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Jun 22, 2006

Submitting a commercial loan request to a lender: A primer for brokersGeorge C. UnserCommercial mortgage lenders Commercial mortgage loan brokers often complain, "I sent a loan request to a lender, and all I got back were questions and requests for more information. Why can't he just send me a quote?" On the other side, lenders often say, "The broker sent me everything but what I need. Why can't the broker send me the information I need so I don't have to delay getting him a quote?" The purpose of this article is to explain how to submit a loan request that will reduce frustration for both the broker and the lender. A commercial mortgage broker usually has two primary objectives for his clients when requesting a loan quotation: to obtain a loan quote with the best possible terms and to obtain a loan quote quickly. How the broker presents the loan request to the lender determines how well he will achieve these objectives. A well-prepared loan submission will help the lender to produce the best possible results. A poorly prepared loan submission will cause the lender problems and will often result in less than the best loan offer. Further, a poor loan submission may result in the lender rejecting what otherwise might have been a good loan. The three-legged stool A commercial real estate project must be supported like a three-legged stool. The three legs are the property leg, the borrower leg and the transaction leg. Without strong support from all three legs, a stool will wobble or even fall over. The same is true for a loan transaction. The broker needs to provide strong supporting data for all three legs in the loan submission. Otherwise, the lender will not be able to give a timely or reliable quote. Overview The process for submitting a good commercial loan request to a lender starts with the mortgage broker's first contact with a potential client. From the beginning, the broker should gather information, keeping the three-legged stool in mind. Once the information on the project is gathered from the client, the seller and other sources, the broker needs to prepare a loan submission package for the lender. This process may take several hours or longer. At this point, the broker should not be hasty. A few hours spent developing a complete submission can save days, or even weeks, of time later. The initial loan request submission should include the following: • An executive summary, describing the loan and all pertinent issues; • The current rent roll, covering 100 percent of the rentable space including vacancies; • Income statements for the last two years, plus the current year-to-date; • Other supporting documents for the statements in the executive summary; and • Color photographs of the property. The property leg The property is the basis for a commercial mortgage loan. It will be used as collateral for the loan. Thus, the lender needs to know a great deal about the property. The following are a few items to describe the property: • Property type (e.g., multi-family, office, industrial, self-storage, warehouse, raw land, retail, mixed use, etc.); • Property address; • Size in square feet, number of units and number of stories; • Land size in acres; • Date built and dates renovated; • Occupancy history; • Rental income; and • Net operating income for the last two calendar years, plus the current year-to-date. The property description should be brief. The description can be a few sentences or a bulleted list, but it must contain all of the items listed above. The broker should review the property material for reasonableness. He should check to see how the occupancy compares to the market. He should check to see if rents are at market. If possible, the property should be visited to see its condition. The broker review may uncover benefits or weaknesses that need to be discussed in the executive summary. The property information should be summarized in the executive summary. The current rent roll and historical income and expense reports should be attached. Photographs are a must and should include at least five views covering both the interior and exterior of the property. The borrower leg The borrower may be individual(s) or an entity. If the borrower is an entity, the lender is also interested in the principals of the borrowing entity. The information on the borrower should include: • Creditworthiness—Each borrower's credit should be indicated as the middle credit score given by the three credit bureaus. It is not necessary to actually pull the credit reports, as this will possibly lower the score if there are too many credit inquiries. The general description of creditworthiness is adequate for the initial submission. Describe any conditions that could adversely affect credit scores, such as bankruptcies, liens, etc. Provide explanations of special circumstances that could incorrectly cause a low credit score (such as a divorce); • Financial condition—For the initial submission, the net worth and liquidity should be disclosed for each principal; and • Experience—Provide a résumé, describing pertinent real estate management experience for each of the principals. Lenders do not expect that every borrower have great credit, high net worth and years of experience. What is important is to describe the borrower accurately so that the lender can match him up with the correct loan program. The transaction leg The elements of the transaction are crucial to ensure that the lender provides the correct financing offer. If the lender misunderstands the transaction, he will often quote inappropriate loan terms. This is the area that is usually the weakest in loan submissions. The mortgage broker should spend extra time and effort to make sure that he understands the client's situation and business objectives regarding the transaction. Elements of the transaction include: • Loan purpose (e.g., purchase, refinance or cash-out); • Loan amount requested; • Purchase price and estimated value; • Borrower's business plans (see below); • Terms desired, including expected interest rate, fixed-rate period, term and amortization; • Date by which the loan must close; • 1031 exchange details; • In the case of a refinance, the current loan balance, due date and terms; • Borrower's intended use of cash-out proceeds; • Length of time property has been owned; and • Special circumstances that affect the transaction. All of the elements above should be covered in the executive summary. The business plan is critical to allow the lender to provide the proper loan quote. For example, an apartment building purchase could have several possible business plans. The buyer may plan to run it as a rental property. However, he may instead plan to convert it to condos or even raze it to build a shopping center. Obviously, these different business plans require different forms of financing. The broker should do some calculations to ensure that the transaction makes economic sense. For example, he should check to see that the borrower has enough liquidity to make the down payment and pay closing costs. He should also estimate what the debt service coverage will be, etc. Any issues the broker uncovers should be discussed with the client and resolved before submitting the request to a lender. Conclusion The loan submission must include a lot of information. However, it need not be lengthy. A good loan submission should be less than 10 pages. The executive summary will typically be one to three pages. Attachments should include the rent roll, profit-and-loss statements, photographs and any other pertinent documents to support the executive summary. The loan submission should not include tax returns, complete credit reports or complete appraisals, unless these documents are needed to support special circumstances of the transaction. In fact, a lot of extra documents are detrimental to getting a timely response. The lender may set lengthy requests aside because he dreads the extra effort required to sort through the unnecessary documents to find the important information. Lenders now usually prefer that all of the documents be assembled into one Adobe PDF document and e-mailed. This article has covered the loan submission from the lender's viewpoint. When a commercial mortgage broker looks at a potential loan transaction from the lender's viewpoint, he will most likely improve his success in meeting his objectives, as well as close loans more quickly. Always keep the three-legged stool in balance, and you will have a solid response from your lenders! George C. Unser is the senior underwriter for Sterling Commercial Capital. He may be reached at (203) 366-0320 or e-mail [email protected].
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