Commercial Magazine

When Lenders Walk

There are options for brokers when a funding request is denied

By David Kotter

Until the U.S. economy recovers and the commercial mortgage market bounces back from the COVID-19 crisis, mortgage brokers are more likely to get this dreaded answer to their funding proposal: “I’m sorry, but we are not going to lend at this time.” In times like these, it is natural to feel angry, anxious and bewildered. What is going on and what do you do now? 

Fortunately, if you are turned down by a lender, you have options for fundable projects. You need to know, however, where to go to maximize your chances. Some types of lenders have made it quite difficult to get financing while others remain open for business. Let’s first take a look at the state of commercial real estate lending as the country begins to recover. 

Tightening credit 

With the arrival of the pandemic this past March, certain types of commercial mortgage lenders immediately tightened credit. Lending for commercial mortgage-backed securities (CMBS), for example, became a minefield. Secondary-market activity slowed dramatically. Until that market fully recovers, the broker who tries the CMBS route faces a high probability of failure and creates a lot of unnecessary anxiety for clients. As a broker, you should continue to monitor CMBS credit availability for changes. Once CMBS lending picks up again, it can be a fruitful source of funding. 

The pullback in the CMBS market has created more opportunities for life insurance companies. The crisis put life companies in the driver’s seat, in part because CMBS lenders became less competitive. Naturally, more borrowers are turning to life companies for funding. If you plan to finance via these lenders, however, you will have to prepare your clients for higher interest rates and lower leverage levels. Furthermore, given the shaky state of the market, some life insurance companies have opted to sit on the sidelines and watch the aftermath of the COVID-19 crisis unfold. These life companies want to see if tenants can actually pay their rent. 

Banks are another option, but the typical banker has been diverted to handle emergency funding requests. During the height of the pandemic and nationwide lockdown, small businesses flocked to banks for assistance and emergency financing via U.S. Small Business Administration programs such as the Paycheck Protection Program, which was approved by Congress this past April. 

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Given the onslaught of applications from shuttered small businesses, bankers are showing some fatigue. Nevertheless, you may draw interest from a bank that is looking for deals that fall outside government-assistance programs. That being said, you have to approach a bank with caution and a clear understanding of what your client is looking for in a deal. You also should regularly scan your bank lenders to gauge their credit availability and shifting guidelines. 

During the height of the pandemic, many private bridge lenders also remained open for business. Yet it is hard to gauge how successfully some private lenders will weather a severe downturn. Bridge lenders that depend on the bond market for funding could go out of business. By contrast, private balance-sheet lenders want to make loans but are cautious and are carefully watching market developments. If you go to a balance-sheet lender, make sure your deal makes sense. If you’re not convinced, they won’t be either. Go the extra mile with your underwriting. 

Lastly, Freddie Mac, Fannie Mae and the Federal Housing Administration are expected to remain active in the low- to moderate-income multifamily-housing space. As mortgage brokers know, the agencies make their borrowers jump over many hurdles. During the downtown, expect the agencies to monitor default rates for multifamily loans and adjust their criteria accordingly. When putting together an agency-financed loan, the broker will need to make sure that the loan can withstand tougher underwriting.

In the new reality created by the coronavirus crisis, a rejection may be where many commercial mortgage brokers begin their financing quest.

Responding to rejection

If your initial proposal with a lender is turned down, that shouldn’t be the end of the story. In the new reality created by the coronavirus crisis, a rejection may be where many commercial mortgage brokers begin their financing quest. The question is, where do you go after an initial rejection? 

Your first step is to start with the lender that denied your request. Ask them if there is anything you can do to change the deal that would improve your chances for funding. Go to the highest-ranking person you know in that company and seek solutions. The lender might approve the loan if, for example, the seller agrees to lower the price or make other concessions. Ask for the lender’s list of desired concessions. If the lender absolutely insists that they won’t fund the loan, ask them to refer you to another lender that might be able to do the deal. 

When you get turned down for a loan, you also should reassess the deal itself. Dig into the details and see what changes you can make. You might, for example, be able to lower the loan-to-value ratio by negotiating a lower sales price or by bringing in a new equity partner. Loan terms can often be changed as well. The lender might agree to a shorter term and amortization period. It might also be possible for your client to put the project on hold. Can your client delay the loan closing for a few months until the market stabilizes and lending conditions improve?  

Your third option when facing rejection is to seek out other lenders. Call some of the accountants, attorneys and bankers in your network to get suggestions. Also, reach out to other commercial mortgage brokers and title companies for recommendations about lenders that might be a good fit with your borrower’s needs. 

Once you have a list of new lenders, give them a call and ask to speak to the manager or director. You should first ask if the institution is continuing to lend and when it last closed a loan. Also ask if their funding is dependent on the securitization market or if they are balance-sheet lender. As previously mentioned, your chance of success is much greater with the balance-sheet lender than any lender dependent on today’s volatile bond market. 

It is OK to be nosey at a time like this. It’s also wise to have at least two or three backup lenders, and to call them. Let lenders know about your deal and be transparent about what you are trying to achieve. 

• • •

This is an uncertain time, but you have options in dealing with this reality. You will probably get rejected at some point. But who knows? Maybe the initial rejection is a blessing in disguise. In the end, you might get a better deal for your client. •


  • David Kotter

    is principal of Integrity Capital LLC, a limited liability company and commercial mortgage brokerage based in Scottsdale, Arizona. As a premier commercial mortgage finance consultant, the company provides a broad range of real estate services, including commercial debt financing, insurance and finance consulting.

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