Two New York City banks became the 27th and 28th bank failures of 2010, according to the information provided by the Federal Deposit Insurance Corp. With 140 bank failures in 2009 and 30 to-date this year, the lending industry continues to struggle with mounting losses from bad loans. Many banks that are still open for business have put a halt on new commercial real estate lending, and are instead, focused on managing existing loans in their portfolio. Financing has become much more difficult for borrowers to obtain, but it is available, for those that know where to look and how to present their request.
While the availability of credit is no longer as widespread as it was just a few years ago, there are national and local banks that are still actively lending on commercial real estate. Other traditional sources of financing such as life companies, agencies, REIT’s, hedge funds, and private lenders have been active throughout the credit crunch and are still viable sources of capital. The loans offered by each one of these sources will vary to some degree. Interest rates, loan terms, amortization schedules, recourse, and leverage are all items that will vary from one lender to the next. What is consistent, however, is the information each lender will need to review a loan request.
The lenders that are currently active in today’s marketplace are finding themselves inundated with loan requests, and requests that are incomplete will find themselves pushed to the bottom of the heap. Understanding how to present your loan request and what information will be required can not only improve the speed in which you receive a response, but also whether that response is an approval or denial.
In general, all lenders will look at the following key factors:
(1) The Property:
- Cash flow of the property – historical, in-place, and budgeted
- The quality of the asset
- The characteristics of the market
- Business plan
(2) The Sponsor
- Financial strength
- Contingent liabilities
Since the Property will be the collateral securing the loan, it will be the key focus of the review. Items that will be required by the Lender include:
a. Current Rent Roll
b. Historical and Year-To-Date Operating Statements
c. Property Photos
d. Market Information, including occupancy and average rents
This information will enable the lender to determine whether or not the Property is currently stabilized and whether the in-place cash flow is sufficient to meet debt-service coverage requirements, as well as whether the Property meets their asset-quality requirements. Stabilized Class “A” properties located in strong markets will qualify for better rates more desirable loan terms than lower properties that exhibit risky attributes such as high vacancy, deferred maintenance and declining rents. With lenders being more cautious in today’s environment, occupancy and rent trends are often reviewed, and providing monthly income and expenses can illustrate whether a property exhibits stable, declining or improving performance.
Borrowers seeking financing for construction or construction completion loans will need to provide a lender with a greater amount of information, as these projects entail a greater level of complexity. Additional information required for construction loans typically include:
a. Project Budget
b. Business Plan
c. Sources and Uses of Funds
d. Project History e. Milestones and Projections
f. Absorption Analysis (for condominium projects)
As the Project Sponsor, the lender is relying on you for the successful execution of the business plan and timely loan payments. They will need to verify that you have adequate financial strength and experience to support the Project. Items that will typically be required include:
a. Net Worth Statement
b. Schedule of Real Estate Owned
c. Schedule of Contingent Liabilities
d. Resumes highlighting experience with similar properties
Lenders will typically look for a Borrower’s net worth to be equal or greater than the loan amount requested. They will also want to see cash reserves available post-closing to mitigate the payment risk should the Property unexpectedly experience an interruption in cash flow. Typically, the down payment required for a property will range from 20% to 35% of the purchase price, and a wise general rule of thumb is to have cash reserves in the amount of 6 months principal and interest payments available after closing. For a property “in-transition” (one that requires substantial renovation, has higher than market vacancy, etc.) the down-payment and cash reserves requirements will be considerably higher to offset the greater risk.
A Sponsor’s resume is also a key factor that will be reviewed, as a track record of successfully developing and/or managing similar properties provides evidence that the required experience is there. The Schedule of Real Estate can add further strength to the Sponsor’s experience, as it shows the number and size of other assets currently owned. It can also be used to identify any contingent liabilities, as the presence of loan guarantees on non-performing properties or upcoming loan maturities can signify potential risk in the Sponsor’s finances. The preparation that is put into detailing this information and creating the financing package can exponentially increase the probability of obtaining a loan. Understanding what a lender will look for, as well as how a loan will be underwritten, can also help when evaluating potential investments. Valuable time (and often, money) is often lost when investors pursue projects for which they cannot obtain financing.
(Data Source: Panel Expert Adam Luysterborghs of Avant Capital Partners).
About Avant Capital Partners – Avant Capital Partners is a real estate investment bank and correspondent lender for several institutional investors and has offices in New York, Boston, Chicago, Dallas and Greenwich. The firm provides clients with a full spectrum of debt and equity capital solutions for commercial real estate, including portfolio advisory, restructuring and workouts. Avant represents a broad range of capital sources, including institutional investors such as life companies, pension funds, REITs, government agencies such as Freddie Mac, Fannie Mae and HUD, private money sources such as hedge funds and family offices, real estate capital markets and national and community banks. The principals and directors of our company have collectively completed over $5 billion in debt and equity financings over the last four years alone, and represent a broad range of experience as developers, owners, managers and financiers of commercial real estate. Avant has serviced clients ranging from individual commercial investors to widely-known institutional asset managers and can provide senior debt, mezzanine and bridge loan financing, equity and/or joint venture capital solutions for real estate acquisitions and recapitalizations ranging from $2 million to $100 million.