Most commercial real estate borrowers will deal with a commercial bank on transactions up to $10,000,000, although some small life companies may welcome deals close to $10,000,000. In addition, Commercial Mortgage Backed Securities lenders will sometimes make loans under $10,000,000 for quality income properties. Getting a bank loan is a process that takes time—sixty to ninety days is typical.
A CRE purchase contract often will involve a contract contingency for financing. The financing contingency must be satisfied within the contractual time period or the borrower could forfeit the contract’s earnest money deposit. So the clock is ticking for borrower, the lender selected, the real estate agent, title company, and any attorney involved in the transaction. Once the purchase contract is executed and loan application made, the deal is still a long way from being done. A hands-on approach for the borrower is imperative to get to closing. As a former lender, I am familiar with the many hiccups and derailments that can occur during the loan application and approval process.
Thirty years ago, loan officers had substantial lending authority. When I left banking my authority was $5,000,000. Today, most loan officers have been schooled and equipped with only the most rudimentary tools, and are not qualified to assess risk. The actual loan authority now usually rests with a “ loan committee” which includes an analyst and other bank lending officials. Remarkably, the frontline person the borrower is dealing with is marginalized. Moreover, the borrower may not have a qualified person advocating for the loan.
When I refer to managing the lending process I am suggesting that the borrower and the borrower’s real estate agent, closely monitor and oversee the requirements of the lender, compliance with the purchase and sale contract (PSA), and the time limits for each step along the way. As a caveat, if this is not done, surprises are common that can either delaying or jeopardize the entire deal.
The following bullet-points (no order) will go a long way towards nurturing your deal to the finish line:
- KNOW YOUR OWN FINANCIAL CAPABILITY! Check your credit before loan application, prepare a personal financial statement, and assemble the last three 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 preparation of a preliminary cash flow analysis. Generally, lenders will require a benchmark 1.2 to 1.5 loan to 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.
- Assist, Prior to loan application, shop the lenders for expressions of lender interest, 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 or 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.
- Be proactive and troubleshoot the process.
- Assist with due diligence and track contract and loan application compliance.
- Assess any environmental or appraisal issues at the onset.
- Be certain as to the timeline for receiving a final approval letter from the lender, and note any contingencies in that letter.
- Anticipate and complete any purchase contract and financing contingencies.
- If the deal is a 1031 tax deferred exchange for either party, compliance with the IRS Code time limits is crucial.
- Make sure the designated settlement firm gets a preliminary title report to unearth any issues early on in the loan process.
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?”?
Most CRE 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.
