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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2016

Make Your Lender Your Partner

Openness and honesty can build trust between brokers and bankers

In many ways, these seem like auspicious times: The economy is stable, construction is up and loans for many commercial property acquisitions are easier to get. Stalled projects have moved forward and the economic crisis seems more and more like a distant memory. 

Is that optimistic assessment really accurate? Although it is correct that lenders have become more willing to look at new deals, the lessons of the past decade continue to be reflected on the balance sheets of large institutions.

Real estate owned (REO) — or repossessed properties — continues to linger on lenders’ books as a result of poorly structured past deals, and new types of underwriting risks become more apparent daily. So how do you close new deals in this uncertain environment?

Keep to the basics

The rules of closing commercial loan deals are logical and simple. Tell your lender about the reality of the loan and focus on the need for the lender to be repaid. Remember what lenders do for a living. They lend money. They are not investors or equity providers and are focused on how they will get repaid the money put forward while also earning a reasonable coupon.

Beyond that basic advice, you also need to know your borrower and understand the intricacies of the proposed loan deal before you call a lender. Present clear and concise information. Do not tell your lender, “This deal has a low loan-to-value ratio and is located in a great market with substantial upside.”

Your lender will hear, “This deal has limited current cash flow to service debt, needs more equity and is likely to be a risky loan.”

Even if those in the lending world are back to being somewhat more liberal in their decisionmaking, many lenders still have robust REO portfolios that serve as continuing reminders of poor loan decisions in the past. With that in mind, tell your lender about the reality of the loan and focus on the need for the lender to be repaid.

Remember, lenders make money by lending money. They are not investors or equity providers and are focused simply on how they get repaid for the money put forward and, at the same time, earn a reasonable return.

Know the market

When reaching out to a lender, do so with knowledge of what is a reasonable interest rate, and not in an attempt to convince the lender to compete for your loan. Often, brokers are tempted to call a lender with the pitch that goes something like this:

“I have this offer for construction financing at 200 basis points above the 30-day LIBOR rate for my client’s hotel deal. I really like your bank and wanted you to have a chance to beat that 200 number and get this great loan deal.”

What your lender hears, however, is the following: “Hey lender, I really don’t have a deal, but need to mention some great rate so I can close this construction loan.”

Don’t assume your lender is naïve about the market. Be open and honest. Present exactly what you know about the deal and work with the lender for a reasonable path to closing the transaction. Create the partnership that allows you and the lender to approach the borrower with a logical transaction and a realistic interest rate.

Closing the loan

Resist the urge to tell the lender, “I have this great deal, a simple refinance of a mixed-use building in Anytown that needs to close by the end of the month. The borrower has everything ready to go.”

Even if you made that call on the first day of the month, that will typically only give your lender 20 working days to review the material on the deal, have it approved internally, write a binding letter to your borrower, and have your borrower accept and begin the closing process. That is in addition to gathering third-party reports (appraisals, background checks on the principals, environment reports, etc.) and reviewing the borrower’s accounting and rent reports.

Yes, it is at times possible, but usually not realistic, to close a deal in three weeks. In any event, it pays to manage the expectations of your borrower and manage those of the lender as well. By setting realistic goals that are achievable, you increase the odds of having a happy borrower and cementing the foundation for a long-term relationship with the lender.

Getting paid

As a mortgage broker, like most professionals, you want to receive reasonable compensation for the work you have performed. Lenders, in general, respect the work brokers do and value opportunities to originate new loans. With that in mind, how do you set a justifiable fee level for a given loan deal?

It really is simple. Assume you represented the borrower exclusively and structured a well-organized commercial mortgage loan presentation that included the following:

  • Historically based revenue and debt-service coverage details;
  • An analysis of the competing assets located near the property being considered for the financing;
  • Updates on any environmental issues; and
  • Details on the principals involved in the proposed transaction.

In such a case, you have a clear basis to request a reasonable fee from the borrower that your lender will likely support. By contrast, if you merely heard about the deal, do not have an exclusive and are not directly representing the borrower, you may want to temper your position when you reach out to the lender. In that case, honestly present the situation with the hope of making the lender your partner, so you both can market to the prospective borrower.

Brokers may think that bankers all sit around in comfortable offices and enjoy the air-conditioned life of good deal flow. Remember, however, that a lot of that deal flow comes from independent brokers who become partners with the bankers, and they work together to expand their market reach. Brokers and lenders share a mutual goal of achieving success. If you cooperate and are responsive to each other’s needs, deals get closed.

Open and frequent communications is key to successfully reaching the closing table. Speak frankly with your banker and ask for candid responses. That is the best route to bringing a transaction to a conclusion that satisfies everyone involved.

Explain to your banker that you want to do your job in managing the expectations of the borrower and need realistic goals and deadlines to accomplish that objective. If you work together, there is a good chance you will both see substantial benefits. Every banker needs closed deals, increased deposits and more relationships, just as every broker needs closed deals and strong relationships that lead to future transactions. 


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