Relationship Advice from a Commercial Real Estate Lender
To underwrite and successfully close a loan, a lender must have an intimate understanding of the principals involved, the collateral and the marketplace specific to the property. Principals play a key role in ensuring an efficient vetting process by providing accurate and in-depth information during the initial financial request — before the due diligence research delves into further detail.
Providing lenders with a clear and concise case for a financial package is an easy first step to securing a loan. The more details provided, the better, according to David De Bauche, manager of Commercial Credit Lending Administration at Alliant Credit Union.
There is rarely a model borrower or financial package, De Bauche says. Each package and borrower has its own strengths and weaknesses, and it’s up to the lender to decide if the separate pieces join together to create a successful financial package.
“What is considered a green-light package with one lender may carry too many risks for another lender,” he says. “At Alliant, we’re open to considering most financial proposals. If we’re presented with a clear, concise proposal with details upfront — it catches our eye.”
Borrowers that are transparent with lenders about potential weaknesses — past credit issues, lease rollover, new competition — create a more honest working relationship and instill confidence on the lender side of the equation.
For example, De Bauche notes that Alliant recently worked to secure financing for a borrower who disclosed a prior felony conviction at the initial meeting.
The felony conviction for the borrower never showed up in any of the credit research that was done for the transaction. Had he not told Alliant, they never would have known.
“While we might have steered clear of the proposal if we had uncovered the borrower’s legal history during our vetting process, the borrower’s willingness to be honest — coupled with the findings from our due diligence process — allowed us to be comfortable with the borrower and the financing request,” he says.
In another situation, however, the lack of borrower transparency resulted in the failure of a transaction to be approved. In that case, no derogatory information arose in the usual due diligence process, but a Google search turned up some borrower problems that had not been disclosed and didn’t show up in the underwriting process.
During the due diligence phase, lenders are looking to identify risks and determine mitigating factors to alleviate those risks. Lenders try to avoid the shock of a surprise during the loan term. Underwriters dive deep into a borrower’s financial position, looking for any cash-draining properties, and utilize Global Debt Service Coverage Ratio to assure that principals involved in the transaction are able to meet all of their obligations.
Lenders also seek to understand the specific marketplace of the property or properties involved in the financing. What are the risk factors associated with the property’s location or tenant roster? Does the marketplace have positive employment and population growth numbers? Does the property stand to benefit from employment growth (potential tenants) or population growth (retail revenue stream)?
Lenders also consider risks associated with the state of the property itself: Would re-tenanting the property be difficult? Will the property need renovations or upgrades? Prior to closing, a property condition report outlines any deferred maintenance and/or upcoming required capital improvements. Usually, if there are identified expenses that will be incurred during the loan term, a reserve will be established so the funds are available when needed.
Ideal Lender-Borrower Partnership
An attractive financial proposal includes well-tenanted collateral with minimal leasing risk located in a successful marketplace. And lenders anticipate that borrowers who are open and honest from the initial meeting will continue to be reliable sponsors through the duration of the loan.
Borrowers who are willing to share and disclose any past issues display integrity and honesty — and these are characteristics that lenders want to see in borrowers, De Bauche adds.
Ultimately, lenders want assurance that each of the loan’s terms will be fulfilled before they agree to secure and fund the financial package. Taking steps to fully research and understand a borrower — their history and future projections — are all important parts of the financing puzzle. Once those pieces of the puzzle fall into place, it results in a successful relationship between borrower and lender.