COMMERCIAL REAL ESTATE EDUCATION OPPORTUNITIES

COMMERCIAL REAL ESTATE EDUCATION OPPORTUNITIES

WWW.CBASSN.ORG Commercial Brokers Association © 2021 COMMERCIAL BROKERS ASSOCIATION

http://www.cbassn.org/

Your Instructor

© 2021 COMMERCIAL BROKERS ASSOCIATION

Michael RyanMortgage Broker

Successfully brokering loans for1. Home Mortgages and HELOC2. Commercial Properties3. SBA, VA Loans

30 years of experience.

Commercial Loans From Start to Finish


IntroductionIs getting a commercial loan easy?

Yes and No

Two key elements to the commercial loan approval:Know what lenders wantKnow what to give to them


The Real Estate Broker•Set Realistic expectations•Help the borrower negotiate the loan with various commercial lenders:

• Terms• Fees• Conditions

•Help choose the best lender offer•Sign and return the final letter of intent along with a check, if required, for a deposit

• To pay for third-party reports, such as appraisals


Commercial Loan Process•Understanding how the commercial loan process works will reduce anxiety for both the Broker and the client•Lenders look for all sources of repayment for a commercial loan:

• Cash flow • Collateral • Guarantors


How A Bank WorksTo protect the Bank deposits:

•All loans go through a credit approval process to determine the chance for a loan to be repaid

•If a commercial loan request doesn’t make the cut then it is denied or restructured to reduce the risk to the bank

• More Collateral• Higher Down Payment


The Credit Approval Process•A borrower makes a request for a commercial loan•The decision makers approve or deny the loan:

• Sales Manager• Credit Analyst• Credit Officer• Real Estate Technical Specialist


Commercial Sales Manager•First to see the loan request•Provides a quick yes/no decision if the loan request is one that meets the lender’s goals

• City, State• Property type• $ amount


Credit Analyst•Analyzes all of the applicants information

• Repayment resources• Borrower’s ownership & management – Due Diligence

•Gathers information to understand the borrower’s business• Products and markets • Financial information• Company brochures

•Produces a loan approval document outlining:• The risks and benefits of approval• The feasibility of repayment


Credit Officer•The Credit Officer has the authority to approve or deny the loan request and has a maximum dollar “approval authority”

• Larger dollar loans go to a Senior Credit Officer• Larger requests go to the bank’s credit committee


Real Estate Technical Specialist•Determines:

• Scope of evaluation• Any necessary environmental work• All reports are compliant with the bank and regulatory requirements


Commercial Loan TypesRecourse

The borrower or guarantors are personally liable for repaying any outstanding balance on the loan in addition to the collateral itself.

Non-RecourseThe borrower or guarantors are not personally liable for repaying any outstanding balance on the loan.


The Non- Recourse Loan Bad Boy Guaranty

•Filing for bankruptcy

•Fraud or misrepresentation

•Failure to maintain required insurance

•Failure to pay property taxes

•Any environmental indemnification

•Committing a criminal act

•Failure to deliver financials to the lender

•Failure to permit lender inspections of property


Bad Boy guaranties, protect the lender and enables personal recourse in the case of certain events, such as;

• Broker and Client must understand the loan documents• Recommend a commercial real estate attorney review

What is a ‘Mini-perm’ Loan?A ‘mini-perm’ loan is for interim financing •Provides critical flexibility for investors

• All property types• Land Development

•Mini-perm loans are normally set at 3 to 5 years


What is a ‘Mini-perm’ Loan?•Interim financing until other funding can be secured for;

• New Construction before income is established• Lease Up period – New or Repurposed buildings• Distressed Properties• Under performing properties

•Once income is stabilized: • Lenders will offer better terms and rates on loans • Sell property with significant value and profit added


Properties for Commercial LoansLoans are available for purchasing, refinancing, and construction of all types of commercial properties:

APARTMENT/MULTIFAMILY: • Garden apartments (3-4 stories)• Mid-rise buildings (5-9 stories)• Hi-rise• Student housing• Assisted living facilities

