Know the necessary documentation requirements to put together a successful loan package
Tami Athens, president, Commercial Loans R Us LLC
As published in Scotsman Guide's Commercial Edition, May 2008.
Brokers who are new to the commercial market often discover early that finding clients is only half the battle; the second half involves a lot of paperwork. It's more than a neat little preapproval checklist.
There is no standard way to complete commercial loan paperwork; there are only general guidelines. You must get to know what documentation each lender expects and then be prepared to complete lender-specific applications and forms that vary in their content.
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There are certain documents that lenders almost always request, however. Even if they don't, chances are you will still need some of the data from those documents to put your loan package together. As such, you should become familiar with the commonly requested documents. Then get as much as you can upfront from the clients, even if you don't end up using it.
Before you actually start collecting documents, of course, you must have an initial conversation with potential clients about their deal. Ask detailed questions. Unless you know what the numbers look like and have an idea of what you are dealing with, you can't move the loan forward.
If it looks like a deal you can place, begin collecting documentation from the clients.
The following are some of the basic pieces to collect:
• Client-broker agreement: It is wise to not work with new clients without a signed agreement. Making them commit to working with you shows that they are serious about the deal. Client-broker agreements, which are also sometimes called fee agreements, should spell out your arrangement with the clients, how you will charge your fees, what you are responsible for and for what they are responsible.
If the prospects will not sign this agreement, ask yourself whether you think they're wasting your time. If so, move on.
Some commercial brokers even charge a commitment fee. You can charge this upfront before you start working on the loan or after you receive a preliminary letter of interest from a lender. Again, it's a matter of choice and of how comfortable you feel working with your clients.
• Credit authorization: In the past, commercial lenders gave more weight to the property itself than to borrowers' credit scores. That's no longer the case. Credit matters. A low credit score may limit your clients to a hard-money lender. Mortgage lates are a definite no-no and often will stop a loan dead in its tracks.
• Rent roll: This document itemizes the tenants in the subject commercial property and provides an overview of the property's cash flow. Information on this form generally includes the tenants' names, unit numbers, unit sizes, lease start dates, lease end dates and lease amounts.
Rent rolls should be dated and signed by the property-owners. Always provide the most current rent roll. Also, be honest about vacant units.
• Leases: When dealing with an income-producing property, most lenders will require a copy of each tenant's lease. Information on the leases should be consistent with all the pertinent information on the rent roll. Review these documents side-by-side to ensure there are no inconsistencies. If there are, ask your clients for clarification.
Remember that the longer the lease, the more security it provides to the lender. Lenders often shy away from month-to-month leases. Advise your clients of this. It's also smart to look at market rents for similar properties and see how your clients' leases match up.
• Operating statement: Also known as an income-and-expense statement, this document shows how much money the property brings in and how much goes out in the way of expenses. It should provide annualized figures, with the exception of a year-to-date operating statement, which shows how the property is performing so far in the current year.
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