Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
5 Keys to Private
Commercial Lending
Inside the Private
Commercial Lending Process
Copyright Notice
All rights reserved. No part of this publication may be reproduced or transmitted in any
form or by any means electronic or mechanical. Any unauthorized use, sharing,
reproduction, or distribution is strictly prohibited.
Legal Notice
While attempts have been made to verify information provided in this publication,
neither the author nor the publisher assumes any responsibility for errors, omissions, or
contradictory information contained in this document.
This document is not intended as legal, investment, or accounting advice. The
purchaser or reader of this document assumes all responsibility for the use of these
materials and information. Sofia Capital Ventures assumes no responsibility or liability
whatsoever on behalf of any purchaser or reader of these materials.
© 2016, Sofia Capital Ventures, LLC
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 3
5 Keys to Private Commercial Lending
This report is for commercial real estate investors, or anyone who wants to
help facilitate private commercial lending. If you are just starting out in
commercial real estate, you are going to want to study this handbook
intensively. If you are a seasoned financial professional, you may be new to
the world of private lending. In either case, this guide is for you.
By reading this guide, you will
find insight into the mindset of
private commercial lenders,
as well as gaining a better
understanding of how every
lender (private or otherwise)
views a commercial project
that is seeking funding in
today’s market space.
Be prepared to take notes and read this guide more than once. There is a
checklist at the back of the guide that you can use to evaluate your own
project and determine your readiness for funding.
You may have a great project or a great idea and even have the elements
you need to put it all together, but if you don’t package it correctly, if you
don’t understand what the lender wants to see (vs. what you want to show
them,) you may not get funded.
If you are ready to take yourself and your project seriously enough to be
“coachable,” then read on to learn “what to do” and then follow the steps
we have outlined.
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 4
Setting the Stage:
2016 Commercial Real Estate Outlook
Most people are rather optimistic about the real estate outlook for 2016.
While we seem to have avoided double-dip recession, we are still not
seeing as much economic growth or decrease in unemployment as
economists had hoped.
While the housing market seems to have stabilized, prices remain well
below the peak of 2006. While mortgage rates remain close to an all-time
low, and residential construction is picking up, the difficulty in obtaining
credit in the housing market continues to act as a drag on the rest of the
economy.
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 5
In the commercial real estate sector, things are cautiously optimistic. While
vacancy rates in in offices still lag, apartments are filling up and rents are
edging upward. New construction is on the increase. However, overall,
commercial property values are still below their historic levels.
With institutional lending and credit remaining tight in the banking/mortgage
banking sector, there is a tremendous need for lending from other sources.
Private equity has been entering the commercial lending sector in a
significant way.
• • •
Conclusions: You need to be aware of the economic climate. What kind
of economy exists right now? Are we facing a “double-dip” recession? Is
inflation creeping up on us? (Evidence: rising gas and food prices)
As a borrower, you need to understand the lending
climate. How are lenders responding to today’s
economy? What types of risks are they willing to
take? What kind of security do they need to make
a loan? How much confidence do they need to
have in a borrower?
To understand the mindset of today’s lender, read on!
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 6
The Back Story:
Private Equity Lending on Real Estate
A quiet revolution has taken place in the commercial lending sector.
It all began in the residential sector with the advent of mortgage-backed
securities. In the late 1990′s, with the introduction of sub-prime lending,
banks (and other mortgage lending institutions) sought to ameliorate the
inherent riskiness of sub-prime borrowers and maintain liquidity (and
therefore to continue lending). They began to bundle together a number of
mortgages with similar risk factors and sell these to private corporations
(Ginnie Mae, Fannie Mae, Freddie Mac) who in turn issued securities that
functioned like bonds and provided investors with a steady cash flow. This
type of lending model became known as risk-managed lending.
A similar phenomenon took place in commercial lending, to a lesser
degree. During the mortgage “meltdown” that began in 2007, banks
virtually stopped lending. At the same time, because of the fall in property
values, which affected the commercial sector almost to the same degree as
the residential, many commercial property owners were also faced with the
need to refinance their mortgage in a declining value economy. This
created a “perfect storm.”