OFFICE: • Business Park• Government• Research & Development• Medical Office


Commercial Loan Types•CONVENTIONAL:

• Term up to 15 years • Amortizations of 10 -30 years with a balloon payment• May require a personal guarantee

•SBA 504 & 7(a): • Best LTV and lowest DSCR requirements • Full recourse - fixed and variable rate options

•CMBS: • Terms of 5, 7 & 10 years• Amortized over 25-30 years with a balloon payment • Non-recourse


Commercial Loan Types•HARD MONEY:

• Private individuals or funds • Contingent on borrower’s collateral• Quicker closing

•SOFT MONEY:• Hybrid between conventional and hard money loan• Longer repayment terms than hard money • Credit score is taken into account


Financing Sources Include: •Commercial Banks•Investment Banks•Hedge Funds•Private Money Funds•Life Companies•Credit Unions


What to Expect When Applying for a Commercial Mortgage Loan


Commercial Mortgage Loan•Reasons to pursue a Commercial Mortgage Loan:

• Borrow working capital to expand your business• Leverage equity in a commercial real estate venture

•Commercial loan process• Commercial loans not backed by a governmental entity i.e. Fannie Mae • Most commercial lenders are risk-averse; they charge higher interest rates• Scrutinizing the borrower's business and commercial property to serve as

collateral


Commercial Mortgage LoanThe following is a list of questions the borrower should ask himself and the lender before applying for a commercial loan.


How am I going to meet the loan repayment terms?Repay the entire loan by the term date

• 5 year term note with a 25 year amortization • Borrower will pay interest and principal based on 25-year amortization during the first 5

year term• By the end of year 5; repay the entire balance in one balloon payment via;

• Cash payment• Re-qualify – Borrower/Property to Refinance


How am I going to meet the loan repayment terms?If the business happens to have cash-flow problems during the loan term?

• The lender may require a higher interest rate• The borrower may not qualify for a new loan• The borrower runs the risk of being turned down for re-financing• The borrower may be required to invest more collateral• The property may be in jeopardy of foreclosure• Lender may provide a short term loan and monitor credit


How am I going to meet the loan repayment terms?•Non-bank (private) lenders generally offer less stringent credit requirements for commercial loans

• Non-bank lenders will make long-term loans without requiring the early balloon repayment

• Loans carry a higher interest rate• They allow repayment over 20 or 30 years

•Pay a 1or 2-point higher interest rate for a fixed-term loan in order to ensure the security of a long-term loan commitment

Are interest rates rising?


How much can or should I borrow?Most bank loans prohibit second mortgagesTherefore:

• Borrow to meet current business needs • Borrow to sufficiently leverage real estate investments


Who will fund the loan?Small loans

•Commercial lenders

•Small local banks

•Credit unions

Larger Loans

• Regional bank

• Private lenders


Very Large Loans

• Mega- Banks

• Private lenders

• Wall street lenders

How long will it take to get a commercial loan?•Many weeks before the borrower receives a verbal or written commitment letter from a bank

• $ Amount of loan• Property type• Collateral

•Even after the loan commitment, the bank's credit committee may veto the loan

• If so, have to start the process over with a new lender


What kind of covenants & conditions may be required?•The borrower to provide

• Quarterly or annual income statements• Balance sheets• Tax returns

•The business to meet certain tests in the future • A certain positive cash flow• A certain debt-to-cash-flow ratio• Or other financial criteria• Maintaining liquidity and bank deposits


What kind of covenants & conditions are required?•If borrower falls short

• May trigger a default & penalties • Pay back the loan immediately

• Find another lender very quickly, or face foreclosure on the property•Different lenders require different conditions

• Ask the lender up front what conditions or covenants apply• Some non-bank loans charge a higher interest rate but will waive all

covenants and conditions • except for timely repayment of the loan

•If the cash flow is uncertain, consider non-bank loans first


What kind of documentation will be required?

