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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2015

Building Bridges to Recovery

Clients who weathered the recession storm can find a path back to prosperity

It’s often said that whether it’s sales, mortgages, shoes or the latest widget on the market, you should “ride the wave” when sales are up because you never know what trend is coming in the future and how it will affect your bottom line. To say trends can be predicted would be like forecasting 2012 to be the end of the world — and we all know what came of that claim.

Few predicted the past five years of turmoil that would send shockwaves throughout the lending industry, but the effects on commercial lending have been unprecedented. With billions of dollars of commercial loans coming due in 2015 and beyond, many borrowers are now facing short timelines with limited positive historical income because of the business downturn of the last few years. This  leaves many commercial borrowers in a sort of lending limbo with a bank loan coming due and nowhere to call home.

Normally, a loan officer would be delighted at the prospect of notes coming due and want to ride that wave; however, because of the last few years of financial challenges, it seems clear that no two loans are alike and most are fraught with unprecedented challenges. The most likely trend in commercial mortgage is the refinance market, but loan products and solutions are far from cookie-cutter, and the “A plus B” approach went out the window in 2008.

You can’t count on the old products to carry you through the postrecession period. Now more than ever, you must be prepared to provide salient solutions for each individual need, and think outside the box to close the loan. The road outside the box may lead to a bridge — bridge lending, that is.

Know the story

To serve your clients during this transitional time, you should get in contact with all

available lenders and gather comprehensive knowledge of their products. More and more lenders are becoming story-oriented. This means that unlike their predecessors, underwriters are now listening to the stories behind the loan requests that surfaced because of the recession. Stories of short sales, loss of business income and eventual recovery from the biggest financial catastrophe of many peoples’ lifetimes are now the norm rather than the exception.

Gone are the days of perfect credit, assets and property. Now almost every loan application has a story behind it, and special requirements are needed for each individual loan. For example, some East Coast clients devastated by Hurricane Sandy are only now seeing the light of day for their businesses or properties. Others own retail centers that suffered income losses between 2008 and 2011 but have now risen, like the phoenix, to near-100 percent occupancy thanks to the post-recession retail sales boom. Even multifamily clients have faced challenges since 2008 that they’re still trying to recover from.

Find the bridge

Without two solid years of historical financials, however, many clients who have endured such setbacks require a bridge loan to get them through until they reach full stabilization. There are bridge products available for all commercial property types. Bridge lenders will make allowances for back payroll taxes, loss of income and a myriad of other unforeseen life events that occurred during the recession.

Typically, a broker can get up to two years of interest-only product that affords clients the time needed to increase cash flow, make renovations and get back on their feet. Bridge lending does not always carry hard-money aspects with it. Often, bridge lending has reasonable terms and costs if there is a solid exit strategy and a recovering borrower.

The “dog ate my homework” approach will not work when submitting bridge-loan applications, however. You must provide well-written letters of explanation with supporting documentation to warrant improved terms. Compensating factors can play a significant role in closing a bridge loan.

If your borrower lacks sufficient equity in the subject property, prepare a detailed schedule of real estate owned that shows property that is cash-flowing, free and clear, as an anchor for the new loan to support the underwriting.

A borrower who lacks capital to close should be prepared for higher costs because cash is still a significant factor in underwriting.

Assess the loan

Put yourself in the borrowers’ shoes and ask, “Would you loan money to you?” If the answer is no, go back and scrub the file, turning over every stone to find a reason for the underwriter to approve the loan. Many times you will find something you first missed — the most seemingly miniscule piece of the financial puzzle that can turn the file around.

For example, did the appraiser give a lower value because the client mistakenly provided a year-old profit and loss statement but marked it incorrectly and devalued the property? Or could the client’s lack of cash be bolstered by an overlooked home equity line of credit or an unidentified asset that never appeared on the personal financial statement? There are countless items that can make a difference when you perform the appropriate amount of due diligence.

Was the borrower in denial about the loan maturing or the need to move certain asset types off of balance sheets? Too often, borrowers wait until less than 30 days before foreclosure, so conventional bank money is no longer an option. Bridge lending can buy the time necessary for borrowers to improve their positions while saving their properties from foreclosure. Bridge lenders often can close in record time compared to their conventional counterparts.

Loan to value (LTV) in bridge loans is crucial, with a typical maximum of 65 percent, but there are exceptions to every rule. When clients are in a position where they have to close and the LTV is too high, the bridge lender will often consider additional points to compensate for a higher LTV as long as the exit strategy is viable.

Exit strategies are integral to closing on a bridge loan. Few bridge lenders are interested in becoming property owners if the client fails to line up long-term financing by the end of the given term. Whether the client is using money to expand and increase revenue or to improve marketing to create a higher occupancy or raise tenant rates over the 12- to 24-month period, there must be a solid solution that will make the property attractive to a conventional lender upon exit.

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No one knows exactly what trends to expect in the coming years, but now is a great opportunity to ride the wave of bridge lending. The solutions you provide your clients with bridge loans will help them bridge the gap from past failures of a dimming recession to future successes for years to come.

 


 


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