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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2005

Step Right Up

Brokers, it’s time to take charge each time a bank turns down a loan

Many borrowers first turn to banks when seeking a loan. After all, banks are well-known in their local market. Borrowers expect banks to understand their lending needs and to be willing to satisfy them — especially when they are long-time clients of the bank. Large banks also have enormous advertising budgets that allow them to create memorable campaigns. Additionally, many advisers, such as accountants or attorneys, are only familiar with banks and with the most-traditional lending processes.

Does such competition limit the market for commercial mortgage brokers? No. Are all the good transactions scooped by banks? No. So when does a bank typically refer borrowers to explore other avenues of funding? Usually when it cannot handle the loan. Perhaps there are qualification issues the bank cannot tolerate, or the property type is not preferred. Or perhaps the borrower is requesting a loan not customarily satisfied by a bank, such a as cash-out transaction.

Banks’ strict regulations create a great opportunity for commercial mortgage brokers. When a bank turns down a loan deemed overly complicated, a broker can step in and take over. Does this mean that only the tough deals come the broker’s way? Not always, but usually. There are a number of loan transactions that banks must pass on.

Property types do not fit bank policy

Because banks are mandated to take the least risk, they will avoid certain property types. They like to lend on the safest investments with the highest returns. Most banks love multifamily, office and retail buildings that are clean and cover debt, while they frequently pass on riskier property types such as industrial, self-storage, hospitality and automotive-related properties.

But brokers know that there is a lender for every property type, subject to underwriting constraints such as loan to value, debt coverage, terms and borrower quality. Many less desirable property types are eagerly sought by nonbank lenders and even by somewhat traditional lenders that are more open-minded to reviewing well-packaged and well-structured requests.

Transactions are too complicated or arduous

Picture a banker sitting behind a desk, reviewing a thick stack of loan requests and a pile of call-slips to return, preparing for a loan-committee meeting the next morning and having to dun three borrowers.

Does that banker really want to take time to understand an intricate transaction a prospective borrower is describing over the phone? The banker’s response to the borrower will likely sound something like this: “I’m sorry, Mr. Jones, I think you have a nice request, but I think I’ll have to pass on it. I don’t think it will meet bank policy.”

The bank’s “tenderizing” of this borrower is a perfect setup for a commercial mortgage broker for a number of reasons. First, rate and terms suddenly become less of an issue for the borrower. The issue now is whether or not he can get the loan. The size of the broker fee may also become less important to him because he now knows he no longer has the bank option. And because the borrower already perceives the transaction to be more difficult, he is likely to be more cooperative in supplying required documentation and in considering alternative lending options.

The transaction may be complex, but once the broker understands it, it can be simply and crisply explained in the executive summary of the loan request. Take, for example, a recent transaction in which a borrower had been to every available bank in his city with a request to fund an automotive-repair facility. He was turned away every time. The facility, while a clean property, was located on two contiguous parcels. Each parcel was owned by two separate entities — each with interests in the other and with other unrelated partners.

Understanding the ownership structure was the first step to understanding the financials in the loan request. With effort, the broker created a simple ownership schematic — clearly describing the situation and loan request — in a brief executive summary. The first lender to receive the loan package immediately said it was no problem and accepted the loan.

Banks have varying policies

Many good loans are declined by banks because they must meet regulatory requirements unfamiliar to brokers, such as the Financial Institutions Reform, Recovery and Enforcement Act that limits the percentage of assets committed to commercial real estate. Consequently, certain credit requirements may vary between institutions.

Some bank policies vary based on the bank’s previous transactions and even based on the bank staff’s personal preferences. In one instance, a community bank stopped lending to salons after a board member’s wife had a bad hair-coloring experience.

Additionally, some banks claim their loans are not based only on scores, but nevertheless turn certain scores away, regardless of the strength of the debt coverage.

•  •  •

Mortgage brokers have always been a preferred choice for borrowers in need of more personal service and greater options. Creative brokers who know their numbers and present understandable loan packages can thrive when banks turn down loans.


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