•Traditional lenders require 2-3 years of:• Financial statements• Income tax returns• Other documentation

• Leases & Rent Rolls• Asset statements• Original corporate documents• Personal financial records of the business owners• Financials on other assets the borrower owns


What if I want to sell the property?The business grows. You may want to repay the loan early or sell the property and move to a larger space. •Commercial mortgages usually have pre-payment penalties

• Some lenders may allow the purchaser to assume the loan• An assumable loan is an excellent selling point because it provides

built-in financing for the buyer


What are the "hidden" or total costs of the loan?•The interest rate is only a part of the total loan cost•Points, for example, are direct percentages of the loan that the lender deducts from your loan

•If the interest rate is 9% with 2 points that means your real cost of the loan is 11% •Other costs may include:

• Legal fees• Survey charges• Loan application fees• Appraisal charges

Every item that will be charged against your loan or that must be pre-paid


• Environmental Inspections• Title Insurance• Background Checks• Broker Fees

What are the "hidden" or total costs of the loan?Loan fees can cost thousands of dollars•Questions to ask:

• Are there required pre-paid fees before loan qualification?• Will the loan interest rate go up if U.S. interest rates go up?• Is there a fixed-rate alternative available?• Is there a discount for paying the loan consistently on-time• Is there a Prepayment Penalty?

•Some lenders allow a lower interest rates over time if the loan is paid on time


The 7 Lender Rules1. Annual Rental Income

• Lenders use the current rent rolls with vacant units at market rents

• Investors and CRE professionals use current asking rents also called turnover rents

• Proven current market rents

• As other tenants’ leases expire they will increase the rents to market


The 7 Lender Rules2. The Vacancy Rate

•Is determined by taking the lower of either: • The actual vacancy at the property• The current vacancy rate in the market• The lender’s required vacancy rate for that property type


The 7 Lender Rules3. Other Income•Is limited to those types of income that are easily quantifiable•For apartments other income; parking, storage, laundry and utility reimbursements•For other property types, cam reimbursements would fall into this category•But income from late charges, application fees, pet rent, damage reimbursements, etc. will not be used


The 7 Lender Rules4. Operating Expenses

• Property taxes, insurance, CAM, utilities, etc.• Including any escalations required in the lease over the previous

year


The 7 Lender Rules5. Repairs & Maintenance•For apartments include turnover expenses and landscape maintenance

• Average the past 2 or 3 years, or• Defer to what’s found in the appraisal• Depending on the age and size of the property;

• May use $500 for Repairs & Maintenance, $200 for Turnover Expenses and $300 for Landscape Maintenance per unit

•For other property types, use historical averages for repairs and maintenance


The 7 Lender Rules6. On-Site Payroll and Off-Site Management Expenses

•For apartments • Lenders may use between 3 to 5 percent of the Effective Gross Income for these two

expense categories

•For other property types• Lenders will follow what’s shown on the property’s historical operating statements


The 7 Lender Rules7. Capital Expenditures

•For apartments• Lenders will use no less than $250 per unit

• Older properties or major deferred maintenance properties, the capital cost could go much higher

•For other property types• Lenders may not include any capital expenditures in their projection of expenses• Or may will use 3% of gross rents


Do Your Homework- Think Like a Lender•To avoid surprises of a lower lender quote, apply these rules to your pro forma

• Use the lender’s underwriting criteria to calculate the loan• What are the lender’s specific rules for sizing the loan?

•Adjust the property’s income and expenses using these 7 rules and recalculate the income analysis

• How does this effect the property’s projected NOI before debt service? • Use the new projected NOI, how does this change the loan amount?


