to detail that it is not allowed unless written permission is provided by you, the lender.

Securing the Loan and Dealing with a Violation

You have the option of requiring collateral in exchange for your loan. If you wish to do this, then you need to make sure you include sections that address this.

For collateral, if you are requiring it to secure the loan, you will need to have a specific section. Collateral would be an asset that is used as a guarantee of repayment.

Examples of assets that can be used include real estate, vehicles, or other valuable goods. If you are requiring collateral, you will need to identify all collateral that is needed to secure the agreement. Another section you need for this is one regarding the security agreement. If you are not requiring collateral, then you can omit this from your loan agreement.

Signing Date

In regard to the collateral, if each party is signing a separate security agreement for it, then you will need to include the date that the security agreement is signed, or will be signed, by each party.

No one ever thinks that the loan agreement they have will be violated, but if you want to make sure that you can deal with the matter in case the terms are not followed, then you need to have something addressing it.

This is just one reason why it is so important to include this section no matter what. Typically, lenders include a personal recourse provision. This will allow the lender to seek recovery from the personal assets of the borrower if they violate the agreement.

Additionally, you should include the number of days that the borrower has to remedy any breach of the agreement.

If you include this, you cannot provide notice of recuperation until this time frame has passed. It does not, however, prevent you from reaching out to them for an update. The notice period that is standard is 30 days, but you can adjust this as you see fit.

Make sure you include all of these details in this section so there is no question about the actions you should be taking in case you are not paid back by the borrower.

Additional Items

In addition to the main sections detailed above, you have the option of adding additional sections to address specific items as well as a section to make the validity of the document unquestionable.

Every loan agreement is different, so use the additional terms and conditions section of the agreement to include any additional terms or conditions that have not yet been covered. In this section, you will need to include complete sentences and ensure that you do not counteract anything that has previously been put in the loan agreement unless you are stating that a specific section is not applicable to this specific loan agreement.

When executing your loan agreement, you may be interested in having a notary notarize it once all parties have signed, or you may want to include witnesses. The benefit of including a notary is that this will help prove the validity of the document in case it is ever disputed. Having a witness is an alternative to having the document notarized in case you do not have access to a notary; however, if possible, you should always try to include both.

 

5 Ways to Spot Fake Landlord References

One of the most crucial aspects in tenant screening is that of checking your prospective tenant’s landlord references, so here are 5 ways to spot fake landlord references.

Unfortunately, some tenants have been known to make up references or list friends or family members as previous landlords. There are even companies that hire themselves out to pose as landlords.

As a property manager, you are bound to receive landlord references day in and day out. Some are beautifully written testaments to the incredible nature of these individuals looking to rent, while others are simply fake, with bogus testimonials about the tenant.

5 ways to spot fake landlord references

No. 1 – Call the references yourself

For starters, on most landlord references, they will provide a phone number.

One of the first things you can do to tell if the reference is a fake is to call the number inquiring about a rental. If it is fake, the number either won’t work or will lead to a completely different person or place.

In rare instances, a fake number does lead to an individual, but they may seem to be either untruthful or not detailed in their answers.

No. 2 – Check up on the reference’s name

Go online and Google the reference’s name and look them up on social-media platforms.

Check to see if this person is tied to the potential tenant through tagged pictures and/or posts. If there is a lot of overlap in the people’s profiles, these individuals may have a personal relationship and not a tenant/landlord relationship.

No. 3- Look at tax records

The tax records for all property owners are in the public domain. All you have to do is look up the records for the address where the applicant claims to have lived.

The name on the tax record should match the name you’ve been given. Double-check that the property hasn’t been sold, but otherwise this is a great way to spot a fake.

No. 4 – Analyze a reference’s answers

It’s best to always fall back on your knowledge as a landlord and analyze the answers that the potentially fake landlord reference has given you.

If their answers are vague and don’t have details then it’s likely that they aren’t a real landlord and are instead a friend or family member of the person who is trying to rent from you.

No. 5 – Ask for advice from the reference

Landlords tend to have the same frustrations, interests, and problems.

It wouldn’t be at all unusual for you as a property manager to ask for some advice from another landlord while calling for a reference. Ask for their procedure for getting rid of a tenant who doesn’t pay, for instance.

A real landlord will have an actual answer, even if they’re not interested in spending much time on the phone with you. A fake, on the other hand, will likely have nothing specific to say. This can help you further determine whether the person on the other line is a real landlord, or someone just posing as such.

In conclusion

As a property manager, a significant part of your job involves filling properties with quality, long-term tenants. Including thorough reference verification as part of your tenant screening process, such as the strategies above, can help you avoid costly mistakes and keep you a few steps ahead of the game.

For Multifamily Commercial Real Estate Financing Contact Winston Rowe and Associates No Upfront Fee Commercial Loans

What to Consider When Purchasing Distressed Real Estate Debt

Contact Winston Rowe and Associates

Real estate assets across the United States have suffered the adverse effects of the COVID-19 pandemic and the resulting shutdowns of businesses.

This unfortunate circumstance will present opportunities to purchase the debt encumbering these properties, whether as a way of generating yield, or as part of a “loan to own” strategy.

Whatever the business case, purchasing distressed real estate secured debt presents considerations and hurdles which may not be completely familiar to buyers whose experience lies in purchasing direct interests in real estate.

