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Are you unrealistic in your expectations? If you have been on a deserted island, just landed on this planet or been living in a cave somewhere for the last couple years, you may have some notions that anything goes and you get a commercial loan approved and funded. This is what is known as unrealistic expectations.
If you think that statement has some humor in it, I have to tell, that everyday I am dealing with brokers and borrowers who fit that description. Worse yet, they are failing to recognize the gravity of the economic situation and how that affects underwriting and credit risk assessment or credit risk management.
You want a commercial loan for your client or yourself, now what? The first and foremost idea that you need to get in your head is that you have no control over the process or terms. This is not a borrower’s market–it is a lender’s market. In simple terms, you don’t have much ability to negotiate terms and/or conditions with a lender because the lender can afford to be very choosy it what they will approve and fund.
What do you need to know about lending today?You may have read news articles or heard stories on the TV and radio news programs on how the residential real estate values have nose-dived across the nation. Being a homeowner myself is not the greatest news to be constantly reminded of. But how does this affect commercial lending? In a word: Directly. As house values drop so do commercial values. This means that lenders are going to consider that dropping values is going to be a continuing trend and lending maximums are going to be reduced to off-set the risk of devaluation of property.
Translated, this means that the maximum LTV (Loan-to-value. The ratio of value to equity to what you owe on the property) is going to be scaled back to anticipate dropping values. In addition to that adjustments, lenders will also reduce the maximum loan amount you can obtain. Finally, the lender will limit certain types of transactions to even more restrictions to protect against anticipated losses.
Note the word anticipated. In this type of economy, anticipated can be better associated with ‘fear of’ rather than anything positive
What are the SEVEN triggers lenders are looking at in approving your commercial loan?
1) CASH: They want to see that you have ‘skin’ in the game. The lenders are typically looking at you have at minimum of 25% equity position into the transaction. Exceptions to this would be under SBA, which has a minimum cash position of 10% into a transaction.
2) CREDIT: They want to see strong credit for all of the principals (those who own 20%+ of the company). This means no mortgage late payments of any type. No prior foreclosures, short sales, settled, collection, charge off or other negative items. They do not want to see the personal credit maxed out either or a lot inquires into credit over the past 12 months.
3) RESERVES: They want to see strong net worth with at least 10-20% of the proposed loan amount in liquid assets.
4) CASH FLOW: The property must cash-flow at above minimum DSCR requirements, especially if the mortgage applied for is a variable rate. If the DSCR required is 1.20, expect the credit officer to look at ability of the property to handle rate increases at least 2% above the start rate in relationship to the DSCR. If the DSCR at start rate is meeting the minimum, the credit officer will easily determine that if the rate goes up 2%, the property will no longer meet the minimum DSCR and therefore decline the loan.
5) STABILIZATION: Business must have stabilized or increasing income/profits. A transaction showing declining income or increasing vacancy will be a big trouble sign and will more likely than not lead to a decline–even if all of the the other components are stellar.
6) PROPERTY/BUSINESS TYPES: The more general the property type, the more likely it is it will be approved. Single tenants, single use or special use property types and properties/business types that suffer more dramatically in tough times are harder to close to impossible. Examples of difficult properties would be; auto dealerships, hotel/motel, restaurant/bar, land/lot loans, construction projects of any type, properties where owners/tenants are real estate/mortgage and or finance companies or rehabilitation projects.
7) CASH-OUT REFINANCE: Cash our mortgage are another sore subject for lenders today. In most cases cash out is going to a cause for decline, especially if the reason is for ‘working capital’ (again SBA 7(a) line of credit maybe the best option here). However, if the cash out is reasonable (10-20% of the total loan amount) and the reasons make sense (buying out partners, consolidation of business debt, acquisition of additional property), then cash out is still available.
What if you get a LOI or Conditional Approval and you don’t like it?I suggest you take the deal and don’t look a gift horse in the mouth. The financing you are taking today isn’t forever. You may have to take it (like it or not) because that may be the only offer you are going to get. I have seen too many people blow off an offer only to circle back around later to see if the offer is still available, only to find out it was a one-time deal.
Case study:We had issued a Conditional Approval on a deal where the borrower’s bank had refused to extend the balance of their loan to complete the renovations to their property. Our Conditional Approval allowed up to $725,000 in cash out to complete the work and up to 80% LTV with a rate of Prime plus 4.5% to be fixed for 5-yrs with a 5-yrs step down prepayment penalty. The borrower rejected the terms citing rate too high and terms to stringent. 45-days late the borrower requests that we re-instate the CA because they can not find financing and their current lender has called the loan due. We told the client that a new CA could be issued, however the rate would now go to Prime + 5.45% and the maximum LTV has been reduced to 70% LTV which meant that they would only be receiving $510,000 in cash proceeds to complete their project. Borrower rejected the second CA. The last we heard is that the borrower is now being foreclosed on by their current lender.
