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For the deal to proceed, you must determine the true value of the asset and how much a lender likely is willing to provide. To start, you must remove the bias various parties may bring to the transaction. A borrower who previously owned a property will have a bias of value — just as a homeowner would. Go strictly with today’s market value.
There are two ways of estimating how much to get from a lender:
Loan-to-value: Typically based on an updated appraisal, which any lender will require; and
Loan-to-cost: Typically based on what the individual is paying for the property.
Although a lender could lend at a percentage of either of those numbers, there are some that will lend on future value based on a construction loan or conversion project. For example, the current value of the building might be $10 million, but after a borrower invests $5 million more in the property, that figure is projected to double to $20 million. Lenders — depending upon their strategy — may do an initial loan and then do draws over time. This allows the borrower to access more money to complete the work required for the conversion.
Commercial mortgage brokers also may encounter borrowers who are looking for cash-out financing. For example, say a client built a new hotel, put $10 million of equity into it and had a $10 million note. If the client believes that the hotel is worth $20 million and wants to borrow $15 million to pay back the note and get $5 million back, that may be a tough sell. Lenders likely will want to make sure that borrowers have skin in the game so there is an incentive to pay loans back.
When it comes down to getting the loan done, the most important factor is to have your ducks in a row when the term sheet is signed. Make sure the borrower has all the required information and documents to avoid going back and forth between the borrower and the lender.
There’s nothing magic about this: It is your role as a commercial mortgage broker to know what the borrower must provide to a lender in terms of financials, historical information, environmental appraisals and so forth. The faster that information gets to the lender, the sooner the process of underwriting can start.
The other piece of the puzzle is to have the deal buttoned up as soon as possible to avoid unnecessary costs for your clients. In many cases, if a deal stalls, a borrower will be forced to pay an existing lender to get an extension until an agreement is worked out with the new lender.
For note purchases, brokers can look to conduits for consummating and negotiating these purchases with third parties and banks. The key is to look for a lender with adequate experience and resources — a lender that is willing to get involved directly with the old lender holding the note, for example.
Clearly, there are deals to be had in distressed properties, but not everyone will succeed in this niche. Ultimately, it is incumbent upon commercial mortgage brokers to do their homework, learn from experience and match borrowers to lenders in a way that everyone involved in a transaction comes away happy.
Jeffrey Wolfer is president and CEO of Silver Arch Capital Partners, a nationwide bridge lender. He has been a driving force in the private lending industry for more than two decades. Wolfer grew one of the leading players in the business
from $40 million in annual closed loans to more than $500 million in 2007, fueled in part by a $300 million credit facility from Fortis Bank. Reach Wolfer at (201) 254-2555 or visit www.silverarchcp.com.
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