As the fallout from COVID-19 continues to manifest, some sectors of the real estate industry have been hit harder than others.

Retail properties, many of whose tenants were suffering pre-pandemic from the continued expansion of online shopping, have been hit hard.

Hotel properties have been hit as hard or harder, as many were forced to shut down or severely ramp down operations, either due to legal restrictions or pragmatically given a lack of guests and a need to preserve cash.

Office properties, especially suburban offices, seem to be faring relatively well thus far, as have multifamily properties (although whether that will continue when CARES Act stimuli and state and local eviction moratoria expire is a big question).

Industrial properties may be doing better than any other sector, due at least in part to increased demand for on-line shopping.

Thus far, lenders generally have been working to provide relief to borrowers, especially those whose properties were doing fine pre-COVID-19, including temporary (e.g., three to six month) interest deferrals, extensions of forthcoming maturities and temporary waivers of covenant compliance requirements.

More extensive, longer term loan modifications seem not yet to be occurring on a broad basis, although anecdotally those we have seen typically require some form of collateral enhancement for the lender, such as principal pay-downs, enhanced guaranties, cash collateral reserves and letters of credit, and cash sweeps, among others.

For borrowers with properties which are able to take advantage of these lifelines offered by lenders, such modifications provide an ability to continue to ride out the pandemic storm in the hope better days are not far off, allowing the cash flow and value of their properties to recover.

But what of those properties where the borrowers and lenders have not been able to find a modification solution, whether due to the pre-and/or post-pandemic prospects for the property, regulatory pressures, or otherwise?

Therein lies the opportunity for investors looking to take advantage of situations where lenders prefer to sell off their debt rather than continue to try to work things out or take over the real estate.

If you are one of these potential investors, here are some considerations for when opportunities to purchase distressed debt are available.

Be prepared to assess based on less information

Debt typically is “distressed” because the underlying real estate is having issues, so one key in valuing the debt is understanding those issues. In a “normal” real estate purchase or financing transaction, the owner of the real estate has built in motivations to be cooperative and forthcoming with information about its property and operations.

So, if it wants to sell, or it wants to get a new loan, it will provide potential buyers and lenders much, if not all, of the information it may be requested to provide. This may not be the situation potential investors interested in purchasing distressed real estate secured debt will encounter.

First—be prepared for a situation where on-site due diligence is not available.

In addition to the pandemic related widespread “shelter in place” or “stay at home” orders which may limit traditional on-site property diligence, the borrower may not be willing to grant access for due diligence purposes, and the selling lender may not want to signal to the borrower it is considering selling off the debt even if the borrower might be willing to provide such access.

As for documentary diligence, if previously or currently engaged in workout discussions with its borrower, the lender may have received updated financials on the property, the borrower and any guarantor(s).

But depending on the extent and tenor of those negotiations, some of the information a selling lender may have could be incomplete and/or relatively “stale” by the time the potential investor gets it.

The lender may not even have information on the property beyond what it is entitled to receive under the regular reporting provisions of the loan documents (e.g., monthly, quarterly and/or annual financial reports) – and if the borrower is uncooperative, even some or all of that information may be unavailable.

Additionally, the lender may not have copies of all of the leases (or any modifications entered into without its consent, especially if such consent was not required), and is even less likely to have copies of other relevant property-level contracts, unless it has been able to acquire these items during any workout discussions.

A copy of the lender’s title insurance policy, and maybe even a relatively recent title update, should be available, but an updated survey beyond that obtained at origination is unlikely, particularly in light of the property access issues noted above.

So potential investors should be prepared to “make do” without the array of documentary diligence materials it typically expects to obtain and review in buying or financing the real estate.

Be aware this all could have to be done in a relatively compressed time-frame compared to “regular” real estate transaction as well.

Further, although the lender may be willing to provide certain representations regarding the debt itself in the loan purchase agreement (as discussed below), an investor should not expect a selling lender to provide any representations regarding the underlying real estate to fill in “gaps”, as a seller/borrower might in a property sale or loan origination transaction.

This is not an insurmountable hurdle, just one for which the average real estate investor who has not had much (if any) experience in the recent economy in purchasing distressed real estate secured debt must prepare.

This may mean, for example, digging in deeper into the materials which are available—the monthly and/or quarterly financials, rent rolls, the available major leases, etc. – and doing more cross checking and extrapolating to gain an understanding of the current and future prospects of the underlying real estate (including, if applicable, its tenants).

The less clarity provided by the available data, the more likely the investor may be compelled to build a bigger discount factor into its pricing in purchasing the debt.

How “good” are the sponsors?

Another key in valuing the debt is evaluating the strength of the sponsorship. The available information regarding the borrower, guarantors and underlying real estate obviously will be used to assess the performance and value of the debt and the real estate.

But this information also must be used to assess the sponsor’s ability to address the property’s issues and possibly maintain ownership of the real estate. Put another way, does the sponsor have equity or other exposure to protect, and the financial wherewithal to try to do so?

This is important to assess for the investor whose primary motivation is to purchase the debt for yield purposes—i.e., can the investor, with a lower basis in the debt, figure out a deal with the sponsor on revised loan terms where the current lender could not?