Cash Flow ModelPotential Rental Income

- Vacancy & Credit Loss= Effective Rental Income

+ Other Income= Gross Operating Income

- Operating Expenses= NOI

- Annual Debt Service (ADS)= Cash Flow Before Taxes (CFBT)


Do Your Homework- Think Like a Lender•Will the recalculated loan amount kill the deal:

• Requiring more equity to invest in the property• Additional equity will reduce the cash-on-cash return below an acceptable amount

•Better to find this out early• Know prior to getting it under contract• Avoid wasting time and money on a property that no longer

pencils because the loan is lower


Create an Air-tight Commercial Loan Package•The Client’s financial records may be:

• Disorganized• Incomplete • A Total Mess

•Loan Process• Longer due diligence• May reject loan


Create an Air-tight Commercial Loan PackageA list of important items to have ready:

• Personal and business tax returns for the most recent last 3 years• P&L statement for the most recent 2 years• Bank statements for the most recent 3 months• Year to date business operating statements – matching statements

for prior years• Lease terms that match rent roll• Valid sales contract (for purchasing)• Payoff statements• Current rent rolls


Items That May Affect a Loan•The AppraisalCommercial property appraisals are subjective

• Never order your own appraisal, the lender will • Ask the lender what the appraisal will cost• May take at least a couple of weeks or more• Appraisers issue a time commitment with their bids• If you need an appraisal faster, you will pay extra for it


Items That May Affect a LoanThe Title Survey

• Title companies often require an ALTA survey before they will issue title insurance for commercial real estate

• Ask what is the cost?

One key takeaway: Your lender will want to make sure that the legal description in the title commitment matches up with the surveyor’s legal description.


Items That May Affect a LoanThe Environmental ReportThe lender will require a Phase I report before granting loan approval. Why?

• Remediation for a contaminated site is big $• Lender will want a clean property if there is a default

What are the costs for a Phase I report?• Range $2000 to $4000+, vary by size and type of property

Phase II and more?


Be Patient•30-45 days to get a commercial loan? Probably not•There may be exceptions:

• Hard money deals done in 30 – 45 days

•Plan for about 45-180 days• Based on:

• Client’s Financials • Property Type • Loan Size


Commercial Loans Take TimeThe number one reason commercial borrowers don’t get approved: Unrealistic expectations!•You are not going to get a commercial loan…

• With no money down • With incomplete financial records• In less than 45 days

•Get the commercial financing you need in a short amount of time by:

• Quickly responding to lender’s requests• Learn the commercial language • Understanding the loan underwriting process• Provide great financial records


Credit•Credit score is lower than 680•If a bank won't do your particular deal, hard money commercial lenders are willing to make subprime commercial loans


Capacity to Repay Underwriting a commercial borrower's capacity to repay:The bank looks primarily to the cash flow of the property.

• The property's NOI must exceed the proposed DSCR 1.25 to 1.45 range Reserves & Management Expenses?

•Conduit lenders require a debt yield ratio exceed 9.0% to 10.0%•Commercial lenders are also demanding more collateral – other property or assets

A conduit loan - also known as a CMBS loan (Commercial Mortgage Backed Security)


Debt Yield Ratio(NOI / loan amount) x 100 = Debt Yield Ratio

For example, a commercial property has an NOI of $437,000, a conduit lender receives a loan request in the amount of $6,000,000.

$437,000 / $6,000,000 = .073 x 100 = a Debt Yield Ratio of 7.3%

The lender would enjoy a 7.3% COC return if it foreclosed.


CollateralIn 2006 and early 2007:

• The typical commercial loan was 75% loan-to-value (LTV) • Some commercial loans were at 80% LTV!

In 2008/2009 commercial market plummeted by 45%, lenders got hammered and took enormous losses.

• As a result, most commercial lenders cut their LTV back from 75% down to 58% to 65%• Ask the lender


CollateralLoans at higher than 65% LTV •YES, there are still some lenders who will consider higher LTV's:• purchase money loans - buying the property• borrower has lots of liquid assets like:

• cash in the bank • marketable securities• owner occupied properties


How Loans Are MadeThe relationship manager identifies a loan request and begins preliminary discussions with the customer about the loan. •The initial application includes a basic needs list and reason for the loan• These discussions typically include:

• Amount • Term• Interest rate of the loan


How Loans are MadeNext, the relationship manager presents the loan request to their sales manager.

