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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

What to Know About Your First Commercial Deals

Keep lenders’ priorities in mind when venturing into the commercial realm

If you’re struggling with residential loans, you may be considering branching out into the world of commercial mortgages. If so, there are a few things you should learn. There are major differences between the residential and commercial mortgage businesses.

Let’s talk about some of the principal ingredients it will take to land a commercial loan.

The executive summary

The key word here is “summary.” The executive summary is not a business plan. It should not be more than two to three pages long. Lenders are busy and want to know several key factors quickly before they are willing to look at pictures and architectural renderings.

It varies deal by deal, but in general, these are some of the main things lenders look for.

1. The numbers: How much is the property worth now as-is? Is it cash-flowing? If yes, what is the net operating income (NOI)? What is the vacancy rate? If it’s not cash-flowing, why not?

If it is a construction deal, what will it be worth as-complete? What is the construction budget?

If it is a hotel, what is the average daily rate? What is the average daily occupancy?

If the request is for a mezzanine loan, the lender will want to know about the senior loan. How much is the debt? At what interest rate? Over what kind of amortization? What is the debt service?

Using the NOI for computation, what is the debt-service-coverage ratio? What is the cash flow available for debt service for the mezzanine loan after payment of the senior debt, sometimes referred to as the excess cash?

2. Location: Where is the property? What is the market like for that property type? If the property consists of units, lots or condominiums, what is the absorption in the market for that type of property? If applicable, what is market vacancy for that type of property? What are the local demand generators? How many construction starts are there for similar property types?

3. The exit strategy: Is it from lot sales, unit sales, bulk sale, construction financing, refinancing with conventional debt, etc.? How will the loan be repaid? Any work done on firming an exit will improve your chances of getting the loan done at the most-competitive rate and terms available.

4. The story: This is the pitch that lenders often hear first but that weighs in last as far as their initial interest in the deal.

Why do borrowers need the financing? Why have they been unsuccessful thus far? Is there any “hair” or a problematic contingency on the deal? If the property is being bought at a discount, why are the borrowers getting a break? How much of their own equity do borrowers have in the deal? Will there be subordinate financing? What key components are they looking for in its financing? Do you have a current photo of the property?

The broker/lender relationship

Often, brokers will shoot their deal to as many lenders as possible to shop for the best and quickest deal. As far as commercial lenders are concerned, this is a big no-no.

Many lenders will not work on a deal at all if they think it is being shopped. A lot of work goes into commercial underwriting, and no one wants to do it for nothing. As such, it is important to establish strong ties with your lenders and to pitch the deal to one at a time. This will help you gain appeal and get the best service. A lender’s loan officers may have five to 10 brokers with whom they have a strong, ongoing relationship. These are the people who get most of their time and who make the most commissions.

In addition, be forthcoming with all the important details from the get-go. Problematic deals often can be massaged and molded into good shape if the hair is revealed early in the game. Nobody wants surprises to pop up during the due-diligence process. By that time, it may be too late, and a lot of time and money will be wasted.


In commercial lending as a whole, borrowers are expected to pay fees, including application fees, commitment fees, good-faith deposits and legal fees. Each has a purpose, and everyone takes them in one form or another. They show that borrowers are committed to working with you and drive the lender to reciprocate.

It is important to note that there are many unscrupulous characters out there who will take your money whether or not they have interest in the deal or the capacity to fund it. For this reason, it is important to always do your due diligence on lenders and to find out what the rest of the lending community knows about them. Ask about recent closings. Search the Internet for information. Speak to other brokers.

In the end, you are responsible for making your borrowers feel comfortable that they are dealing with a reputable firm.

Due diligence

This is the greatest difference between residential and commercial lending. Without a good broker’s assistance, due diligence can be tedious and timely.

Many times, a good portion of the due diligence comes from a third party, such as an appraiser. Take note that a commercial appraisal is nothing like a residential appraisal. The commercial appraisal may be a 100-page narrative and take a month or longer to complete.

In addition, there will be requirements for documentation that are not obligatory in residential lending. The legal process can be long and onerous if the deal isn’t squeaky-clean. But the more educated you become, the smoother the process can be.

A good broker can make a hairy deal shine like glass. In conclusion, there will be much work to do, but the payoff is great.


Here’s the fun part where everyone gets paid. But wait, how much did you say you were getting?

Whenever possible, get an agreement with your borrower regarding your commission. When some lenders issue a loan commitment to be executed by the borrower, that information is present anyway. But not all lenders work this way, and it is important to prove your agreement with the borrower so there are no disagreements at the closing table.

•  •  •

There are many other things you will have to learn to become a superstar commercial mortgage broker. While all your sales, marketing and other origination-related skills will be a great help to you, commercial financing can be complicated.

The right lender should help educate you. As an educated broker, you will add a wealth of assistance to the lender and to the deal as a whole.

The main thing to remember when starting out is to keep it simple and build from there as your lender requests. The rest of it is just a matter of experience.

When you stop learning is when you lose touch with your business.


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