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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2009

Destination: Closing

Rough road to commercial funding? Following these 9 checkpoints can help seal your deal

Destination: Closing

Whether you're on yourfirst commercial deal or your 50th, you likely started in the business the same.

Most mortgage brokers begin by doing one transaction at a time, stumbling through their first 10 to 20 commercial loan applications as they pay their tuition to the school of hard knocks. Although you certainly will learn from each failure, lender contact and missed opportunity, it ultimately is an expensive and time-consuming education.

In the challenging commercial finance market, it may help new brokers and those refreshing their knowledge to have a guide to refer to when presented with a loan opportunity.

Here are nine steps to consider with any commercial loan transaction.

1. Screen the deal

When presented with a deal, you first must interview your clients and receive key items to determine if you should proceed in securing financing for their project. It's helpful to have a spreadsheet with key elements that can help you qualify a potential transaction in as few as five minutes.

Your spreadsheet should include:

  • The investment property's gross income, operating expenses -- don't count depreciation or capital expenditures -- and net operating income (NOI) from the most-recent tax return;
  • The current market rate and amortization for the type of property and loan program your client seeks;
  • The loan amount requested; and
  • The debt-service-coverage ratio (DSCR) the lender will most likely require.

This information will help you determine if the property can service the debt and meet your lender's primary guidelines.

Also collect the following from your clients:

  • The adjusted gross income from their most-recent personal tax return
  • Their credit scores -- 650 to 700 is a rough range for minimum scores lenders require
  • Their current liquidity -- look for 10 percent of the loan amount
  • Their net worth, which should be greater than the requested loan amount

2. Create a fee agreement

Once you determine that you have a viable transaction, gauge your borrowers' intentions. Although many lenders will protect a mortgage broker's position in a financing transaction, some do not. 

If your primary lender passes on the loan request, you may have to shop it to several new lenders. If so, the best way to guarantee your payment is with a fee agreement.

Present one after your initial screening with some preliminary quotes to see if your clients are serious about working with you. 

Depending on your state's laws, you may want to consider collecting a small application fee to cover your initial underwriting time and out-of-pocket costs, as well. This can serve as a further test of client loyalty.

It's also a good idea to consult an attorney about a fee agreement that is specific to your state.

3. Collect the documentation

Next, it's time to collect all the necessary parts of your clients' loan package.

Approach a loan package like you're writing a novel: It must have certain parts in the proper order to make sense and to be a hit with the underwriter who reviews the deal.

There is an art to structuring a successful loan package. You should:

  • Start it with an executive summary, which is actually the last document that you will prepare;
  • Describe the transaction, the property and the borrower, which often is an entity. Be sure to include color pictures and maps of the property;
  • Show the important numbers (e.g., NOI and DSCR); and
  • Draw a conclusion regarding all the data presented.

It is important that you point out the weaknesses as well as the strengths of each loan request. Lenders often expect their underwriters to find weaknesses in every file. If you do the work for them, they will be less inclined to search deeply through the file to find those weaknesses. Don't give underwriters reasons to look for problems in the file; make it easy for them to do their job.

4. Summarize

A good summary will save you and the lender hours of headache. If you have to shop your clients' transaction, a well-prepared summary will help potential lenders screen the transaction in minutes rather than hours.

Lenders typically dislike having to sift through 20 random documents to try to figure out what a particular borrower is trying to do when applying for a loan. They usually throw these packages to the back of the underwriting line and give the most-serious consideration to submissions with well-prepared summaries.

Another benefit of preparing a good summary is that you will know your file well. When questions come up from underwriting, you will typically have the answers at your fingertips. This may mean more work for you upfront, but it pays off.

5. Receive the letter of interest

If you have done your job well, your lender will issue a letter of interest -- or conditional approval -- to your client. The letter of interest spells out the terms of the lender's offer to your borrower and any additional conditions that your client must meet prior to approval.

Any legitimate lender usually will perform a significant amount of due diligence on the credit file before making a formal quote and a request for a good-faith deposit. At this point, your clients often must get out their checkbooks.

Remember, in a difficult financing environment, it is possible that some scam artists will act as lenders, seeking to live off of large due-diligence deposits with no intention of performing on the loan request. Before your client pays for any services, one of your tasks is to check out new lenders to make sure that they have a history, can fund loans and are not in trouble with their respective state regulators.

Be sure to interview lenders thoroughly. Get to know their supporting personnel, and learn their preferred loan types. As a commercial broker, it is your job to represent real lenders and borrowers.

6. Wait for third parties

Waiting for third-party vendors to complete their investigations is usually the longest part of the commercial financing process.

Phase I environmental-site-assessment reports often are mandatory and usually take two to three weeks to complete. Appraisals usually take two to four weeks, depending upon the type of report the lender orders.

Do not order any of these reports on your own. If your client already has them, some lenders may still review recent reports that are put into their names. This practice is diminishing, however, because of regulatory requirements.

The recent mortgage meltdown has forced lenders to order the reports themselves to maintain the purity of the opinion. So save your client a few-thousand dollars and let the lender order the reports.

Other reports that may be required, depending upon the property type and lender, are a structural engineering report, a feasibility study, and a lead-based-paint or asbestos-contamination report.

7. Review loan documents

When the third-party reports come back, the underwriter will review and comment on them in preparation for a final loan-committee approval. Depending on the lender, the committee may be several people or just one person.

If the reports support all the claims in the file, then the lender likely will approve the loan and prepare the loan documents.

The documents are usually sent to the clients so their attorney can read and comment on them. It's a good idea for you to get a copy, too. Often, brokers will find elements of the documents that weren't prepared correctly. 

Once any necessary corrections are made, your clients sign the documents and send them back to escrow. The lender then may fund the deal within 24 to 48 hours.

8. Get paid

At this point, you want to make sure that your fee agreement is in escrow, the escrow or title agent has acknowledged receipt and you get a copy of the estimated closing statement to verify that your fee is on it.

If your lender is collecting the fee for you or also providing a yield-spread premium, you may not need the fee agreement mentioned in step No. 2. Regardless, it is a good idea to get a copy of the closing statement so that you can help answer your clients' questions.

9. Build partnerships

As you move through commercial loan transactions, you will collect several names, addresses and phone numbers of people who are in good positions to refer more commercial loans to you. These include, for example:
Your client's attorney, accountant and commercial real estate agent in purchase transactions;

  • The seller's broker;
  • The escrow and title officers;
  • The environmental engineer;
  • The appraiser;
  • The property manager; and 
  • Your client.

Your goal should be to get these prospective referral sources into automated marketing campaigns so that you can keep your name in front of them regularly.

•  •  •

Following these steps when working on commercial loans can dramatically reduce the amount of time you spend on dead-end transactions and increase your chances of funding those that have merit. Getting to know your clients and their transactions and your lenders well will improve your chances of success, particularly in today's tight market.


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