This is equally important for the investor whose primary goal is obtaining ownership of the underlying real estate—i.e., will the sponsor be motivated and financially capable of making it difficult for the new loan holder to exercise remedies to obtain the real estate, or is it more likely to be amenable to giving a deed-in-lieu of foreclosure?

Understand what can (and can’t) be done in enforcing the loan documents

Whether the primary goal is to turn the distressed real estate secured debt into a performing loan on revised terms, or ultimately to acquire the underlying real estate, the investor also must gain an understanding of what the loan documents provide, and the remedies which may or may not be available in the applicable jurisdiction to enforce those documents.

As noted above, the lender looking to off load distressed real estate debt may have limited or imperfect information on the underlying real estate and sponsor, but it should have a complete set of loan documents for the loan it is selling.

The investor should insist on receiving a complete set of fully-executed loan documents (and should confirm each was executed by the proper parties), and confirmation the lender possesses the original note(s) evidencing the loan, before becoming too enmeshed in this process; absence of these basic elements could create significant enforcement and other issues for the holder of the loan.

The investor also should obtain access to the lender’s and any servicer’s loan file, including all correspondence between the lender and the sponsor, which also may impact enforceability of the loan documents (e.g., facts giving rise to potential lender liability claims or other defenses).

Some of the questions to consider in reviewing those loan documents include:

Are there provisions requiring cash management, and have they been implemented?

What other defaults may exist beyond any payment default, and what rights and remedies do those defaults create for the lender?

What reserves are provided for, are they properly funded, and what use can the lender and sponsor make of those funds while a default exists?

Once access is obtained, the investor must assess not only the economic terms, but also the legal terms and remedies available under the documents and applicable state law.

For example, for debt secured by California real property, the state’s relatively unique “one action” and “anti-deficiency” statutes will impact how those remedies may be enforced.

The intricacies of the California framework is beyond the scope of this article, but in simplest terms the “one action” provisions will require a foreclosure (judicially or non-judicially) of the real estate under the mortgage/deed of trust; the “anti-deficiency” statutes, and whether there is a judicial or non-judicial foreclosure, will affect the ability to recover from the borrower and guarantors if the property sells for less than the outstanding debt at the foreclosure sale.

If available in the applicable jurisdiction, a non-judicial foreclosure sale usually may be completed much quicker and more cost-effectively than a judicial foreclosure, but the requirements and ramifications of the options available should be considered carefully.

Also, appointment of a receiver may be advisable to protect the collateral while a foreclosure is pending.

Given the proliferation of lenders requiring special purpose entities (SPEs) own only the subject real estate as borrowers, the guarantor(s) and guaranty(ies) which are part of the loan package are very important.

If there is a guarantor with assets from which to recover, the guaranties supporting the loan can be a source not just of potential value/revenue to support the debt purchase, but also as leverage in accomplishing the investor’s goals.

As noted above, the information available hopefully will provide some indication of the financial viability of any guarantor.

A credit worthy guarantor with exposure under one or more guaranties may be very motivated to facilitate a workout, or to prevent the holder of the loan from exercising remedies, or to facilitate the transition of ownership of the property.

The loan may include a completion guaranty (if the loan has a renovation component, even if the loan otherwise is not a construction loan), a full or partial payment guaranty, an interest and carry guaranty, and/or an environmental indemnity, all of which must be reviewed to determine whether they are enforceable and whether recovery rights have been or may be triggered.

The same goes for any non-recourse carve-out guaranty, which may require the most scrutiny, both as to what the document says, as well as to determine whether any facts exist which may trigger any of the carve-outs.

The factual aspect of this assessment may not be fully possible until after the debt is acquired, so the investor’s initial diligence should be directed towards what “bad acts” are covered by the guaranty, and what level of liability is triggered by each act (e.g., liability only for losses attributable to the carve-out, or full recourse for the entire loan).

Some examples of relevant carve-outs include bankruptcy/insolvency-related events, which often (although not always) trigger full recourse for the debt against the guarantor.

Similarly, a carve-out for interfering with the lender’s exercise of remedies may trigger recourse (full or losses/damages recourse).

These may prove to be sufficient to discourage the sponsor from taking such actions and interfering with or delaying the investor’s desired outcome in purchasing the debt.

Carve-outs for “waste” or misapplication or misuse of funds, before or after an event of default exists, also could prove relevant; events triggering one or more of these recourse provisions may or may not be discernable from the financial and other information available – but those facts may not always be obvious.

A real-world example: while engaged in workout discussions with the original lender, a borrower was able to lease space to a new tenant (which the original lender approved).

The lease required tenant improvements to be paid for by the landlord/borrower; not having enough cash on hand, the borrower’s investors advanced funds.

Ultimately, the debt was sold, and the new debt holder discovered the borrower had re-paid the equity advances from available cash flow while still in default – a violation of the loan documents which triggered recourse for recovery of that cash.

The threat of potential liability for the guarantors created tremendous leverage for the new holder of the debt, and ultimately resulted in the borrower giving a deed-in-lieu of foreclosure (and also paying back some of the funds).

Ultimately, the loan documents, the remedies available under the applicable state law framework, and the facts around the loan and sponsors will affect the outcome for a given loan, so all must be assessed as thoroughly as possible in determining whether and how much an investor is willing to pay to purchase the distressed debt given the investor’s desired outcome.

