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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2013

Get Back to the Basics of Lending

Don’t overlook lenders’ core requirements for funding

Veteran commercial mortgage brokers may remember how easy lending was before the financial crisis. Lending terms were relaxed and many stated-income applications secured loans of as much as 100 percent. This was a time when many didn’t foresee the approaching collapse of the housing market that shattered the global financial system.

In the aftermath of the financial crisis, the situation has changed dramatically. Under regulatory pressure, lenders have adopted stricter lending policies to lower the risk of borrower default. In turn, borrowers have been struggling to qualify for lending as the ripples of the financial crisis hit their businesses and finances. The good news is that commercial lending has been picking up.

Whether you’re just beginning in a commercial brokerage or you’ve survived the market’s ups and downs, to succeed in today’s environment, it is important to go back to the basics and focus on the criteria that lenders review in almost every deal. First, review the six C’s of commercial lending:

  1. Capital: This includes the company’s capitalization, reserves, statement, net worth, etc.
  2. Capacity: Borrowers should demonstrate the ability to repay the loan.
  3. Cash flow: Borrowers should show a debt-service-coverage ratio of at least 1.3.
  4. Character: Mortgage brokers should work with their clients on evidence of borrowers’ character, integrity and professionalism.
  5. Condition: This includes a combination of the deal’s business analysis and valuation, as well as a feasibility study of competition and the marketplace.
  6. Collateral: Borrowers should provide a strong collateral consideration and other securities.

Second, keep in mind that loan terms in commercial deals can run anywhere from one year to 10 years. Third, although loan-to-value (LTV) ratios vary, expect a range between 50 percent and 80 percent. In some loan types, like some U.S. Small Business Administration loans, LTV ratios can be as much as 90 percent.

Fourth, make sure that your clients’ documentation is complete and satisfactory with regards to lenders’ requirements. Documentation should include the following: the project’s executive summary and history; financial statements of the borrower and the business; schedules of real estate owned; a summary page of any recent appraisals; details of paid-to-date costs and costs to complete; pro forma cash flow; and net operating income.

Finally, help your clients be prepared for lenders’ fees. Unlike residential lending, commercial lenders will charge certain upfront fees like an application fee, a due-diligence fee or a retainer to cover the typically costly due diligence involved in the processing and underwriting of each file. These costs may cover blocking funds, underwriting, ordering appraisals, borrower investigations, feasibility reports, legal fees and any other costs required to perform due diligence on the loan file. In addition, the upfront fee also is meant to prevent borrowers from shopping around while a credit application is being processed thoroughly.

Commercial mortgage brokers who learn and develop in their career without losing sight of the basics of mortgage lending are the ones who will be able to deal with today’s market and be prepared for future turbulence. 


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