I recently watched a TV commercial for a local bank. At first I thought the ad was for a travel website, because they showed families enjoying their vacation. Then I realized they were selling their ATM access. Nothing was said about loan programs or commercial lending. The fact is, they don’t want borrowers to contact them because the answer is most likely going to be NO.
Private Lenders are looking for borrowers. Most brokers don’t have the resources to alert the masses and most borrowers instinctively go to banks. This article will give you some ideas on how to fish for borrowers and get them to come to you.
Commercial lending, for the most part is based on the value and performance of the commercial assets used as collateral. Because of the focus on the asset performance, many borrowers expect commercial loans to be non-recourse. Most borrowers are optimistic investors leaving much to chance. Most private lenders are bullish and use mathematical models to provide risk assessment. Loan originators are jammed up in the middle.
If you are looking for a business loan, commercial real estate loan, or looking to raise equity for a commercial project, you are likely going to work with a commercial loan broker to raise the capital. This article addresses the quandary known as the broker chain. If a broker chain is formed to find a source for funding a project, the process is likely to be impeded by weak links in the chain.
Have you applied for a commercial loan lately? Most banks are not doing commercial loans and others just wait forever to give you an answer. They don’t want to lose you as a customer and they really don’t want to fund your project.
Commercial loan brokers are aware of the painfully long process of closing a loan for commercial real estate. The process will take several months to complete. It can be even longer for construction loans or business loans that are not tied to commercial assets. For example, HUD loans can take 18 months to fund. Recently, a borrower in Honolulu came to me to refinance an operating assisted living facility. He has been working with a local bank to refinance for 6 months and still does not have an answer.
One of my favorite movies is Easy Money with Rodney Dangerfield and Joe Pesci.
Rodney’s character made a deal to give up all of his vices to inherit his mother-in-law’s fortune. It turned out to be harder than he imagined.
There is nothing “easy” about obtaining a Hard Money loan from a private lender. It is a proposition based on risk. The lender assumes the risk of repayment of a highly leveraged loan, the borrower assumes risk of paying up-front fees to someone who will not perform, and the brokers assume the risk of getting squeezed out of the deal. Hard money fees can be as high as 10 points with interest rates above 12% and upwards of 20%.
My wife, Monalisa and I just celebrated our 24th anniversary. She is my soul mate and I could never have found a better person to spend my life with. We have truly loved and respected each other all these years and are the perfect match.
The Perfect Match
By now you know that I am an Agent representing Private Lenders for Commercial Real Estate. Those of us in this business specialize in certain types of loans, based on the offerings of our Lending Groups. One of the problems in this industry is that the lending groups are looking for the perfect match.
This article may seem self-deprecating as I try to give a realistic view of Private Lending Groups for Commercial Real Estate. Many agents contact me with loan requests that were turned down by their lender. Instead of walking away, they try to find someone who can solve their problem. We all do this because we want to help our clients. That should be a good thing, but it is frowned upon by the Lending Groups.
As a private lender for commercial real estate, I receive requests everyday for loans and equity partnerships. On average, about 1 out of 100 is presentable to the lender and 1 out of 25 of those is fundable. If you are a broker or an investor looking for a loan for a commercial real estate purchase or refinance, you could save yourself some time and frustration by giving the lender what they need to evaluate your request.
Start by Selling the Borrower
The best loan request I ever got started out with a short paragraph telling about the borrowers. “Chris and Anthony Jones have made an offer that has been accepted on an apartment building in San Francisco, CA. The purchase price is $12M. The borrowers own 2 other buildings in the area that are free and clear. Their combined net worth is $80M. Their
credit is excellent. Their total debt is $3M on their home and they have sufficient reserves to cover their debt.”
I usually start my blogs out with something amusing to get the readers’ attention.
This time I thought the picture makes a great point. Every business plan is good for something – then there’s that whole perceived value thing. This article will give some tips to creating an executive summary targeted to private lenders for commercial real estate.
Personalize Each Submission
Investors looking for funding or joint ventures should tailor their documents to match the recipient’s interest if they wish to be taken seriously. Because of competition in the industry, private lenders don’t publish their criteria, rates, or preferred deals. Each deal is evaluated on its own merit and a decision to work with a borrower or JV partner is based on a small window of opportunity via the executive summary.
I grew up in Woodbridge, NJ, which is about 30 minutes by train to NYC. When my Mom was walking out the door, if we asked where she was going, her response was typically something like, “Up the pig’s ass for a ham sandwich. You wanna come?” I miss my Mom, she had a great way of getting her point across.
Negotiating is an Art
I recently had a conversation with Mike Paff, a real estate broker in the Northern NJ and New York City Metro area. Mike is has a wealth of experience and an excellent grasp of his market. We discussed the lending business and how all the players take a position and are not willing to budge. Buyer’s brokers end up contacting everyone they know to get the same answers. Some lenders will scrutinize a $10 million loan more than a $100 million loan with lower ROI. It is difficult to understand their position because they don’t publish their criteria. It’s all about negotiating and not losing your position because you overlooked some important information. According to Mike, “in the process of negotiating commercial real estate, everybody must be willing to lose the same number of fingers.”
I recently went to a networking meeting where a young real estate investor spent about thirty minutes talking about how investing in multifamily real estate is making him wealthier than he ever imagined. He claimed to get into the business with no cash using other people’s money (OPM). So why was he in a networking meeting trying to make connections? There’s a special place for people like that.
Is there money to be made in this area of real estate? Absolutely! To succeed you need what I like to call the 3 C’s and some B’s. Capital, Credibility, and Crystal Ball(s).
Commercial Real Estate – Best Hedge against Inflation
According to the National Real Estate Investor website, the outlook for real estate investments in 2011 is optimistic. “An improving economy combined with a thaw in the capital markets and limited new supply led to a big spike in investor confidence in the fourth quarter” nreionline.com .
Commercial Real estate investment, like investments in commodities such as gold, oil and wheat, has traditionally offered and been regarded as one of the best hedges against inflation. Which is why real estate has traditionally been included in institutional portfolios. When you combine the hedge against inflation, with a favorable risk and return profile, real estate remains an excellent investment.