The novice approached the two luminaries and asked, “If you could name one thing that is responsible for your success, what would it be?” He expected the billionaire businessmen to speak about the importance of hard work or maybe discuss secret metrics for success. The answer that each provided simultaneously surprised him. It was one word: focus.

“The preliminary discussion to have with a client — before considering any other contingencies — centers on whether a deal has legs.”

Buffett and Gates are legendary for their abilities to cut out all the noise and focus on top priorities. Each of them are incredibly protective of their time and are very selective about what they work on.

Steve Jobs, arguably one of the most successful business leaders of our time, had the same take-no-prisoners focus. When Jobs returned to Apple in 1997 as its CEO, he famously reviewed the scores of product initiatives being pursued at the time and eliminated almost all of them, distilling the company’s focus down to what would become four iconic products.

What does this have to do with commercial mortgage brokers? Everything. Brokers who want to get deals funded and maximize their incomes need to focus on the loan requests that have the highest chances of success. Of course, this is easier said than done.

Picking winners

The most successful mortgage brokers are protective of their time and only focus on viable loan requests. Part of this process is to learn how to spot the winners. Another aspect of the process is being comfortable with saying no. This may entail learning some new habits — or breaking old ones.

When brokers receive loan requests, they need to understand the good, the bad and the ugly of each potential deal. From there, they need to make calls on whether the loans are fundable.

Brokers could go through the files and look for liabilities — tax liens, ownership glitches, credit issues, etc. — and ponder whether these problems can be resolved. Then they could run the numbers to see if the files are workable. But there are other, more efficient ways to get the job done.

Right questions

The preliminary discussion to have with a client — before considering any other contingencies — centers on whether a deal has legs. There are some crucial questions you will need to ask.

Does the loan request fall within the chosen lender’s parameters?A broker needs to determine whether the loan request  is too high or too low for the lender in question. Work with the borrower to hammer out what’s needed in terms of the loan amount or terms. A lender won’t want to fund a deal if the borrower doesn’t have a plan. For example, borrowers who put “max LTV” in their loan requests probably don’t have explicit uses in mind for the additional leverage.

Will the project at hand service the debt at today’s interest rates? One of the first things a lender will do is a debt-service-coverage ratio (DSCR) calculation. Head off an instant rejection by beating them to the punch.

For example, with bridge loan rates hovering in the 11% to 12% range today, do a quick calculation to find out whether the borrower’s income will cover the debt. Brokers can simply take the requested loan amount and multiply it by the interest rate to get a picture of what the annual interest payments will be. Compare this figure against the borrower’s net operating income.

If the proposed loan won’t allow for a positive DSCR, formulate a strategy for the borrower that could make the request more appealing. For example, look at their profit-and-loss statements or tax returns to find items like depreciation or one-time expenses, which can be added back to the equation to enhance net operating income. An interest reserve, which is a capital account created by the lender to fund the loan’s interest payments for a period of time, is another option if the borrower has a solid story.

Right metrics

Brokers also must determine whether the property qualifies under the lender’s parameters. The disconnect between the borrower’s estimate of property value and the appraised value is one of the more common reasons for a deal to fail. Yet the lender’s quote for loan-to-value ratio, cash out and the total funding amount all hinge on this estimate being realistic.

Consider whether the metrics the borrower is using are reliable. For example, the purchase price of the subject property will control the valuation, regardless of whether the borrower thinks the property is worth more. When a borrower says a property is worth $3 million but the purchase price is $2 million, a lender is not going to approve $2.5 million for the purchase.

In addition to valuation, there are many factors related to the property that need to be fleshed out. The location is key for determining population and other demographics. Tertiary markets — some suburban and most rural areas — are difficult to qualify in today’s market and may result in a quick rejection.

Crime statistics can come into play. Take, for instance, a property that was in an area where a resident had a 1 in 13 chance of becoming the victim of a violent crime. The lender passed.