Other potential factors to consider

Purchasing distressed real estate secured debt also could involve a number of other considerations, some of which could include:

Others in the Capital Stack:

Although this article is focused on potential purchase of a real estate secured loan, mezzanine lender(s) and/or preferred equity holders in the capital stack may have rights and motivations which could affect attaining the investor’s goal. Such players in the capital stack could prove a positive (e.g., another party motivated to step up to help turn the mortgage debt into a performing loan) or a negative (e.g., by invoking rights or taking other actions which could delay exercising remedies to gain ownership of the underlying real estate).

Loan Purchase Agreement:

Negotiating an acceptable agreement to purchase the loan also may prove to be a process different than a typical purchase agreement for real estate.

Although real estate purchase and sale agreements commonly state the property is being sold “as is, where is,” just as commonly the seller will provide a “market” set of representations and warranties the buyer can rely upon (with limitations on survival and liability). In the context of a loan purchase and sale agreement, expect there will be much fewer reps from the selling lender (sometimes limited only to organizational and authority reps, ownership of the subject loan, and the outstanding balance of the loan), with few (if any) reps relating to the underlying real estate or the related information provided, and very limited survivability and exposure for breaches to the selling lender.

Taxes:

Acquisition of the underlying real estate, via foreclosure or deed-in-lieu of foreclosure, may trigger transfer taxes or a reassessment of real estate taxes (although the latter may not necessarily be a negative if the property’s value has declined from the most recent assessment). These factors should be reviewed in the applicable jurisdiction.

Management:

In situations such as the current pandemic, or other general market declines, a third-party manager may have been doing a very capable job, but for those circumstances.

Investors should assess whether continuing current management, under existing or revised terms, makes sense for a given property. In the context of a hotel, for example, an otherwise well-performing management company which knows the property and the market, and has good relationships with a franchisor, could prove to be an asset.

Of course, if the management company has a management contract which cannot be disturbed by a foreclosure/deed-in-lieu or workout, its continued management of the property will have to be factored into the assessment of the property and debt.

Conclusion

In challenging, uncertain times such as these, all investment decisions carry a greater degree of uncertainty and risk. Even in “normal” times, however, the most successful investors are those who best assess and value assets and the attendant risk.

For investors pursuing distressed real estate secured debt, those best prepared and able to execute their strategies by carefully considering the limitations and challenges such as those described above will have the most success.

 

Strategies for Managing the Commercial Loan Post-Closing Process

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After a commercial loan transaction closes, it’s easy to feel that all the important work has been completed, but the truth is there are many post-closing matters that still require the lender’s attention.

Often, the tasks that must be performed after a loan closing involve perfecting the lender’s collateral liens, and in many situations, lenders need the borrower’s cooperation in order to satisfy post-closing requirements.

However, borrowers are often eager to focus on managing their businesses, creating difficulty for the lender to redirect their attention back to the loan closing. Taking an opportunity during the closing process to define and communicate the responsibilities of each party, including post-closing expectations, can help simplify the cumbersome post-closing process for lenders.

A crucial step in an efficient post-closing process is letting borrowers know that their cooperation may still be required after a loan closes, which is why we recommend using a Post-Closing Agreement with all loan transactions.

These agreements outline specific requirements that need to be satisfied post-closing, and they provide an opportunity to manage the borrower’s expectations while informing them that they still have a responsibility to communicate and work with their lender after their loan closes. It is advisable that all post-closing requirements have specified deadlines listed in the agreement.

Another document we recommend lenders use is an Errors and Omissions Agreement. This document requires borrowers to provide additional information and execute additional documentation, as may be required by the lender after a loan closing.

The closing process presents several opportunities for mistakes to be made, including omitting certain documents from the closing document package, incorrect signatures on documents, and execution of outdated versions of documents.

The Errors and Omissions Agreement is a good way for all parties to agree to resolve these potential issues after closing.

An additional tool that lenders can use to help manage post-closing issues is the Loan Agreement. A good Loan Agreement clearly outlines each party’s ongoing responsibilities, and in doing so, helps manage the borrower’s expectations. Loan Agreements are particularly useful in more complicated transactions because the agreements can be tailored to fit various scenarios and include additional terms a lender may require.

The Loan Agreement may include events of default should the borrower fail to satisfy any post-closing requirements prior to the applicable deadlines.

Depending on the type of collateral involved in a transaction, there can be many different potential post-closing issues for a lender to track and resolve.

Real estate is a good example of a potentially complicated type of collateral to deal with post-closing because it involves ensuring mortgages get recorded properly, tracking receipt of recorded documents and final title policies, confirming the adequacy of title policies, and working with title companies to resolve any issues or unexpected exceptions that may appear on a final policy.

Automobile liens can also be especially tricky, and not only require the correct documentation from the borrower, but also may require substantial interaction with the DMV in the state where the vehicle is titled.

Additional post-closing responsibilities include review of executed loan documents, filing UCC financing statements, obtaining confirmation of UCC terminations, tracking financial reporting covenants, ensuring proper documentation is received in connection with draw requests, and following-up on collateral insurance expirations.

