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Structuring the loan
When it comes to structuring the loan, you have to make a significant judgment concerning the proper amount of financing that a particular property can sustain. The judgment must be based on a thorough analysis of the project's characteristics.
The recommended financing must be attuned to the particular lender with whom you are dealing. If, for instance, the property is a nursing home, and your one nursing home lender has never made a loan in excess of 70 percent of value or has never made a nursing home loan with less than a 1.5 debt-service-coverage ratio, keep those facts firmly in mind when negotiating an application and recommending a particular dollar amount to the lender.
For some borrowers, the aim of financing is not necessarily to arrange for a proper level of financing as much as it is to obtain the highest dollar amount at the lowest rate for the longest term. On the other side of the fence, however, some lenders believe they should strive for the lowest number of dollars at the highest interest rate for a term that keeps the loan classified as a long-term, permanent loan. For many of these lenders, the actual amount of the loan is immaterial. Fortunately, there are many members of our industry who aspire to place a proper level of financing upon any income-producing property.
Lenders' levels of interest will vary between types of properties and industries. There are some life-insurance lenders that have had phenomenal success with financing industrial properties or shopping centers or motels and are willing to lend more aggressively in those categories.
Many experienced players in our industry will agree that more projects have failed from overfinancing than from underfinancing, and a lot of people have been driven from our industry because they never acquired the self-discipline to allow projects to stand on their own merits. Older and wiser heads in our industry can recount tale after tale of competent borrowers who began counting on the funds from their next project to bail out a previous one.
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Ultimately, the structure of the loan must be reasonable for the property type, borrower and lender. It is this combination of project, sponsor and lender whose interests must all be evaluated and equalized if one is to be associated with successful income-producing properties.
Lorenzo Hills, managing director of East Coast Commercial Finance,
is responsible for the origination, analysis and placement of real estate debt and equity investments nationwide. He is affiliated with the National Association of Industrial and Office Properties, Urban Land Institute and Mortgage Bankers Association. East Coast Commercial Finance is involved in commercial real estate finance and investments and is located in Charlotte, N.C., the second-largest banking center in the United States. Reach Hills at (704) 526-6878.
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