Asset class also can impact a lender’s interest. Office properties are difficult to fund now, so these deals will require extra effort to persuade a lender. Look at all fundamental performance metrics to determine whether the property is worth the time.

It’s always wise to check the borrower’s numbers. Find historical financial reports and see whether the property’s income has gone up or down over the past few years. Resolve the red flags that will inevitably come up during underwriting, so you don’t waste time on a deal that’s not viable.

Borrower qualifications

Does the borrower have the qualifications the lender is seeking? Different lenders have different expectations for their borrowers. For many, prior experience in the asset class is paramount. For others, it’s liquidity, and for others, it’s credit. A common example with a bridge loan is to require the borrower to have a net worth equal to or greater than the loan amount, with liquidity — cash in the bank — that’s at 10% of the loan amount.

The borrower’s character also comes into play for some lenders. A cursory search can uncover a criminal background or a history of litigation. It’s always better to discover these issues before the lender does, so you can let go of a deal with a fatal flaw.

When working with multifamily properties, take a moment to Google the property address to see what the ratings and reviews look like. This is a way to catch badly managed properties and uncover elevated crime statistics. If you find something negative, see if there’s a good explanation for it.

From there, dig in and see if other red flags come up. If the lender likes the borrower’s story, there’s a greater likelihood they may be willing to tackle some problems. But if the deal doesn’t have the fundamentals to begin with, there is virtually no chance of being funded. Why waste time resolving a situation that has no solution?

When you’re speaking with a borrower, learn to focus on what you need to know. This may require reading between the lines. For example, a borrower may offer up a recent appraisal of the property. From their perspective, this saves time and money while proving their valuation claims.

The lender will have a different perspective and several questions. Why do they have a recent appraisal? Was it performed for another lender? Did that lender turn down the deal? What has the borrower done to overcome an objection from another lender?

Letting go

Rejecting a deal is difficult because it’s counterintuitive to turn away business. But relying solely on volume is deceptive. It’s easy to get seduced into thinking that a risky deal is worth a phone call at the very least. One call won’t hurt, right?

Let’s say you have a little extra time. You make a quick phone call to a lender to float a so-so deal. Nothing ventured, nothing gained. One phone call leads to one rejection and zero income. The problem with this habit is that it’s not sustainable. A broker who makes 100 useless calls over the course of a year can wind up with a serious loss of income.

Your time would be better spent honing skills that will allow you to quickly identify the deals that will close. Brokers need to focus their time and resources on these types of deals. Let the others go before they steal your precious time.

It’s also a good idea to periodically evaluate how you get your leads. If brokers find they’re getting stuck with too many loan requests that are no good, they need to explore ways to improve their networking connections and put more time into marketing efforts.

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Commercial mortgage brokers don’t need to be successful billionaires to run their businesses like one. They can thwart the time thief. By focusing only on what’s important, they can improve deal flow, get clients over the finish line and revel in rising income.

At the same time, there are ancillary benefits for brokers who focus on the best deals. These include better business relationships, larger professional networks, and strong reputations with lenders for thoroughness and quality deals that are worth considering. ●

The post Escape the Time Thief appeared first on Scotsman Guide.

Despite current market conditions, these borrowers still need to refinance. Many are eligible for extensions with their current lender. But these extensions will likely carry substantial prepayment penalties, yield maintenance or deposits for years to come.

“Although interest rates are clearly higher today compared to a few years ago, there still are low-interest loans available. The trick is to meet the qualifications.”

Other borrowers are facing a different problem. Their income, coupled with a higher interest rate, won’t meet debt-service-coverage ratio (DSCR) requirements, which is the division of the annual net operating income by the annual debt service. This figure needs to be above 1.0 to refinance the full loan amount at a preferred interest rate or term. These borrowers are at risk of maturity default.

The crisis these borrowers are facing represents an unprecedented opportunity for commercial mortgage brokers to guide them safely to a solid loan solution, earning their trust and business in the process. Understanding the options upfront and knowing how to use them in different borrower circumstances will properly arm brokers to successfully shepherd clients all the way through to funding.