As complicated as the post-closing process can be, lenders can help ease the burden by utilizing Post-Closing Agreements,

Errors and Omissions Agreements, and Loan Agreements, all of which clarify the responsibilities of each party and help manage post-closing expectations with borrowers.

 

How To Get A Great Commercial Real Estate Deal

To be a player in commercial real estate, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage.

Map Out a Plan of Action

Setting parameters is a top priority in a commercial real estate deal get a sense of how much you will pay over the life of the mortgage.

Learn to Recognize a Good Deal

The top real estate pros know a good deal when they see one. What’s their secret? First, they have an exit strategy – the best deals are the ones where you know you can walk away from. It helps to have a sharp,

Key Commercial Real Estate Metrics

The common key metrics to use for when assessing real estate include:

Net Operating Income (NOI)

The NOI of a commercial real estate property is calculated by evaluating the property’s first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.

Cap Rate

A real estate property’s “cap” – or capitalization – rate, is used to calculate the value of income producing properties. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.

Cash on Cash

Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare the first-year performance of competing properties.

Look for Motivated Sellers

Like any business, customers drive real estate. Your job is to find them – specifically those who are ready and eager to sell below market value.

Approach to Evaluate Properties

Be adaptable when searching for great deals. Use the internet, read the classified ads and hire bird dogs to find you the best properties.

The Best Free Property Management Tools

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Property management software is a critical component when managing any property or block of properties. It helps with efficiency in handling different tasks that would otherwise be challenging and time-consuming.

Such duties include financial management, marketing, tracking of inventory, and rental application screening, to name a few.

If you’re looking to get started with property management, whether that’s through Right-to-Manage or you’re a property owner wanting to manage your own portfolio, these FREE property management tools will help you get going.

Cozy

Cozy enjoys a lot of market popularity, and the basic package is free. Some of the benefits include comprehensive online property listings, in-depth lease agreement terms, photo gallery, and pet and amenity policies, among others. Tenants can also apply directly under the portal.

  • Pricing: The software is free to use. You will, however, pay for screening reports, rent estimates, card payments, and express payouts.
  • Pros: All the core benefits are free and there is no limit on number of tenant applications.
  • Cons: It could be difficult to use for some people and it doesn’t provide access to accounting and maintenance reports.

Rentec Direct

The basic platform on Rentec Direct is free and works well for small property owners. Some of the functionalities include expense and income tracking, tenant and property accounting, as well as tenant screening.

  • Pricing: The basic package is free. The pro and premium packages cost $35 and $40 per month, respectively
  • Pros: It will help you streamline your Property Management services, and the software is easy-to-use
  • Cons: The task organization and Financial Reporting features need improvement, and you can only manage up to ten units on the free version

Tenant Cloud

Tenant Cloud has the advantage of being free for the first 75 units. For numbers above that, you will need to pay a minimum of $9 per month, which is still very affordable. You get help with different property management tasks such as vacancy listings, handling maintenance requests, collecting rent, among others.

  • Pricing: Free for up to 75 units
  • Pros: Includes lots of features to help you and is easy-to-use
  • Cons: The accounting and reporting features need improvement

 

Free Tools for Commercial Real Estate Brokers

Contact Winston Rowe and Associates

248-246-2243

Check out these free tools for commercial real estate brokers, they are not affiliate links.

Yes, they are all free no credit card needed.

Compstak Exchange

Free for brokers, appraisers and researchers, CompStak Exchange is a platform for real estate professionals to exchange lease comps in an efficient manner. Exchange comp information you have to get credits and redeem those credits for comps you need, when you need them. Simple.

LeaseMatrix Office Space Calculator

Quickly calculate how much office space you need by inputting the quantity of each type of space you need within your office. You’ll enter the number of private offices, cubicles, meeting rooms, receptions areas, and kitchens. There’re default dimensions for each type of space, but these can be changed. After your data is entered, you’ll see your total usable area and total rentable area.

LoopNet Trends

This widget from LoopNet allows you to get customized market trend graphs based on location and property type. You can get the code and use it to paste these graphs on your website or blog to show how current prices and rents compare to historical data. All you have to do to get access is sign up for a free LoopNet account.

The News Funnel

The News Funnel is a news aggregator and content platform for the real estate industry. You can sign up for a free customized news feed so that you see the real estate news relevant to you.

Customize your feed by filtering for market, industry segment, areas of interest, or keywords. It’s also a great distribution platform for real estate companies to upload and showcase their press releases, videos, blogs, and market research.

PRLog

You can set up your own press room for free and issue multiple free press releases monthly. PRLog has distribution to all of the major search engines with numerous RSS feeds. You can also distribute to your own RSS feeds. It integrates well with all of the social sharing and media platforms.

Valuate

This is a web-based CRE tool that will help you expedite asset valuation and investment analysis. You can use it on its own, or with your existing Excel, but they have plenty of reasons listed on their site why you should use Valuate over Excel.

You can try it out without creating an account and interact with the slick interface to edit Cap Rate, Square Footage, Holding period and more. You can also create a free account to get even more access, all without a credit card.

Waterstone Defeasance

This company specializes in the defeasance process when you’re selling a property or refinancing a loan. The free calculator available on their website can give you a quick estimate of your defeasance costs by entering a handful of data related to the loan.

