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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2008

Bring in the Most Funding

Larger loans and alternative financing can help clients maximize their deals

There is one big factor in most loan situations: the size of the loan -- or the amount of funding that you can deliver.

Generally, borrowers want to have more funds for the deal. As such, mortgage brokers who deliver the most funds will win their clients’ satisfaction.

Although the largest loan amount is usually desired for purchases, there are some cases in which a lower loan amount may be better for the property’s financial performance. In the case of a refinance, for instance, it may be best to maintain the same size loan.

Mortgage professionals should focus on getting the best loan for their clients, which may not always be the biggest loan.

When seeking to optimize the loan amount, however, there are two ways to provide the most funding for the deal:

  1. Boost the loan to value (LTV) and get the most from the lender.
  2. Bring in funding from all sources and get the most for the deal.

Boost the LTV

There are several factors that lenders review to determine the loan size. These include perceived value, market, income, debt service and the borrower’s strength. It is necessary to optimize each of these to get the highest LTV for the loan.

In today’s lending environment, many lenders have more-restrictive lending practices. They have reduced their required LTVs and tightened their underwriting. Therefore, it is important to find lenders that will look at all the factors to increase the LTV.

The place to start is the property’s perceived value. There are three strong indicators of property value:

  1. The purchase price of the contract: A higher price will allow a higher loan amount. 

    In today’s environment, there are investors who are buying property at a discount from the real value. Negotiating the lowest price with the seller may not give these buyers the greatest advantage. 

    In some cases, it may be better for the buyer to offer a price that is closer to market value and for the seller to give back on some things to the buyer, such as improvement funds for the property (in escrow for the property), contributions of funds at closing and other advantages for the buyer.

  2. The property appraisal: Review the factors that determine the property value. These are the basis of the value. Ensure that the rental rates, the expense rates and the cap rate are all in line with the prevailing rates in the local market area.

  3. The broker price opinion: It is advantageous to hire a real estate broker who specializes in the property type and the area in which the property is located. Specialists can identify the factors that add value to the property and make it more valuable.

Next, consider the market in which the property is located. The property location and type (e.g., office, hotel, retail, etc.) is a major factor. It is important to identify advantages of the property in the specific market. For example, a shopping center was recently evaluated for a refinance request. The property was located in a city with a soft economy but in a local area with no other competing shopping centers. Therefore, a continued strong demand for the retail stores in this location was projected, based on the factors of the micro-market.

Another important factor is the income of the property. Include a pro forma with the optimum income in the loan request. This can allow the lender to provide the highest amount of funding, which may be released upon the achievement of certain benchmarks. For example, the lender may release 70-percent LTV upon the initial closing of the loan and then an additional 10-percent LTV upon the leasing of the remaining space.

The loan amount will be based on the factors described above, plus the property’s ability to debt service the loan. The lender will calculate the debt-service-coverage ratio (DSCR), which is equal to the property’s net operating income (NOI) divided by the required debt service of the loan.

The size of the loan will be greater with lenders that have a lower required DSCR. For example, a lender that requires a DSCR of 1 may approve a larger loan. The opposite is also true -- a smaller loan size can be approved based on a DSCR of 1.3. Seek lenders that have the lowest required DSCR.

Finally, the loan size also depends on the borrower’s strength. This is a part of the lender’s assessment of the strength of the deal.

If needed, your client can bring in a stronger partner who has a higher net worth, more assets, more income and/or more experience with the particular property type.

Look at multiple sources

Typically, the lender is seen as the only source of financing, but there are many other sources for additional funding. They all can be tapped to bring more funds into the deal.

Many parties are connected to the transaction; look to each one as a person motivated to make the deal go to closing. Motivated parties can contribute a variety of funding to the deal.

These parties include:

  • The seller: The seller is one of the most-motivated parties of the deal and can contribute to the closing costs, property improvements and property reserves.
  • The buyer: There are many sources of funds available to the buyer, such as a business line of credit, real estate line of credit, a loan against other assets, factoring of receivables, etc. In cases where the borrower owns another property, this can be a source of funding for the deal, as well. The property can be financed by another lender source or can be used as additional collateral for the lender for the current deal.
  • The current lender: In some cases, the current lender desires to have the loan paid off in a timely manner or in a shorter timeframe. Ask the lender to accept a reduced payoff amount in exchange for a faster payoff of the loan. The lender can subordinate a remaining portion of the loan.
  • The new lender: Some lenders provide a wider range of loan products with a higher LTV. Find lenders that offer the highest LTV with a mezzanine-loan product, which can provide 85-percent to 90-percent LTV.
  • The tenants: In cases where there is a vacancy in the property, the new tenants may provide the cost of tenant improvements before they move into the space. For example, tenants could perform improvements that would cost $150,000, which reduces the loan amount needed.

•  •  • 

If mortgage brokers get creative and consider all of a deal’s possible angles, they can maximize funding for their clients.

Consider a shopping-center owner who wanted to refinance to buy another property. The shopping center was appraised at $3.5 million, but the largest space was vacant. This reduced the operating income and the property value.

The owner expected a loan to meet all of his needs with a 75-percent LTV based on the fully leased property. But because of the vacancy and lower NOI, the property value was reduced.

The mortgage broker negotiated with the lender to provide a higher loan amount based on the property’s future value.

The lender required a signed lease with a new tenant as a condition to the commitment letter. The lender could then approve the loan and close on the financing before the new tenant moved into the property.

Brokers who use these techniques often will close more deals with more satisfied clients. 


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