Set the stage

A borrower’s options will rely in part on asset class. Industrial and multifamily real estate remain robust. Retail is steady, especially if anchored by large, creditworthy tenants. Strip retail centers with smaller and sound tenants also can be attractive, even without anchors. Indoor malls are more difficult but fundable if occupancy rates are high and the tenants are financially stable.

“The crisis these borrowers are facing represents an unprecedented opportunity for commercial mortgage brokers to guide them safely to a solid loan solution, earning their trust and business in the process.”

Other asset classes, such as office buildings, are more of a challenge. This is not news. But rather than assuming no office property is fundable, brokers can help clients explore options to make a refinance deal more appealing. These strategies can work with many hard-to-fund loan requests.

For example, the borrower may own other properties in addition to the one securing the loan that is set to mature. These additional properties sometimes can be leveraged to cross-collateralize the subject property with the net effect of reducing perceived lender risk.

If the borrower can plan ahead, many problems can be mitigated. For instance, when occupancy is down, the focus should be on ramping it up before the loan comes up for renewal. This could mean making temporary rent concessions or offering other incentives — such as tenant-specific property improvements — to attract new tenants.

Existing tenant leases should be extended for as long as possible so that lenders are confident in the property’s income streams. An important metric for brokers to consider is the weighted average lease term (WALT) score, which is a calculation of all remaining lease terms at a property weighted for the size of each tenant. Lenders typically want to see a WALT score of at least four years. Brokers who advise borrowers on this metric ahead of time can help them correct course when needed, which can make the difference between a maturity default and successful refinance.

Seek tenant stability

Tenant quality is crucial when refinancing occupied properties. Borrowers should obtain tenant financial reports as part of their due-diligence process, then share them with brokers and lenders to underscore the strength of their tenants and resulting rental-income streams.

In addition to financial stability, tenant suitability is a factor. For instance, an owner of an office building should choose tenants whose employees can’t work from home, making office space invaluable. This includes health care, retail, construction and manufacturing companies, to name a few. When approaching a maturity default in today’s market, startup tenants should be avoided if possible, but any tenant is better than none. Credit tenants are preferred.

Landlords should also consider repositioning. For example, a client transitioned his office building into a biotechnology-only facility. He invested in focused tenant improvements that were needed to attract strong tenants in the biotech industry. Because he was successful at leasing it out and increasing occupancy, he ended up with a competitive loan package in a mortgage environment that is often hostile to office properties. This process was started long before the loan matured.

Adaptive reuse is another viable strategy for properties in underperforming asset classes. Many borrowers are opting to transition offices or sluggish retail spaces into multifamily homes. Again, this process should start long before the loan matures.

Low-interest options

Although interest rates are clearly higher today compared to a few years ago, there still are low-interest loans available. The trick is to meet the qualifications. These lower-interest options typically take longer to close — 60 to 90 days — so borrowers need to start planning well before the current loan matures.

Borrowers shouldn’t put precious time and money into a loan application that is destined to fail. The most likely roadblock is meeting the DSCR threshold. If the ratio is 1.0, the landlord’s cash flow is at the break-even point. Most lenders want a cushion.

The net operating income needs to be sizably larger than the proposed debt service. Borrowers can expect a DSCR requirement of 1.3 to 1.4, so they should anticipate the need to increase income or lower expenses whenever possible.

A common misstep for borrowers is to begin withholding payments as the loan reaches or passes maturity, or while the refinance is in process. Borrowers who pursue a refinance, especially a low-interest option, must keep paying their current lender. Late or missing payments at this juncture, even as the loan matures, can cause them to be disqualified.

Other loan types

A hybrid or “short money” loan can buy some time while the borrower waits for long-term rates to stabilize. This cross between a long-term, low-interest loan and a bridge loan offers a lower interest rate than a typical bridge product, with a shorter term and a shorter prepayment penalty period than a permanent loan.