Commercial Property Loan Calculator

This tool figures payments on a commercial property, offering payment amounts for P & I, Interest-Only and Balloon repayments — along with providing a monthly amortization schedule. This calculator automatically figures the balloon payment based on the entered loan amortization period.

Commercial Property Balloon Loan Calculator

This tool figures a loan’s monthly and balloon payments, based on the amount borrowed, the loan term and the annual interest rate. Then, once you have calculated the monthly payment, click on the “Create Amortization Schedule” button to create a report you can print out. This calculator automatically figures the loan amortization period based on the desired balloon payment.

DUE DILIGENCE – THE BROKER’S DEAL MAKER OR DEAL BREAKER

DUE DILIGENCE – THE BROKER’S DEAL MAKER OR DEAL BREAKER

Due diligence is one of the very first steps to building this strong foundation with your clients. If the loan broker does not do his due diligence and makes a deal with a borrower that is less than trustworthy, it could mean thousands of dollars lost and a black mark on his career. Even before offering loan types, or financing options to potential clients, some amount of due diligence should be done.

So, What Is “Due Diligence”?

Due diligence is the process of verifying the information that clients give to the broker in the original loan request. Based on this information, the broker will make the decision on whether to move forward or not. The main purpose of due diligence is to determine if there are risks involved and what impact they may or may not have on the loan agreement.

During the due diligence stage, we hope that the client will be as open and honest about their credit, business financial information and property as they can be. It is wise to remind clients that their credit report will reveal quite a lot of information, and that transparency is the best way to obtain a loan quickly.

Due diligence can include background checks, internet searches, and contacting references. You will need to look closely at a potential client’s bank records, payment history, and business ethics. Depending upon the type of loan and the loan amount, the due diligence phase could take 30 days or more to complete. It is definitely recommended that you notify your clients of this to maintain that important transparency.

Although it may seem invasive to ask your clients for so much personal information, it is absolutely necessary to ensure that you are not spending time trying to secure financing for businesses that just aren’t qualified to repay a loan.

Not only is due diligence a form of protection for you, the business loan broker, but it also protects your lenders. Performing due diligence on your end saves time and finances for the lenders and they will appreciate you vetting the borrowers before referring making introductions.

We talk a lot about the relationships that you are constantly nurturing as a business loan broker and this is no exception. Start every relationship with trust and insist that every client be transparent.

Due diligence is a business loan broker’s insurance and could be the difference between the best deal of your career and the deal that ends your career.

 

The “Five Cs” of Credit Analysis

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan.

Payment history of existing credit relationships — personal or commercial — is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you have personally invested in the business and is an indication of how much you have at risk should the business fail.

Prospective lenders and investors will expect you to have contributed from your own assets and taken on personal financial risk to establish the business before asking them to commit any funding.

Collateral or guarantees are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan.

A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory?

The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.

Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees also will be taken into consideration.

What do the 5 Cs of Credit mean to a small business?

One of the most common questions among small business owners seeking financing is, “What will the bank be looking for from me and my business?” While each lending situation is unique, many banks utilize some variation of evaluating the five Cs of credit when making credit decisions: character, capacity, capital, conditions and collateral.

  1. Character. What is the character of the company’s management? What is management’s reputation in the industry and the community?

Lenders want to put their money with those who have impeccable credentials and references. The way the owner/manager treats employees and customers, the way he or she takes responsibility, timeliness in fulfilling obligations are all part of the character question.

This is really about the owner or manager and his/her personal leadership. How the owner or manager conducts business and personal life gives the lender a clue about how he/she is likely to handle leadership as a manager.

It’s a banker’s responsibility to look at the downside of making a loan. The  owner/manager’s character immediately comes into play if there is a business crisis, for example.

Small business owners place their personal stamp on everything that affects their companies. Often, banks do not differentiate between the owner and the business. This is one of the reasons why the credit scoring process evolved, with a large component being personal credit history.

  1. Capacity. What is the company’s borrowing history and record of repayment? How much debt can the company handle? Will it be able to honor the obligation and repay the debt?

There are numerous financial benchmarks, such as debt and liquidity ratios, that lenders evaluate before advancing funds. Become familiar with the expected pattern in the particular industry. Some industries can take a higher debt load; others may operate with less liquidity.

  1. Capital. How well capitalized is the company? How much money has been invested in the business? Lenders often want to see that the owner has a financial commitment and has taken on risk for the company.

Both the company’s financial statements and the personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will the owner be prepared to add more of his or her own money?

How far will his or her personal resources support both the owner and the business as it is growing? If the company has not yet made profits, this may be offset by an excellent customer list and payment history. All of these issues intertwine.

  1. Conditions. What are the current economic conditions, and how do they affect the  company? If the business is sensitive to economic downturns, for example, the bank wants to feel comfortable with the fact that the business is managing productivity and expenses.

What are the trends for the industry, and how does the company fit within them? Are there any economic or political hot potatoes that could negatively affect the growth of the business?

  1. Collateral. While cash flow will nearly always be the primary source of loan repayment, bankers should look closely at the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment.

Alternatively, accounts receivable and inventory can be pledged as collateral, though in some countries, these “movable assets” are not well supported by the legal framework. The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge.