Although this case study may seem extreme and is unfortunate however, I am afraid that it will become a more common story line as this economic crisis continues.
Visit our web portal for more on the commercail financing that we currently offer. www.mycommerciallendingpro.com
Gregg Cochran is the SVP Wholesale Commercial Lending Unit of CFR Mortgage Group, Inc. in Southern California. CFR Lends in 44 states and has been in business since 1979. Mr. Cochran has been with the company since 1992. Mr. Cochran can be reached at 714-731-5282 or via email at cfrgroup@att.net
What could be important to emphasize in 2007 in real estate in canada?
First growth rate of construction of residential and commercial real estate.
Indeed, comparing the previous year, you can see a trend of increasing number of construction projects in canada that positively affect the economic situation in our city. It may be noted such developing investment zone in the construction sector, as street Frunze, as well as floodplain Kamianka rivers, streets and Galuschaka Narymskaya, familiarization streets Bolshevik and start construction in the area of Karl Marx, here you can insert and micro Gorski. You can also noted an increase in delivered volumes of space, in 2007 in canada have been turned over 900 thousand sq. m. housing, compared with 2006, which was handed over about 800 thousand sq. m.. The same is to focus attention on increasing the quality of construction sites building organizations, although there remains such as «dolgostroi», is a unfinished facility, the timing of delivery of which is either badly delaying or not defined at all, which is the cause of poor construction, financial instability or legal disputes construction companies with government agencies.
The second-largest phenomenon could be an increase in real estate prices in canada, and if, unlike the residential sector, rising prices in the commercial sector more balanced, in residential construction, due to a number of economic factors, such as mortgages, financial attractiveness and speculation, the sharp rise in prices continued during the winter and spring of 2007, and only since the fall marked a slight easing of positions related to the mortgage crisis in the USA. And at the moment prices are in the range of 45-65 dollars per square meter, compared with the beginning of the year where the peak price was 50 dollars per square meter of housing.
Comparing the prices of commercial real estate sale in canada, we can see that the price increases of no more than 10-15%. But do not forget that the economic zones of canada constantly in development, and if at the beginning of 2007, in Dzerzhinsk District average price of office space was about 55 rubles per square meter, it is now, it averages 60-70 thousand per square meter. The figure of 10-15% relevant to the core economic areas of canada, such as the Central District, Prospect Karl Marx and other rental rates as well as not undergone significant changes and the annual growth rate of about 12-17%, with the exception of Central and railway areas , Where the discovery of several business centers class «A», the picture has changed, and the average rental rate of office space at 1400-1700 rubles per square meter. Considering the rates of rent commercial premises, you will notice that there is substantial growth and the year it grew by an average of 40-50%, indicating a significant development in this area. It can not be left unattended and warehouse properties, but unlike the commercial and office space, significant changes have been observed in the sale or rental because of the still underdeveloped with real estate development, warehousing, logistics and small entry points.
And in the end I would like to mention another important factor as the opening of several major shopping centers in our city, such as «Auchan» (the area about 10 thousand sq. m.), «Big Dipper» (area 46 thousand square kilometers. m.), «IKEA», (the area of 27 thousand sq. m.), «Royal park» (the area about 60 thousand sq. m.), which is a positive effect on economic development in our city and is an indication that the whole city of canada attractive for investment in many industries including Commercial real estate listings.
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For a while now I’ve written about the latest “change” in commercial lending: “The Small Balance Commercial Lender.” These guys are re-writing the rules on commercial loans that are less than $3 Million. While this might not impact your business immediately if you are dealing with larger properties, it will eventually affect you because of something else they are doing:
Stated Income or EZ Document Loans
Commercial lending, with the exception of private money loans, has been strictly a “full document” underwriting proposition. This meant that the borrower had to show up with a mountain of paperwork including personal tax returns, business tax returns, and financial statements in addition to the documents related to the property such as the leases, rent roll, and income and expense history. And in the end, the lender would underwrite the loan based entirely on the property’s cash flow, ignoring the borrower’s income, anyway!
These new lenders are willing to take into account the borrower’s free cash flow on a stated basis, and make their underwriting decision using the borrower’s credit score, the property’s cash flow, and the borrower’s reserve liquidity. This is unprecedented in commercial lending and will most likely force conventional lenders to come up with competing programs in the near future or they will lose too much loan volume.
Another consideration is that the investors who buy these loans will most likely increase their loan amounts in the future if they have a good experience with the smaller loans. Why wouldn’t they? It costs as much to underwrite and fund a $5 Million loan as it does a $500K one, yet the return is 10 times as much. This will put even more pressure on conventional lenders to create some kind of competing program or sell the same programs from the same investors.