This type of loan can work for a borrower who does not need to lock down long-term financing because they plan to sell or repurpose the property. With a hybrid loan, the borrower can avoid maturity default without committing to a long-term loan with stiff prepayment or yield maintenance penalties.

For some borrowers, a traditional bridge loan might be the best option, despite the higher interest rate. If the property has strong fundamentals but the borrower needs rates to go down before meeting the DSCR for a permanent loan, bridge financing fills this gap. The advantage is that interest-only payments will help keep debt service in line without stressing the borrower’s bottom line. With a bridge loan, the lender can build in an interest reserve to offset any potential cash shortfall.

Bridge loans, which are short-term loans designed to provide financing during times of transition, also offer the advantage of a quick close because underwriting requirements tend to be lighter. But these borrowers still need to be prepared to defend their projections.

It’s also important to consider the exit plan once the bridge loan matures. Lenders will want to know now what the plan is two to five years down the road. How will this loan work when exiting into long-term financing with a 5% to 6% interest rate?

Consider the competition

Lenders today want to see lower leverage to offset the risk of deflating property values. Borrowers may need to bring more cash to the table. Now is not the time to float a 90% financing request.

To bring more money to the deal, a borrower can offer to cross-collateralize, pay down debt or make a larger downpayment. As painful as that might be, it can pay off in the long run. It’s a much better alternative than losing the property, and the borrower can look to pull cash out later when rates improve. Lenders already are seeing an uptick in refinancing requests. The easy ones tend to drop into the funding queue quickly. To compete for these funds, borrowers need to make their loan package stand out.

Construction loans and large property sales are typically supported by an offering memorandum (OM), a legal document issued to potential investors in a private-placement deal. These documents come with all the bells and whistles that make a case for a new development or property sale. While this is not typically done in refinance situations, there is value in compiling this level of research and presenting answers to obvious shortcomings before a lender has the chance to decline.

Borrowers should devote attention to the economic and geographic environment of the subject property, selling the lender on the merits of the location and reducing perceived risks. For example, a tertiary market location is difficult to fund. Lenders prefer major metro areas or secondary markets. Borrowers in small cities or rural areas will need to formulate a story and mitigate factors to avoid a quick rejection.

Factors such as rent comparisons weigh heavily on a lender’s decision to issue a term sheet. An OM that shows how current rents compare locally, along with growth projections if rents are at or below market rates, can assuage a lender’s fears.

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Commercial real estate owners who need to refinance loans in the next two years are facing lower revenues and higher interest rates, which in turn will impact the DSCR needed to refinance. For many, qualifying for long-term replacement financing will be a challenge. But loan options exist for borrowers who are willing to be flexible. Mortgage brokers who are proactive can seize this opportunity to build client trust and increase deal flow. ●

The post A High-Wire Act appeared first on Scotsman Guide.

Defining terms

Although it is possible to switch gears and convert a long-term loan application into a bridge loan request, this can drive up the costs or, in the worst case possible, kill the deal.

Logistical challenges

With the costs of permanent loans and bridge loans being so similar, this affords commercial mortgage brokers a new perspective when comparing products.

Bridging the gap

Debt-service factors

Right questions

The post Apples or Oranges? appeared first on Scotsman Guide.

Through adaptive reuse, these real estate investments can find new life and become better insulated from future economic downturns.

Creative uses

The greatest challenge in funding adaptive reuse is the lack of verifiable income or cash flow.

Planning ahead

Cash-flow conundrum

Two-step strategy

Proactive approach

Fitting pieces together

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It may seem counterintuitive, but pursuing every potential funding deal costs money. For every one that crashes, there may have been a better one that would have funded. By considering the lender’s perspective and avoiding these hazards, it becomes easier to evaluate borrower requests, choose the most promising one and increase the odds of getting the deal over the finish line.

Time and effort spent to prequalify a request before involving a lender significantly increases your likelihood that the deal will fund. This process needs to be surgical and align with the lender’s requirements.

