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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2010

Hard-Money Lenders Act More Like Banks

Changing times mean changing structures for deals with cash-poor borrowers

With economic changes, words and phrases often take on different meanings to fit the new circumstances. One term that appears to be shifting in meaning is "hard-money lender."

A few years ago, hard-money lenders were willing to lend based solely on the collateralized asset's value. This is becoming rarer, and hard-money lenders' approach often is now more akin to traditional banks.

This shift is instructive to commercial mortgage brokers seeking hard-money deals for borrowers who are asset-rich but cash-poor. Brokers must know why the change has occurred, as well as how it affects their hard-money loan submissions.

The fundamental change in the equation is that with asset values no longer increasing or staying even in the market, many hard-money lenders are now concerned that they may acquire assets they don't want to end up owning. This is because in a foreclosure, asset values decline further. By the time the mortgage is perfected, the lender often has three key problems:

  1. The foreclosed asset's value shrink each day that the lender holds it;
  2. There is no cash flow from loan payments to the lender; and
  3. The lender cannot sell the asset easily and recoup its funds to reinvest in another project.

Ultimately, lenders are in a situation where they are participating in the borrower's success and failure, similar to a bank.

For mortgage brokers seeking hard-money loans for clients, it is no longer possible to place a loan without submitting a full package of information for the lender to review. Further, it means that you should not present casually gathered information as fact without prior verification. False information is far more harmful to a loan now than it used to be.

You must be upfront as to why borrowers are seeking a hard-money loan. Many hard-money lenders previously did not care about this. Now, they're concerned because they may be subject to the same forces that brought a borrower to their door.

One such example is when notes have been called by the bank and option contracts are expiring. In these instances, the borrower's timeframe becomes the lender's timeframe. Conversely, a credit issue that may be important to a bank may not be important to a hard-money lender if it does not directly affect the lending transaction; unpaid medical bills are an example. Brokers should address any potential issues in the executive summary.

Also verify borrowers' leases or letters of intent to lease or buy. These are now important to determining the asset's value. Cash flow is important, as well. Try to get a recent personal financial statement from your borrower to see if there are enough liquid assets to cover payments over any part of the loan period. A statement older than 90 days is ancient history.

Finally, consider the exit strategy. Brokers must help make the takeout scenario feasible for both parties. A $3 million loan with a $150 million takeout is a tall mountain to climb. It would be better to scale back the project to make it work in the short run.

This is particularly true for cash-poor borrowers. If they are planning to roll the interest payments into the loan, make sure that the loan is not based on unreasonably optimistic expectations. Cross-collateralize, find partners, pre-sell, pre-lease -- in a nutshell, make the exit door wide enough so that the borrower and lender can get through it together.

In a market that has faced a long-term decline, hard-money lenders, as well as borrowers, have a lot to lose. For once, they are in the same boat. Brokers who understand this and who structure their clients' hard-money loan requests appropriately can adapt to hard money's new role.


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