Buy a Home in Reverse
Small commercial for all brokersG. Paul Fogelsmall commercial lending, benefits, appraisal approaches I am constantly hearing from residential brokers who pass on commercial financing requests, saying, "I have never done a commercial loan," or "I would not know where to start." Armed with the knowledge of what it takes to close residential loans, a good lender and some patience, any broker can add commercial transactions to their repertoire, better servicing their existing clients, expanding and diversifying their base of business and, of course, gaining another great source of revenue. Generally speaking, small commercial lenders service properties valued less at than $1 million, while larger commercial lenders handle more than $1 million, including multifamily, mixed-use, retail, office, warehouse, automotive, bar/restaurant, hotel/motel and other special-use properties. In comparison, small commercial transactions outnumber the large, and small commercial profit margins are higher. Having worked as a lender for a large regional bank, a Wall Street investment bank and now a privately owned investment bank, it has been my experience that there is less competition for smaller transactions--conduits, life insurance companies, and large banks often fight for the large transactions, while small commercial properties offer brokers a much lower risk of being shopped out of the deal. Large transactions are predominately financed by national corporations who specialize in such a high asset size. In the small commercial lending arena, however, there is a diverse group of lenders; some are residential lenders who dip into commercial, others work with large commercial loans, but dabble in small commercial and some even offer both. There is only a handful of lenders who make small commercial their primary business. Some banks will offer small commercial financing to consumers with good credit, but most specialize in short-term financing, with a maximum of between five and seven years, for mixed-use, multifamily, retail and office properties. With a good banking relationship, banks can sometimes use these compensating factors to go "outside the box." Investment banks and credit companies with small commercial programs offer similar financing terms. Both can provide for long-term debt assistance and offer both stated and full documentation programs, but pricing is often higher than banks, and many programs are limited to certain property types and credit scores. The process Never turn away any commercial prospects and make sure to become familiar with your lenders' programs. Nearly all lenders are credit-score and loan-to-value (LTV) driven. Obviously, the higher the credit score is, then the higher the LTV is and the better the pricing will be. Knowing what lenders can and cannot do is essential to being productive and credible to your borrower. Request information for quick reference and become familiar with each program. Find out from the lender what documentation they require to begin. This varies between lenders, but at a minimum, they will likely request a credit report, loan submission or application and 1003 form. Each lender has their own specific guidelines for appraisals, including what type of appraisal should be ordered, what needs to be included in the report, or an "approved list" of appraisers. The hardest part of commercial lending is understanding the art of how properties are appraised and valued. There are three overall approaches: Cost approach, income approach and sales approach. Cost approach The appraiser determines what it would cost to build an entirely new structure, with similar build-out under similar zoning requirements. The cost approach is the least effective method for lending purposes, but is often used for insurance purposes. Income approach The appraiser attempts to reconstruct an operating income and expense scenario, mirroring the market and conditions of the property. The income approach is the most accepted determination of value. Sales approach The appraiser researches comparable land sales, such as location and lot size, analyzes the variables and adjusts for differences in physical structure. The sales approach compares land and building sales on a square footage basis to determine value. To avoid any difficulties during the review, it is best to hire an appraiser that has prior experience with your particular lender and to follow the lender appraisal guidelines rigorously. When the appraisal process is completed, and all other conditions on the pre-approval are met, the transaction should be ready to close. Most lenders will run the transaction through underwriting one last time, just to be safe, before submitting the file to their closing department. With good processors and transaction managers, no future problems should arise. I hope this has given an acceptable overview of how small commercial transactions are written. The small commercial mortgage arena is in abundant supply and presents an opportunity for all brokers. While it takes a bit more work and some perseverance, it is not very difficult to become comfortable and profitable in this area. I suggest finding a good account executive who represents a good product and give it a shot! You have nothing to lose. G. Paul Fogle is an account executive at Interbay Funding LLC. He may be reached by phone at (866) 848-3049, e-mail at [email protected] or by visiting www.interbay.com.