Lenders often receive submissions from brokers with scores of attachments — months of bank statements, old applications, surveys, legal documents, etc. It is not uncommon for a lender to receive 20 to 30 attachments with a submission. Many of these pages are labeled with numbers rather than clearly marked as to their relevance.

While many of these documents may be helpful and even required as the file progresses through underwriting (assuming that it does), it is not an efficient use of a commercial mortgage broker’s time to gather all of these disparate documents on the front end before obtaining a commitment that the deal is fundable. For some lenders, providing too much documentation upfront can be a red flag. It suggests that the file has been shopped heavily and turned down by competitors.

What’s worse, these documents may not answer the fundamental questions necessary to gauge if the file is a potential winner. A one-page preliminary summary that outlines the verifiable information is far more useful at this phase — and certainly less time-consuming. Include the core financial dynamics of the property, such as its estimated value, any liens and mortgages, as well as the asset type, which is always needed to determine the maximum loan-to-value (LTV) ratio. You also should summarize the borrower’s financial health, including their net worth, liquidity and FICO score.

The lender will run an informal debt-service-coverage ratio (DSCR) analysis in the initial review, so it is important to provide gross rental income plus core property expenses such as taxes, insurance, maintenance and homeowners association dues. For an owner-occupied commercial property, include the business owner’s net annual income. This helps the lender to determine if there is enough revenue from the business to service the loan.

Common pitfalls

The lender will run a population analysis to determine if the property location sits in a desirable metropolitan area or if the location is tertiary, which in turn affects the maximum LTV. It is important to be aware of this contingency and to include the property address in the initial submission.

One of the consistent issues that arises with submissions is the borrower’s estimate of property value. Borrowers often overestimate the value of the property. But all final parameters, including the LTV and loan amount, will be based on the appraised value.

Although the true current value of the real estate may remain unclear until the appraisal is complete, the borrower should understand the potential harm of overestimating value. They may spend money on appraisal, legal, title and underwriting only to discover that the loan is not fundable because the LTV is too high.

Another issue that frequently comes up is insufficient reserves. Often, there are minimum reserves required based on the monthly level of principal, interest, taxes, insurance and association dues (PITIA). Lenders may require reserves equal to six to 12 months of these payments, so it is important to verify that the borrower has sufficient reserves before moving forward.

Although it may be possible to resolve outstanding tax issues by funding them at closing, past-due property taxes may affect the initial LTV calculation. If these issues are only discovered during the title search, it may be too late to steer the deal away from adverse loan terms.

The same goes for past-due IRS taxes. It is not uncommon for IRS liens to be discovered during a last-minute title search after the borrower has spent money on closing costs.

Lender preferences

Lenders sometimes can’t provide the rate and terms that a borrower wants for a specific property type and their own unique circumstances. Encourage your clients to remain open-minded and to consider the available options, such as accepting short-term bridge financing to stabilize a property before moving into a lower-interest, long-term loan.

Resolving the borrower’s concerns can be as simple as explaining the advantages of available programs and eliminating misconceptions. For instance, the rate may be higher on a bridge loan, but the term is short and there is likely no prepayment penalty. In this case, the rate may have little impact on the borrower’s bottom line.

Borrowers tend to fixate on interest rates and may balk at the closing table if they don’t understand how their specific issues impacted the loan’s terms and fees. If a borrower’s expectations are too high, it makes little sense to present the file to lenders that cannot match these terms.

Remember that every file has a “story” that plays into the loan approval process. Give the lender a picture of the borrower and their goals, even if it’s one or two sentences.

A broker who is well-versed in the borrower’s story is in a better position to find creative solutions to problems that arise. In a recent example, a borrower fell short on a purchase loan because the PITIA reserves were too low. But she was a seasoned investor with cash available to pull out of other properties that could be used to shore up reserves, and the deal proceeded.

Also, in telling the borrower’s story, don’t get swept up in a sea of irrelevant information. What a lender needs to know for an initial determination could be accomplished in a 10-minute interview with the client.

