A Borrower’s Guide to Managing the Lending Process

Most commercial real estate borrowers will deal with a commercial bank on transactions up to $10 million, although some small life companies may welcome deals around $10 million, and CMBS lenders on smaller net-leased transactions. Getting a bank loan, of course, is a process. A CRE purchase often will involve a contract contingency for financing. So the clock is ticking, but not simply for your real estate agent, the attorney, if involved, but also for you! Suffice it to say, the deal is a long way from being done so a hands-on approach for the borrower is imperative. As a former lender, I am familiar with the internal loan drill and there can be hiccups and derailments along the way.

Thirty years ago loan officers had substantial lending authority. When I left banking my authority was $5 million. Most so-called loan officers have been schooled and equipped with only the most rudimentary tools, and frankly not qualified to assess risk. Today authority usually rests with a “committee” which includes an analyst and other bank lending officials. Remarkably, the frontline person you are dealing with is marginalized. Moreover, you may not have a qualified person doing your bidding. C’est la vie!

When I refer to managing the lending process I am suggesting that you, to the extent possible, engage yourself, as well as your real estate agent (broker), in this intricate process with ardent oversight as to requirements of the lender, compliance with the purchase and sale contract (PSA) b, and in general, closely monitor each step along the way. As a caveat, if this is not done don’t be surprised when you “get a surprise”, either delaying or jeopardizing your deal.

The following bullet-points (no order) will go a long way towards shepherding your deal to the finish line:

  • KNOW YOUR OWN FINANCIAL CAPABILITY! Check your credit so you are aware going in, prepare a personal financial statement, and assemble the last 3 years of tax returns. You will be doing everyone a favor and troubleshooting the process. The lender will require this information in any event.

  • If the purchase is an investment, I strongly recommend that you run a preliminary cash flow analysis. Generally, lenders will require a benchmark 1.2 to 1.5 debt service coverage to make the grade. The National Association of Realtors, via their RPR (www.narrpr.com) subsidiary offers easy to use software that can turn around an analysis in 20 minutes. Again, this is a preliminary run. The bank analyst will do a more sophisticated ARGUS analysis as well.

  • Shop the lenders for expressions of lender interest as well as interest rates and terms. Lenders are competitive but some will show more appetite than others.

  • Establish and fully understand the approval procedure of the lender (individual, committee)

  • Understand whether the loan is non-recourse, recourse, and the extent of any guarantees

  • While I do not recommend applying to multiple lenders, identify a backup lender

  • Again, do your best to be proactive to be able to troubleshoot the process.

  • Assist with due diligence and track compliance

  • Assess any environmental or appraisal issues at the onset

  • Be certain as to the timeline for receiving a final approval letter (usually with contingencies) will be rendered by the lender

  • Be constantly cognizant of the PSA (contract) contingencies for study periods as well as financing

  • If this is a 1031 for either party, be on your toes. Familiarity with the code is imperative

  • Make sure the designated settlement firm gets a preliminary title report to unearth any issues early on

The foregoing are just a few suggestions to put on your “checklist”.

Next: Please look for discussions involving life companies, CMBS (Commercial Mortgage Backed Securities), and alternative financing, “How do I Select a Commercial Real Estate Agent?”, “Managing the IRS Section 1031 process, “and “How to Look for Office Space?”