• They have a discussion about whether or not you are a customer that they would like to have

• If it looks good, then the loan underwriter will approve it and you will receive a LOI or Term Sheet


Documents for the Lender1. Year end balance sheets 2. Income statements for the past three years3. Rent roll and proforma (for real estate)4. The most recent interim financials along with corresponding statements from

the prior years 5. The annual budget6. 2-3 years of tax returns for the business (if year end statements are unaudited), 7. Accounts receivable aging, and possibly accounts payable aging8. For privately held businesses, the owner(s) guarantee the debt, so current

personal financial statements and personal tax returns are collected.


Required Loan Documentation •Personal Tax Returns including all schedules and K1s from the last 3 years •Business Tax Returns complete with schedules & K1’s from the last 3 years•Current Interim income statement and balance sheet for existing business •Documentation verifying the existence of the business entity (depending on entity): • Business license • Fictitious name statement • Partnership agreement• Articles of organization (LLC) or incorporation (Corp)


Sample Commercial Loan Document Handouts

•CBA 11.1- Request for Tax Form 4506-T (fill out form for each Person & Business) •CBA 11.2- Resume Form (for all principals)•CBA 11.3- Business Loan Application KPCU•CBA 11.4- Personal Financial Statement •CBA 11.5- Current business debt schedule •CBA 11.6- Borrower’s information form•CBA 11.7- Borrower’s Checklist


Application is ReceivedA loan officer will review the borrower’s:• Amount of available collateral

• real estate, stocks, bonds, and other guaranteed items of high value

• Income • liabilities and personal financial statements including all assets

• Personal tax returns dating back at least three years • Review individual's credit history The loan officer will determine if any additional documentation is required.


Loan Application Package ReviewThe loan officer will request more documents, deposits for certain reports and determine if any additional documentation is required:

• preliminary environmental reports • area maps• survey • title reports • property appraisals • lease summaries


Letter of Intent or Term Sheet•The LOI include:

• Names of all involved parties• Amount of financing • Type of security (collateral) • Loan term • Proposed interest rate• Other key terms• The lender’s fee

• As a deposit or to cover the costs of reports

•You sign the LOI•Decisions can be made in 1 to 5 days•Additional documentation may be requested


How Loans are Made•Negotiate the best terms, fees, and conditions from various lenders

•Choose the most attractive offer, sign and returning the final LOI along with a check, if required, for a deposit, and to pay for third-party reports, such as appraisals

•After all third-party reports are successfully completed and underwriting conditions are satisfied, the final loan package is resubmitted to the loan committee for final approval


Paperwork ApprovedThe loan application is forwarded to a loan committee.

• The committee will approve or deny the loan based on the information provided

• The decision to approve or reject the loan usually takes about 5 days

• May be asked to provide additional documentation to the loan committee should they require it

• Provide more information if required and then submit your loan to a committee for final approval


Loan Approval DocumentKey components of a loan approval document.

Sometimes called a “Credit Memo” internally.


Summary of the Loan RequestProvides a high level overview of the loan request including:

• The loan amount • Loan term • Proposed interest rate• Individual/corporate guarantors• Use of funds, etc.


Information About the CompanyThe Company section includes:

• Who the principals are• How much operating experience they have• How long the company has been in business• What the company does, etc.


Industry Research on the BorrowerThe Industry section includes:

• Information on what are the prevailing trends in the industry of the company

• How does the subject borrower’s company compares to other companies in their industry

• What is their industry outlook, etc.


Repayment AnalysisThe credit analyst will take all of the financial data and estimate the company’s ability to repay the loan.

• Analyzing past data • Looking at growth trends• Industry trends • Proposed loan terms • Debt service coverage ratio (DSCR) assumptions

The DSCR is the company’s free cash flow divided by the estimated debt service on the proposed loan. For a real estate loan, the process is the same, but the analyst will look at the cash flow generated by the property in question.


Individual/Guarantor Financial AnalysisMany lenders require a company principal(s) individual to guarantee the loan.

• An analysis is performed on each of the individuals who will be guaranteeing the loan• Analyzing their ability to cover any shortfalls in the debt service

The key is the guarantor’s liquidity or how much cash they have in the bank, and excess personal cash flow.


