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Understanding a Commercial Lender’s Mindset

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Begging Borrower

If you are a business owner or commercial real estate investor, at some point you are going to be looking for a loan to purchase or refinance a property. Or, perhaps, you are a developer seeking construction money for your project. In each of these situations, it is essential to understand your lender’s mindset. 

Here’s what it’s not. People often approach us who are either brokers or project principals asking if we are “interested” in a deal. This is the wrong question to ask.

Here’s where that question comes from. This borrower’s mindset is they have figured out how they want to do the deal and they are looking for someone to “buy” their terms. Hence, the question, “Are you interested.” This type of approach works in the private equity market – if you’ve complied with SEC, State and Local regulations. Once you have registered your offering, or filed for your exemptions, you are free to offer debt instruments, equity in your company, revenue participation, stock options, stock warrants, and other investment instruments and solicit accredited investors to participate in your investment program.  In this type of situation, you would certainly want to find out early on whether the potential investor was “interested.”

However, this is not the mindset of the commercial mortgage industry.  In commercial lending, it’s not about whether the lender is “interested” in your deal. It’s whether your deal fits within the basic parameters of one of their loan programs.

Mortgage lenders are interested in collateral and cash flow.

Collateral is their security. Cash flow is their income stream. They want to know that a) the property, and b) the borrower, can make those nice, steady monthly payments.  And if those payments stop coming, they want to know that they can foreclose, sell the property quickly and recover their principal.

Therefore, mortgage lenders offer a debt solution that is dependent on the nature and quality of the collateral you are offering—namely, the commercial property you are proposing to purchase, refinance or build.

Commercial mortgage lenders use their underwriting process to prove up the asset being offered for collateral. This includes the physical condition of the property, the financial condition of the property, and the legal condition of the property.

The physical condition of the property includes its location (urban/rural/top 25 metro areas, etc.) as well as its appearance and amenities – luxury, average or substandard. Lenders also consider the state of repair, deferred maintenance issues, landscaping, and other features that may substantively affect the value of the property. The property appraisal captures most of this information.

The financial condition of the property includes other liens or mortgages that may be attached to the property and its ability to generate income. Lenders like to look at the historical performance of the property (Income and Expense or Profit and Loss) as well as projected revenue and expenses, if ownership is changing hands. They want to review rent rolls and leases. If it is your own business that is occupying the commercial property, they will also want to examine the income and expenses of the business. Then, they will want to review tax returns to corroborate everything.

The legal condition reflects the seller’s or owner’s ability to provide clear title to the property. If there is a cloud on the title that means that someone other than the lender might have the priority to liquidate or sell the property, which doesn’t work for the lender. They want to know that they will be in 1st position as a lienholder on the property.

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If you are seeking financing for a commercial real estate project, Sofia Capital Ventures offers a FREE Deal Evaluation. We are happy to evaluate any proposal you are considering. If your project is not a candidate for a commercial loan, or is structured improperly, we will let you know. We also offer Capital Consulting to assist you in developing the right financing strategy, packaging your project in the right way for lenders or investors, and in some cases, we can work with you to assist in the process of raising capital. Please CONTACT US Today with your funding proposal.