The homestretch

Borrowers should be careful not to do anything during the loan underwriting process that affects their credit or financial condition. It has the potential to kill the deal at the finish line.

In one instance, a prospective borrower was slow to provide underwriting documentation, which delayed the loan and required a second credit check. By then, the applicant had defaulted on other payments and lowered their credit score below the lender’s qualifications. The deal died.

A similar problem arises when the borrower stops paying their mortgage during the underwriting process because they incorrectly assume that it will be paid at closing. In some cases, a 12-month mortgage history that extends right up to the loan funding may be required. Last-minute defaults or late payments may disqualify the borrower.

Borrower cooperation is imperative during the underwriting phase. A borrower’s hesitation to provide documentation is seen as a red flag. The same is true when the underwriters uncover discrepancies in the documentation and need additional information.

If the borrower is behaving belligerently, the mortgage broker needs to make a judgment call on whether to proceed, weighing the likelihood of succeeding against the reputation the broker wants to maintain with the lender. More often, however, the borrower merely gets overwhelmed. This problem can easily be resolved through proper communication. A kickoff meeting between the borrower, the broker and the lender’s underwriting team or representative can alleviate concerns and keep everyone on the same page.

Once the process is complete and the loan is ready to fund, some deals still can fall apart at the closing table. A borrower can get skittish when they read the settlement statement. Seeing the fees in black and white, or simply placing their signature on the documents, can be upsetting. These feelings need to be mollified and a little handholding is sometimes required. This is where the relationship with the borrower can really pay off, if they’ve come to trust their broker and know someone is in their court.

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Some funding deals will collapse no matter how cooperative the borrower is or how diligently a broker works to resolve problems. But following these steps will significantly increase the likelihood that deals fund and the broker gets paid for all their hard work. ●

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Too many commercial real estate owners are risking default on long-term loans. As owners exhaust cash reserves and credit lines, more of them will likely seek to pull cash out of their properties. Although these borrowers sailed through the financing process in the past and qualified for the best interest rates, many now can’t get approved for long-term loans given their cash crunch. For these borrowers and their mortgage brokers, it is time to think outside the box.

Although it defies conventional wisdom, refinancing longer-term debt into a higher-interest, short-term bridge loan is one way out for some cash-strapped commercial real estate owners to keep their struggling properties and stabilize them. This otherwise extraordinary action makes sense for several reasons.

First, your borrower may need cash to upgrade the building for new tenants but may be unable to meet the debt-service-coverage ratio (DSCR) on a long-term cash-out refinance. A short-term bridge loan, however, offers a path to be creative.

With a bridge loan, for example, the borrower may have the opportunity to establish a loan-funded interest reserve, whereby the lender advances funds to pay interest on the loan and the payment is added to the loan balance. It can be used by the owner to weather lean months of income, or to free up cash for property improvements and rehabilitation. Although this is not a direct substitute for a cash-out refinance, an interest reserve can be a way for strapped owners to avoid selling at a discount and losing the future income stream.

Short-term flexibility

Bridge loans also can be used by opportunistic buyers. Investors looking to pick up a struggling commercial property are likely to run into the same problems with long-term financing. If the property is underperforming, low-rate lenders will likely take a pass. But locking in a bridge loan to acquire a property can give the buyer an edge over competing bids. Once the income is restored and the property is stabilized, the borrower can look at refinancing the bridge loan into a lower-interest, long-term option.

Bridge loan interest is typically higher than that of permanent loans, but not as high as many business credit lines. A bridge loan, combined with an interest reserve, allows borrowers to break the cycle of using unsecured business lines to make up monthly shortfalls on mortgage payments. When considering whether a bridge loan is the best option, however, you’ll need to estimate the property’s potential return on investment from the projected income as a way to justify the cost of the loan.

Bridge loans often have the flexibility to be extended beyond the normal term of 12 to 24 months, which is especially helpful during times of economic uncertainty where it can take longer for some assets to stabilize. Conversely, if the economy recovers more quickly than predicted, bridge loans are sometimes available with little or no prepayment penalty.