Final Credit/Loan ApprovalThe complete loan application package is resubmitted to the loan committee for final approval, after:

• All third-party reports are successfully completed• Underwriting conditions are satisfied

The final loan package is resubmitted to the loan committee for final approval The lender issues a final full loan commitment


Final Credit/Loan Approval•If the Borrower accepts the terms of the loan, they will sign the term sheet and the Lender will issue a commitment letter•Once the term sheet has been signed and the lender has issued a commitment, the loan will be routed to either the lender’s internal loan operations area or to an attorney for the preparation of the loan documents•After the loan documents are prepared and the borrower (or the borrower’s attorney) has reviewed them, the lender and the borrower will meet to sign them and the loan process is complete


Loan is ApprovedThe borrower will sign the finalized loan documents.•If the applicant has a closing agent, all closing documents will be sent to them• Attorney • Escrow representative or title company


Loan is ApprovedThe closing agent will file and complete all remaining paperwork

• Record deed transfers and mortgages• Order title insurance• Coordinate the exchanging funds, etc.• Arrange for signing the loan documents

•Closing can take place within days of approval or underwriting•At the closing, the lender funds the loan with a cashier’s check, draft, or electronic wire transfer


Small Business Loan ProcessLook for a designated SBA national preferred lender who process and services SBA-guaranteed loans.


SBA Loan ApplicationThe loan process begins when the Small Business Lending representative is contacted.•The Business Development Officer (BDO):

• Discusses the client’s financing needs and determine the best product• Provides a loan application• Is available to assist in completing the application• Can recommend one of their products to fit the borrower’s needs

If there is a fit, the client will need to supply additional information.


BDO will ask you to provide:•Interim financial statements no older than 45 days from application date•Copies of the business federal tax returns for the last three fiscal years•If the business is a startup or does not demonstrate historical debt service ability, a business plan or projections for the next two years will be required•If purchasing real estate or other business assets, BOD will need a copy of the purchase agreement


BDO will ask you to provide:•If the business is a franchise business, BOD will need a copy of the Uniform Franchise Offering Circular (UFOC) as well as your signed franchise agreement•If refinancing debt, a copy of the note being refinanced will be required•Depending on the specifics of the loan, the business, and the industry, the BDO may require other information as well


Top 10 Mistakes Made When Applying for a Business Loan1. Not knowing your credit rating

Have copies of the credit scores from the three major credit bureaus.

2. Not reading the terms carefully before signing Signing without reading the details and terms of the loan. Ask questions about anything you do not fully understand.

3. Not locking in a rateInterest rates change, lock it in before it goes up.


Top 10 Mistakes Made When Applying for a Business Loan4. Not explaining what the loan is for

How the money will be used. Lenders want to know exactly what your needs are and how this loan will meet those needs.

5. Making major changesDo not make personnel or other changes to the businessLenders want stability in how the business is done and with whom.

6. Applying only to the most convenient lenderShop around. Credit unions and other sources are worth investigating. Small business owner should consider what the Small Business Administration can do through one of their loan programs.


Top 10 Mistakes Made When Applying for a Business Loan7. Not having your finances up-to-date

Clients shouldn’t apply without having the proper financial documentation ready.

8. Failing to have some equity in the project Having some equity in a business project significantly enhances the chances of securing a business loan.

9. Having no collateral Clients need to provide some collateral, should there be a default in payment.


Top 10 Mistakes Made When Applying for a Business Loan10. Not having a business plan

• If you’re starting a business, you need to demonstrate how the business will operate and make money.

• A business plan is essential for a lender to see your goals and specifically, how you intend to reach them.

• You must include all applicable supporting data, including financials.

-SCORE-


Will I Qualify for a Commercial Real Estate Loan? Due to the Great Recession of 2008, banks are much tougher when they underwrite commercial loans these days.

Will you qualify? It all depends on the three C's of underwriting –

• Credit• Capacity to repay • Collateral



Questions?

Next Class: CRE Transaction Document Review