So my personal take on the situation is that there will be some significant changes in the loan marketplace if the Small Balance Commercial Lender has a winning formula. They are too new to have any real experience in a down market and I’m sure that the conventional lenders will be watching them closely.
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ?Craig Higdon, ?The Investment Property Insider,? works as a commercial mortgage broker. He publishes the weekly ?Investment Property Insider? e-zine and blog, www.InvestmentPropertyInsider.com. Visit the blog and get a complimentary report on commercial financing techniques.?
Watch My LIVE Broadcasts (On-Demand): www.livestream.com Add me as a friend on Facebook! www.facebook.com Get DAILY GrowBy10 Updates on Twitter! twitter.com Aug. 10 (Bloomberg) — The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moodys Investors Service. Thats making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls and hotels this year, pressuring companies such as Maguire Properties Inc., the largest office landlord in downtown Los Angeles, to put buildings up for sale. Negative Fundamental Demand for commercial space comes from employment and the income generated by that employment, said University of Pennsylvania Professor Joseph Gyourko, director of the Wharton Schools Samuel Zell and Robert Lurie Real Estate Center in Philadelphia. Mounting job losses are a really significant negative fundamental, signaling that conditions are going to be tough for the industry for a while, he said. That may spill over into mounting losses at some banks. Forty-seven percent of loans at the 7000-plus smaller US lenders are in commercial real estate, compared with 17 percent for the biggest banks, according to New York-based Goldman Sachs Group Inc.
Many commercial lenders have effectively (if not actually) shut their doors. For the rest of us, the resulting volume is so great our appraisal and processing systems are stressed to the limit. Several of our competitors are not even taking any more loans just to get through the current overload in their systems. We have chosen to push through the current avalanche of loans, and will continuing to entertain your new loan requests – all while trying to keep our rates very competitive.
What has changed (at least for now, and especially on larger loans) is our desire to only look at solid apartment and commercial properties, with borrowers that add to the overall strength of the loan. To lessen our processing overload, we have temporarily “closed the tap” on hotels/motels, gas stations, owner/user properties, environmental issue properties, “poor-credit” borrowers, etc. This is intended to help “unclog” the backlog so that your more traditional loans will go through faster.
For loans $3,000,000 and above, we are going to be strictly looking for traditional properties, nothing exotic, no stories, issues, or moving parts. Policy DSCRs and LTVs will be strictly adhered to. Borrowers will need to have average credit scores of 680 or better, their adjusted net worth must be 150% or greater than the loan amount, personal debt ratios cannot exceed 40%, etc.
Loans under $3,000,000 have more flexibility in all these areas. The range of acceptable product types is greater, we will look at a wider range of borrower credit and issues, and we can look at offsetting strengths and weakness (where we will not in larger loans).
Debt Service Coverage Ratios are on the rise as we see the economy weaken… 1.20 ratios for residential and 1.25 (or higher) ratios for commercial for the time being…
Though I’m not sure for how much longer… we are still offering to lock your loan, for up to 90 days, at no cost to your borrower.
And yes, we still offer you 1/2% rebate pricing – up to $15,000.00 per transaction.
I have enclosed our latest rate sheet for your review, and I will be happy to discuss your next transaction. On loans over $3,000,000 I will want to see reliable borrower financial data along with your submission – but feel free to call to discuss the transaction even if you do not have “everything” in hand.
For the short term, loans can be expected to take 60-90 days to close. We cannot handle any “rush” transactions for at least the next 60 days. Please let your borrowers all know to structure sales with longer closing dates!! If you have a 1031 exchange, make sure all parties can live with the reality of these closing times. The shortage of quality lenders with good rates, and the uncertainty of the market, will pass and the market will settle. Until then, we will try hard to meet your financing needs. My best wishes to you for the New Year!
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www.lendinguniverse.com Commercial Lending Loans in Mississippi All industries need lender combine with commercial real estate mortgages, private loans, together with commercial real estate lenders, commercial hard money lender, the hard money, commercial real estate loan. Fix and flip loans www.youtube.com flip that house also known as how to flip houses can be done with the help of flip housesResidential property or Commercial property. In case you need a fix and flip loans Contact private Investors for best results on flip houses. Hard money commercial loans www.lendinguniverse.com In a deed of trust, the borrower (trustor) transfers the Property, in trust, to an independent third party (trustee) who holds conditional title on behalf of the lender or note holder (beneficiary) for the purpose of exercising the following powers: (1) to reconvey the deed of trust once the borrower satisfies all obligations under the promissory note; or (2) to sell the Property if the borrower de faults (known as a foreclosure). Foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, acquiring title to the Property. The foreclosure sale, in most cases, satisfies the debt.
Housing Crisis – Analysis and Discussion with Harrison LeFrak of LeFrak Organization: Commercial Real Estate is in a Slow-Motion Car Crash; No Green Shoots Ahead (Bloomberg News)