Until the business is proven, a loan should nearly always have collateral. If it doesn’t come from the business, the bank should look to personal assets.

Keep in mind that, in evaluating the five C’s of credit, lenders don’t give equal weight to each area.

Lenders are cautious, and one weak area could offset all the other strengths. For example, if the industry is sensitive to economic swings, the company may have difficulty getting a loan during an economic downturn — even if all other factors are strong. And if the owner is not perceived as a person of character and integrity, there’s little likelihood he or she will receive a loan, no matter how good the financial statements may be.

Lenders evaluate the company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be the owner.

10 Fundamentals Beginning Real Estate Investors Should Know

  1. The Cup Is Always Half Full

New real estate investors are very nervous on the first deal and start to panic at every obstacle. These emotions are natural considering most are spending their life savings on an investment property. Never let your emotions get too high or too low because both can cost you time and money.

  1. The Value Is in The Experience

Your first flip isn’t all about the profits. Many first-time investors won’t make a killing off of their first property, so it’s key to keep in mind that there’s also value in the time spent managing the acquisition and renovations, learning from mistakes and seeing the project through to completion.

  1. Setting Aside Working Capital Is Key

Many new investors fail when they are hit with unexpected and major expenses or income loss such as significant repairs or a major tenant vacating. To avoid this, make sure to set aside enough working capital in reserves to account for these problems so that you can carry the property through the tough times.

  1. Discipline Will Help You Stay on Budget

First-time investors are sometimes so eager to get started; they will abandon their set numbers. This may lead to overspending on the acquisition or on the improvements. My most disciplined clients won’t go over their set budget. What seems like a negligible amount can impact returns.

  1. Return Calculations Can Be Misleading

In commercial real estate, it is very common to advertise cash on cash returns, capitalization rates, and internal rate of return for investment properties. I wish more early investors understood how easily manipulated those figures can be and that you could provide 10 seasoned industry professions the same data and come up with a wide range of IRR estimates

  1. Lying Will Ruin Your Reputation

Reality TV shows are pure entertainment and do not accurately reflect investing, so don’t rely on them at all for your education. Get involved with people who actively invest in your local area.

  1. You Won’t Get Far Without Mentors and Partners

There are successful investors out there, right now, with decades of experience, who would be happy to help you on your journey. Find a way to add value for them, and in return ask if they can help you in your real estate investing business.

  1. Having the Right Team Is Priceless

Working with a well-seasoned professional team is key. Often, real estate investors are looking to rent out the property, but the first-timers don’t work with a team of professionals to think through cost estimates, financing options, profitability and different aspects of being a landlord or occupancy rates.

  1. The Details Are in The Contracts

I can’t tell you how many people I have known, including myself early on, that just trusted the personality running the deal, and never understood what they were investing in.

  1. Plans Are Useless, But Planning Is Indispensable

We see a lot of first-time investors purchasing investment properties. While there is a multitude of impactful factors, the end reason the project is being done is to make money. To keep everything on track and in perspective, create a Pro-forma (projected) profit and loss statement to determine the impact and timing of decisions and investments.

 

Tips for Choosing the Best Commercial Mortgage Broker

Tips for Choosing the Best Commercial Mortgage Broker

When you decided to work with a commercial mortgage broker, you definitely made a smart choice.

However, it is more important for you to realize that if you get the right broker to work with, it can save you thousands of dollars but working with the wrong one can cost you just the same.

The basic things that a broker should assist you with include preparation of loan package, selection of lender, loan package submission to multiple lenders, loan package evaluation and preparation for closing.

Get Recommendations from Trusted Individuals

To begin your search for a commercial mortgage broker, you can first ask around for recommendations from your established connections of business associates.

Get in touch with the smartest and most successful commercial investor that you know and get contacts from them if possible.

Given that they are smart and successful, then there is a great chance that they did work with a reliable commercial mortgage broker.

Look for Someone with Commercial Mortgage Expertise

You must of course select someone that has demonstrated experience and education in the industry of commercial mortgages and does not focus on residential mortgages because those are two very different things.

Find out if the broker has the experience and the contacts that will give you better chances in closing your loan in a timely manner.

Remember, there is a wide range of commercial property types out there and you need to be working with someone who was already able to close a deal that is particular to what you require.

Look for someone who specializes in the type of investment property that you prefer. An example of which is if you want an apartment complex, then you must find a broker who specializes in apartment complexes.

Know that you are paying for expertise so you have to make sure that you are working with an expert.

Start Your Search Ahead of Time

A good idea would be to select a broker even before you need one. In doing so, you are giving your broker ample time to conduct additional research for your property type and loan options before you are ready to pursue the application.

Commercial mortgage closing sometimes need to happen fast and you do not want to be caught in a situation where there is no one to look after your best interests.

Familiarize Yourself with the Commercial Mortgage Process

Having said this, you have to make sure that the broker you are working with is really looking after your best interests and not about the interest of the lender or themselves. Keep your eyes open during the whole process and be sure to ask questions if things are not clear to you.

Clarify your concerns such as the points they charge, fees, how many lender contacts they maintain, among other things, so you will have an idea more or less as to how the broker works.

Do not be in the dark about the whole process and educate yourself. Learn about the commercial industry and the basics of the loan process yourself. Find time to talk to a few brokers about the options they may offer you for your specific property type.

