The commercial corner: Don't say no - think nicheMike Boggianoniche marketing, owner-occupied properties, self-employed borrowers
The Mortgage Press is pleased to present "The Commercial
Corner," a monthly column by Mike Boggiano of Silver Hill
Financial, LLC, dedicated to answering your questions about the
commercial mortgage marketplace. If you have a question that you
would like answered in a future installment of "The Commercial
Corner," please e-mail
[email protected].
Q: How can I turn problematic borrower scenarios into
business?
A: In the commercial lending arena, certain types of
borrowers or deals are habitually viewed as problematic. As a
result, many lenders and originators find themselves saying no to
would-be borrowers, realizing the traditional roadblocks to
obtaining a loan. However, a better approach is to view these
situations as unique opportunities to attract a very targeted,
underserved segment of borrowers. In other words, carve out a niche
instead of dealing out a no.
Three distinct, yet interrelated, areas come to mind. Here's a
description of each, with insight for capitalizing on business that
others might be turning away:
Owner-occupied properties
Generally speaking, most lenders have a limited appetite for
financing small-balance commercial loans, preferring to invest in
relatively low-risk properties that have cash flow with a strong
debt service coverage ratio, the traditional commercial analysis
method. Owner-occupied properties tend to be limited tenant
buildings. The fewer the number of tenants there are, the riskier
the property is. In other words, it is more difficult to debt
service if one out of four tenants is lost than if one of 14 is
lost. In addition, traditional lenders rarely debt service these
properties, because only the non-owner-occupied units are
generating rent.
While some may consider owner-occupied properties to be a
problem, it would make sense to instead turn them into prospects,
and with the right lender, these deals can be easily funded. For
example, a small-balance commercial lender using a debt-to-income
(DTI) underwriting approach a niche in its own right would be a
good fit to fund limited-tenant, owner-occupied properties. In some
cases, the DTI ratio can even be stretched for a higher tolerance
of approving the deal.
Self-employed borrowers
Many self-employed borrowers understate their taxable income by
declaring losses or overstating expenses anything to bring down the
income on which they will be taxed. A bank looks at the bottom line
or net income, using this figure to approve or deny a loan.
Usually, as a result, hard money or stated programs are the only
viable source of financing for this group of borrowers.
By contrast, a lender who examines tax returns to figure a
self-employed borrower's realistic net income adding back in the
figures that are overstated or understated would be able to approve
more deals. In realizing the commonplace tax strategies of
self-employed borrowers, an innovative lender, with the right
approach to analysis, might even qualify a self-employed borrower
for 90 percent loan-to-values, among other attractive options and
rates.
Underwriting approach
Last month's column gave attention to the difference between
traditional commercial DSCR underwriting, versus the more familiar
DTI approach used in residential deals. As mentioned with
owner-occupied properties, traditional lending institutions only
approve properties that debt service that is, they generate more
than enough income to pay the mortgage, insurance, taxes,
maintenance and operating expenses incurred by the property.
Typically, banks look for a property to generate at least $1.20 in
revenue for every $1 of expense. If this ratio falls short, they
will, most often, pass on the deal.
In a DTI analysis where the focus is on the borrower's personal
ability to carry the debt on the loan, many of these rejected deals
would be considered and funded instead. And, on top of the process
being easier for both the broker and the borrower, a DTI
underwriting approach has added benefits. First, a commercial
lender with DTI underwriting has the ability to finance vacant
properties or those with inadequate debt-service ratios. For
example, examine a property that needs renovation before it can
produce income; with DTI, a strong borrower could potentially get
the funds needed for a profitable investment. Second, in markets
where values are high California, Arizona, New York, Florida or New
Jersey, for instance it is extremely difficult for properties to
generate enough rents to carry a high LTV. The higher the LTV is,
the higher the debt load will be, and the harder it is for the
generated rents to carry a high mortgage payment along with related
property expenses. The same scenario under a DTI analysis may yield
an approved deal based on the borrower's DTI ratio. This approach
may even allow for a 90 percent loan-to-value in some cases an
impossible feat if relying on the property's debt service.
These are a few examples of areas where a savvy broker, working
with the right lender, can turn problems into profit.
Mike Boggiano is senior vice president, national sales
manager for Silver
Hill Financial LLC. He may be reached by phone at (877)
676-1562 or e-mail
[email protected].