Lenders live and die by the numbers. But the question of, “How will you pay me back?” can’t always be answered with spreadsheets. There’s often a story that transcends the numbers. By telling this story, a borrower can breathe some life into a sleeper deal that would otherwise be declined.

As a general practice, lenders are not looking for potential — not unless someone points it out. There are many stories out there and some have happy endings.

Borrower advocacy

Take, for example, the case of one borrower who went beyond the numbers to obtain a loan by telling the real story of the property’s potential. This borrower owns two adjacent properties near the beach in a seaside resort town. One property is a parking lot that generates stable income in good times. The other property is leased to a company that was constructing a family attraction. The parking lot stands to benefit from the family attraction which, in turn, is expected to draw traffic from the beach about a block away.

Still, the borrower could not qualify for long-term financing. Like so many commercial real estate assets, 2020 income was depressed. The DSCR wasn’t acceptable for a conventional long-term loan and neither property was stabilized. The owner’s current loan was set to mature and he was at risk of default.

After previously being declined for a long-term loan, the borrower tried again with another lender. He was open to a bridge loan, but at first blush, he didn’t qualify for that either because of the depressed income. The lender applied a conservative capitalization rate when determining the loan-to-value (LTV) ratio. At this low cap rate, the loan amount still didn’t make sense.

But the borrower had facts to back up his assertions of higher value. He advocated for a recalculation based on pre-pandemic income and the predicted success of the new business with its potential to generate significantly increased traffic for both properties. The parking lot historically generated high income and likely would do even better once the borrower overcame the current roadblock.

He also felt strongly that the cap rate and comparables the lender was applying to the properties didn’t track what they would appraise for. He had documentation to support this. This was, arguably, a gray area. The borrower had a strong working knowledge of his industry and a solid plan. This loan had a story. The bridge lender listened and liked the story.

Initially, the borrower asked for a little more than $14 million. The loan file moved from the decline stack to an offer of roughly $19 million, with the bulk of the funds to be provided at closing. The borrower also had the right to earn-out the remaining funds as the projected income stabilized.

Advocacy paid off. By telling a story, the borrower made a convincing case for an exception. The borrower’s business plan now has a chance to mature. Otherwise, he might have been forced to sell the property at a discounted price before the income potential could be realized.

Unpopular assets

It is possible to use bridge financing to fund certain assets, such as retail, that are out of favor. Retail centers are particularly difficult to finance right now. Many lenders are declining loan requests due to higher numbers of rent concessions, late rent payments and tenant defaults. But in another example of a story loan, one borrower was able to make the case for an exception.

In this case, the borrower owned a 16,000-square-foot retail center in the South. The property included more than 20 tenants, including a dentist’s office, a tax service, several hair salons, a music store, a catering company and even a church.

By looking at the tenants one by one, it was apparent to the lender that the majority were paying rent on time. This was clear from the rent-roll and bank-deposit records that provided corroboration. Many tenants had been in place for years, which added strength and predictability to future income projections and the all-important DSCR.

When funding retail assets in particular, it is important to consider the tenant mix. Lenders are not only looking at tenant payment habits but also at the tenant types relative to businesses most severely affected by the pandemic. These include restaurants, bars and hair salons. This retail center had relatively few higher-risk businesses. By pointing this out, the borrower was able to demonstrate decreased risk.

The subject property appraised for much less than anticipated. With a lower property value, a cash-out refinance did not appear realistic. The lender’s initial term sheet provided for an LTV of only 60%. But after hearing about the property’s compensating factors, the lender reconsidered and raised the LTV to 70%.

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As we all recover from the turmoil of the past year, the lesson of the story loan is more vital than ever for commercial mortgage brokers to close loans and aid cash-strapped clients. Right now, lenders are skeptical — and they need to be. But that doesn’t mean borrowers can’t make their case. Smart lenders will listen. ●

The post Tell Your Story appeared first on Scotsman Guide.