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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2010

Know Your Owner-User Deals

To get a loan package through underwriting, understand what lenders want

Many mortgage brokers consider owner-user loans to be the simplest loans for which they can qualify borrowers.

In addition, banks that prefer these loans often like them because they can be made for almost any type of business and because the business depends on the real estate it occupies, which means less risk.

As a broker, it can seem as though all it takes for a solid owner-user deal is a client occupying at least 50 percent of a building's space. But there's more to it than that.

"Owner-user loans are available for nearly every property type."

To find funding for these clients, commercial mortgage brokers must know what lenders look for in these borrowers and what to ask for when preparing a loan request.

Here are some tips for tackling these deals.

Know the borrower

Banks and some institutional lenders typically like owner-user borrowers, which are typically defined as business-owners who own the property in which their business is located and occupy at least half of the subject property.

Some of these owners may rent out a portion of their property, as well, which creates an additional income stream to support the proposed debt.

Owner-user loans are available for nearly every property type, including special-purpose properties, offices, industrial or warehouse facilities, commercial condominiums, and retail stores.

Borrowers for these loans can include a range of businesses, from retailers, wholesalers, manufacturers and distributors to gas stations, doctors, veterinarians, dentists and other service-providers.

Each property and borrower type has distinct needs. These loans generally carry a lower interest rate and higher loan-to-value (LTV) ratios than other loan types, however.

Understand the financials

Before you seek funding for an owner-user client, ask for the business-owner's information, such as corporate paperwork, personal and business financial statements, and the previous two to three years' tax returns.

To determine how an owner-user borrower will repay the proposed debt, you must figure out which income is personal and which is business, as well as how to add back cash for certain expenses, when possible.

Request the business's financial statements for the current year plus year-end historical financials. Borrowers must show that the business has historical or pro forma income that is sufficient to repay the proposed debt at the required debt-service coverage.

After reviewing clients' financials, get pictures of the property or do a drive-by, especially for older properties. If you identify issues, address them with the borrower. Also consult with the lender about needed repairs or potential glitches you observe before you submit the loan application.

If the financials and the property look good, you often can overcome many obstacles and can move on to collecting and analyzing income and expenses, as well as debt-service-coverage information.

Determine the ratios

Typically, commercial lenders consider prospective deals from a risk-analysis perspective, using current value, equity and cash flow. The property value must fit within lenders' LTV guidelines, and borrowers must have some equity in the deal and an above-average credit history with a healthy cash flow.

What constitutes "healthy" is relative. Determine this by figuring out lenders' required debt-service-coverage ratio (DSCR), which is not always easy.

The lenders' required DSCR may increase the amount of net operating income (NOI) your borrower needs to pay back the proposed debt. To determine the DSCR, divide NOI by the annual mortgage payments.

For instance, if the lender requires a 1.25 DSCR and proposed loan terms indicate annual mortgage payments of $38,466, the NOI must be about $48,000 to qualify for the loan.

If the borrower has sufficient net income, the lender likely will want to know more about the property and the borrower. Check out real estate prices, and shop rates and terms to see if there are varying debt-service requirements for this type of borrower or property. LTV restrictions or property-type issues can be important items, but they may not kill the deal. Closing your deal at the desired rate and term requires you to identify issues before the closing of escrow.

Submit the deal

Lenders that prefer owner-user deals often associate less risk with borrowers whose businesses depend on their real estate.

If you are brokering a loan for a startup business, banks typically will require a downpayment between 20 percent and 50 percent. Depending on the borrower and the real estate, business-owners also could finance real estate or equipment purchases with the U.S. Small Business Administration's (SBA's) 504 and 7(a) loan programs. Local banks and correspondent lenders, as well as local certified-development companies, that specialize in SBA loans can assist you in funding your clients' real estate or equipment purchases using the 7(a) or 504 programs.

When submitting your client's loan application to a lender, include company-prepared financials, pro forma estimates and historical or pro forma financial statements. Also include your clients' bank statements, which should show that the required downpayment is on hand, and a cover letter briefly explaining the loan request.

Brokers should have simple explanations about why a deal is special. Tell the lender what economic advantage will result from the business being at the location, what improvements will be made to the site and how the debt can be repaid from income the business generates.


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