As published in Scotsman Guide's Commercial Edition, August 2007.
Commercial brokers do not need management consultants to ensure a lender notices their deals. They must, however, know their deals before marketing them to lenders.
From a lender's perspective, brokers must converse intelligently about a deal when shopping for financing. Mastering six key points about their deals allows brokers to make best use of their 60-second pitch opportunity to lenders. These points include: collateral; collateral value; a project description; loan amount and purpose; loan type; and timing.
Understand the key points
When shopping a loan to lenders, brokers must be able to answer an array of questions about each factor. This will help ensure that lenders will take the brokers and their deals seriously.
1. Collateral: What is it? Where is it? How big is it? Does the property have improvements? If yes, what are they, and what is their size in square feet? Is it an income-producing property? Are borrowers willing to cross-collateralize the loan with other property? If so, brokers must provide an accurate description of this, too.
It also is important to provide the exact street address, including ZIP code and county. The parcel-identification number also is useful because it lets the lender look up the real estate in the local tax assessor's database and to learn more about the property's ownership history and its tax-assessed value.
For income-producing properties, provide a current rent roll and the past three years of financial history, if available.
2. Collateral value: Is there an appraisal available? When was it completed, and for whom? When you give a value, label it. Is it the liquidating value, the as-is value or the as-completed value? A number without a label is meaningless.
Lenders usually are willing to make loans based on a percentage of the liquidating value or of the market value. It is important to understand the timeframe on which the definition of each is based. Some lenders may consider the value based on a 90- to 120-day sales and marketing period, while others may indicate a 120- to 180-day sales and marketing period. This is often described as a cash sale to a bulk buyer within a specified time period.
3. Project description: Along with top-level financials, you should provide an overall big picture of the development project. What is the plan? What is the developer attempting to do, and how does this compare to other developments in the same area? Why will this development fly?
If a lender asks you why a particular project is so great and you don't respond, then you will have knocked the wind out of your own sails. All brokers should determine their deal's positive points, just as they should know the less-appetizing elements.
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