Loan-To-Cost Ratio LTC Explained Winston Rowe and Associates

What is Loan To Cost Ratio LTC

The loan-to-cost (LTC) ratio is a metric used in commercial real estate construction to compare the financing of a project (as offered by a loan) with the cost of building the project.

The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan. Similar to the LTC ratio, the loan-to-value (LTV) ratio compares the construction loan amount with the fair-market value of the project.

The LTC ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget. After the construction has been completed, the entire project will have a new value. For this reason, the LTC ratio and the LTV ratio are used side by side in commercial real estate construction.

Example

Assume that the hard construction cost of a commercial real estate project is $200,000. To ensure that the borrower has some equity at stake in the project, the lender provides a $160,000 loan.

This keeps the project slightly more balanced and encourages the borrower to see the project through. The LTC ratio on this project is 80 percent.

Loan-to-Value Ratio

The LTV ratio compares the total loan given for a project against the value of the project after completion. Considering the above example, assume that the future value of the project, once completed, is double the hard construction costs.

If the total loan given for the project, after completion, is $320,000, the LTV ratio for this project is also 80 percent.

Significance to Lenders

The LTC ratio helps to delineate the risk or risk level of providing financing for a construction project.

Ultimately, a higher LTC ratio means that it is a riskier venture for lenders. Most lenders provide loans that finance only a certain percentage of a project.

In general, most lenders finance up to 80 percent of a project. Some lenders finance a greater percentage, but this typically involves a significantly higher interest rate.

While the LTC ratio – as well as the LTV ratio – are both mitigating factors for lenders that are considering the provision of a loan, they must also consider other factors.

Lenders consider the location and value of the property on which the project is being built, the credibility and experience of builders, and the borrowers’ credit record and loan history as well.

Commercial Loan Due Diligence Approach and Methodology

Commercial Loan Due Diligence Approach and Methodology

Due diligence is an important exercise in a loan transaction because it allows the lender to make an informed decision as to whether it should lend money to the borrower and, if so, on what terms. A thorough due diligence review of the borrower and its business ensures that the loan does not involve legal risks that the lender is unaware of that could endanger the repayment of its loan. Due diligence is an effective tool for uncovering aspects of the borrower’s business that can either:

Introduce new negotiating points for the pricing and terms of the loan.

Lead to changes to:

the collateral package that secures the loan; or

other credit support for the borrower’s repayment obligations, such as guarantees or insurance.

Cause the lender to withdraw from the deal.

The failure to identify significant legal risks in a loan transaction can cause problems for a lender, ranging from an unfavorable business transaction to legal liability and the obligation to pay damages.

The scope of a due diligence investigation is driven by:

The type of transaction.

The parties involved.

The level of risk the lender is willing to assume.

Counsel must know which questions to ask and the proper steps to follow to carry out a sufficiently detailed review that serves their clients’ interests. Due diligence typically involves a large number of documents that must be exchanged and carefully examined. This often requires coordination of a team of reviewing attorneys, good organizational skills and planning a well-defined scope to the due diligence exercise.

Depending on the transaction and the nature of the borrower’s business, due diligence concerns may vary. For example, a lender’s credit analysis and due diligence review of a business with extensive real estate holdings will focus on different issues than a lender’s credit analysis and due diligence review of a holding company with assets consisting largely of securities in subsidiaries and intellectual property.

 

Commercial Real Estate Loan Check List Winston Rowe & Associates

Commercial Loan Processing

Winston Rowe & Associates, a national no advance fee commercial real estate advisory and financing firm. Their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity for your commercial real estate loans.

They have prepared this article to provide insight into the supporting documentation needed to perform the due diligence and underwrite a commercial real estate transaction. This is not a comprehensive list of supporting documentation, only a general guideline.

General Supporting Documents Needed For Commercial Real Estate Financing:

1. Last 3 Years Personal Tax Returns (For Purchase or Refinance)
2. Last 3 Years Business Tax Returns (Needed From Seller and Buyer For a Purchase)
3. Personal Financial Statement (For all Guarantors of the Loan)
4. Business Profit & Loss 3 Years (From Seller and Buyer for Purchase or Refinance)
5. Articles of Incorporation (Buyer and Seller for Purchase and Refinance)
6. Schedule of Tenant Leases (For Purchase or Refinance)
7. Schedule of Units With Square Foot Per Unit (For Purchase or Refinance)
8. Resume (For Buyers)
9. Schedule of All Assets Owned (For Buyers and Refinancing)
10. 4506 (T) IRS Form (Patriot ACT Requirements for All CRE Transactions)
11.Purchase Agreement Executed (For a Purchase)
12.TRI Merge Credit Report (For Purchase and Refinance for all Guarantors)
13. Exterior Photos of Subject Property (For Purchase and Refinance)
14. Interior Photos of Subject Property (For Purchase and Refinance)
15. Most Recent Appraisal (For Purchase and Refinance)
16. Current Property Insurance Binder (For Purchase and Refinance)
17. Signed and Dated Personal Financial Statement (For Purchase and Refinance)

Winston Rowe & Associates provides no upfront fee bridge loans in the following states.

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine,  Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia,   Washington, Washington DC, West Virginia, Wisconsin, Wyoming