As published in Scotsman Guide's Commercial Edition, March 2010.
Commercial mortgage borrowers often must meet the five C's of credit -- credit, collateral, contribution, character and capacity -- for loan approval. There is a sixth condition that borrowers must satisfy, however, particularly in today's market.
Experience plays a major factor in all commercial lending, whether for owner-occupied properties or investment properties. In fact, experience is a large factor in lenders' underwriting decisions. Although experience may not be necessary for all borrowers, it is crucial when mortgage brokers are seeking a closeable loan with good terms for their clients.
To help their clients find the best terms on a loan, brokers must understand why experience is so important, as well as what lenders will consider relevant experience.
Lenders have seen more bankruptcies and foreclosures in the past two years than they had in decades. If lenders can detect a pattern for a failing venture, then they can avoid lending to clients who have these characteristics in their lending history. Lenders have memories like an elephant; they never forget anything, especially when they took a loss.
For example, as a broker, you might present a deal to a lender that seems solid and that you expect to sail through the loan committee to approval. But if a member of the final loan committee previously lost money by lending to the same type of business, that loan might be declined. The banker's experience often will take precedence over the content of the actual loan package.
Failures have consistently occurred where borrowers had no experience in the business they acquired. The retail-franchise industry, for instance, saw record failures in 2008 and '09. Even with the turnkey approach to operating a business, borrowers and banks lost their investments. If franchises saw excessive failures despite having everything in place for a new owner to take over, it's no wonder that borrowers with no experience running that type of business are failing, as well.
When seeking financing for a client, you may wonder what constitutes experience and when lenders will consider that experience relevant. When seeking an owner-occupied loan, is experience managing a place considered the same as experience owning a business? Can experience in one industry be significant enough to satisfy a lender that it can transfer to another industry? You must examine these questions thoroughly.
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