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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2017

Today’s Special? Restaurant and Bar Opportunities

These properties offer challenges and opportunities within small-balance commercial lending

Today’s Special? Restaurant and Bar Opportunities

What is the true measure of a commercial mortgage broker’s worth? Although a LinkedIn account chock-full of industry contacts and a state-of-the-art website may help to create the outward appearance of success, an originator’s true value is derived from his or her ability to identify the ideal solution for a client — even when all hope is seemingly lost.

In the world of small-balance commercial mortgages, new challenges emerge almost daily. And with those challenges come new opportunities for brokers to prove their value and establish themselves as true solution providers in the eyes of prospective clients.

It is with this sentiment in mind that brokers should consider expanding their focus beyond the typical multifamily-investor transactions and work to close more owner-occupied bar and restaurant deals. Mortgage professionals who are able to meet the unique needs of small-business owners have a real opportunity to increase their revenue and stand out from the increasing amount of competition that exists within the small-balance lending space.

There are many thousands of successful small-business owners across the country looking for mortgage loans of $5 million or less.

There are many things brokers need to know before they can begin to take full advantage of this niche.

Borrowers need help

The restaurant and bar industry in the United States is full of small-balance commercial mortgage opportunities. The National Restaurant Association reports that although restaurant sales are projected to reach nearly $800 billion in 2017, only three in 10 restaurants are larger than single-unit operations. This means that there are many thousands of successful small-business owners across the country looking for mortgage loans of $5 million or less to either purchase or refinance their property.

The problem? Borrowers have historically faced great difficulty when trying to get the funding they need from traditional sources, such as banks.

The fact that the more risk-averse, traditional lenders make it difficult for restaurant and bar owners to obtain mortgage financing may not be surprising given the high failure rate of these types of businesses. But commercial mortgage brokers should recognize the chilling effect bank denials have had on their potential clients in general.

A recent study conducted by OnDeck, an online lender, found that 82 percent of small business owners who apply for growth capital were denied financing by their bank. One can easily see how a steady stream of past denials could dissuade a prospective borrower from seeking commercial mortgage financing in the first place.

Mortgage professionals also should look at the area surrounding the property. Are other businesses succeeding there?

The takeaway here is that although there are likely countless business owners in a given market who need commercial mortgage financing, few are achieving success on their own. This is where mortgage brokers can save the day by identifying and securing alternative solutions for prospective borrowers.

Alternative funding sources

Borrowers may not know it, but there are other financing options available in today’s market. To take advantage of bar- and restaurant-funding opportunities, brokers will need to familiarize themselves with alternative lenders and understand how each one stacks up against traditional banks.

  • SBA loans. Perhaps the best-known alternatives to traditional bank financing are SBA loans, which are offered by lender partners across the country and guaranteed by the U.S. Small Business Administration. While brokers may already be familiar with how these loans work, they should take a closer look at SBA requirements so they can better identify the clients who best fit these programs.
    The ideal candidate for an SBA loan is a profitable, experienced business owner with strong credit, loads of collateral and a demonstrable need for the loan proceeds. Those who do qualify can typically enjoy lower downpayments and longer repayment terms than conventional bank loans. This has the added benefit of enabling small businesses to reserve their cash flow for operational expenses.
  • Nonbank lenders. Of course, a great many restaurant and bar owners who fail to meet traditional bank requirements also struggle to qualify for SBA loans. Identifying solutions for these borrowers can be challenging, but alternatives do exist. Brokers who develop a stable of nonbank partnerships have a real opportunity to use more flexible programs to establish new revenue streams and grow their business.
    So, what does a nonbank alternative program look like? Typically, the solutions these lenders provide are designed to address the specific reasons borrowers get rejected by the more traditional industry players. Therefore, nonbank lenders may offer a stated-income program to meet the needs of business owners who have trouble documenting their income. In the same way, nonbank programs may remove seasoning requirements or allow borrowers to take an unlimited amount of cash out of their existing mortgage.
    In exchange for these benefits, borrowers can expect to pay higher interest rates, on average. But brokers will likely find that many of the restaurant and bar owners they work with are willing to pay more for a solution that meets a greater number of their needs.

Armed with alternative solutions for a wide range of borrowers, mortgage professionals can find themselves in a good position to provide true value for an underserved population of small-business owners.

Use your expertise

Once commercial mortgage brokers see the opportunity in today’s market and familiarize themselves with a number of alternative programs, the final step is to learn how to identify the best solution for each particular business owner. There is no substitute for experience here, but there are a few things mortgage professionals should look for when analyzing a restaurant or bar deal.

Perhaps the best place to start is with the borrowers themselves. Before the hunt for financing options takes place, brokers should learn everything they can about a borrower, including the number of years they have been in business, their past experience within the industry and their specific motivation for seeking a loan. These are basic questions, but a borrower’s answers can help brokers quickly eliminate certain funding options.

If a creditworthy restaurant owner can use tax returns and projected operating cash flow to easily prove their ability to repay a loan, then brokers should not hesitate to seek a bank- or SBA-financing solution. If an owner can’t prove their income via tax returns and is attempting to refinance less than a year after purchasing their property, however, most traditional lending options can be taken off the table.

Brokers also can look to the properties themselves for additional insight. Can the building be repurposed in the future? Lenders typically feel more comfortable lending on a versatile property than one that could only be used as a restaurant. Mortgage professionals also should look at the area surrounding the property. Are other businesses succeeding there? Can a restaurant be profitable in this location? Is it even visible from the street?

Anyone who regularly closes commercial deals already should be familiar with many of these questions. The key is to recognize that certain dings or blemishes should not preclude restaurant and bar owners from ever getting the funding they need. Indeed, this is where the real opportunity lies for those who understand the value of alternative funding sources.

• • •

There is a reason why some small-balance commercial lenders choose not to lend on restaurants or bars. These types of deals often include greater challenges and more risk than the lenders are willing to accept. But it is important for mortgage professionals to remember that many other funding sources offer solutions for small-business owners, including the bankable and nonbankable alike. By expanding their focus and their stable of lender partners, mortgage brokers can turn challenges into exciting opportunities.


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