We all know the impact of the recession on the stock market (or vice
versa.) During the “Great Recession,” a lot of private money withdrew from
the stock and bond markets and looked for the next best opportunity to
invest in. That opportunity was commercial real estate lending.
Sofia Capital Ventures works with a number of private equity sources
across the U.S. that lend on commercial mortgages. Private equity can
anything from a high net worth individual, to a hedge fund, privately held
pension fund, insurance pool, or other privately held funds.
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 7
One thing these private sources have in common is their approach to
lending. Rather than managing risk to assure uniform paper that can be
bundled and sold, private lenders look at return on investment (ROI.) They
tend to hold their paper and look for consistent cash flow. This type of
lending is called portfolio lending.
Conclusions: While banks have now cautiously re-entered the
commercial lending market, they are heavily scrutinized by the government
agencies that oversee their lending practices. In the residential sector,
especially, it will probably never come back to the easy days of ‘if you can
fog a mirror, you can get a loan.’
With the scarcity of conventional lending, where a borrower could shop rate
and term and pit one lender against another to get the best deal, a new
paradigm of lending is emerging. This is the world of private lending. The
philosophy is different. The lending goals are different. The rules have
changed!
One big conclusion you should draw from all of this is that Americans are
going to have to re-think their spending, saving and investing habits, and
especially, their use of credit. We are moving toward an era where fiscal
responsibility will become the norm. This means responsibility on the part
of borrowers and lenders to each play their part in a way that maximizes
the likelihood of a successful outcome, and doesn’t set the borrower (or the
lender) up for failure.
To learn some of the new rules of the game, read on!
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 8
Ok, So How Do I Access
Some of this Private Money?
In the new paradigm of private mortgage lending, there are new “rules” to
follow. As we discussed earlier, private portfolio lenders are looking at
ROI, not fitting you into a slot on a rate sheet (managed risk.)
First, there are some things you should know about private lenders.
1. Private lenders do not advertise. This means that you cannot simply
walk up to a private lender (like you can walk into a Wells Fargo
Bank) and ask for a loan. Private lenders are dependent on
intermediaries (sometimes called brokers, referring agents,
representatives, or facilitators) to introduce potentially fundable
projects to them.
2. Similarly, private lenders do not have loan officers. This means there
is no one working for the lender whose role it is to qualify you for the
deal and manage all the paperwork. It also means that there is no
software system in place that is crunching your numbers and seeing
which box you might fit into.
So how does this all work? In general, private lenders rely on third-party
entities (and individuals) to perform most of the functions that a mortgage
broker, loan officer, loan processor and underwriting department would do.
Specifically, lenders rely on groups like Sofia Capital Ventures to market to
prospective borrowers, pre-screen them and their projects, and then
introduce them to the private lending source.
Private lenders also rely on third-party underwriting to evaluate the merits
of the deal. Underwriting includes scrutinizing the documentation provided
by the borrower to verify that the representation of the property and the
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 9
borrower is accurate. This usually includes the appraisal as well as other
types of analysis. Because they are an independent entity, the company
providing the underwriting charges the lender a fee for their services. This
is usually passed along to the borrower in advance of closing.
Steps in the Process
In terms of protocol, here’s how private lending generally works:
1. You meet, or are introduced to, someone
who has a relationship already established
with a private lender. You discuss your
project. You may be given a quick evaluation
on the spot, or asked for an executive
summary.
2. Some lending groups are now using their own intake form to facilitate
the conveyance of information to the lender, so you may be asked to
fill out a form. This is not a loan application, but rather a summary of
the project and the borrower’s needs in a format that will be familiar to
the lender.
3. You will usually get an indication of interest in your project in a few
days. Some lenders take longer than others. It probably depends on
how busy the lender is and has nothing to do with your project, so
please, be patient!
4. If a lender indicates interest, you will be asked for a complete loan
package, sometimes called a pre-qualification package. This usually
consists of a loan application, operating data on the property and a
financial statement for the guarantor(s) plus tax returns. You will be
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 10
given a list. There is a checklist at the end of this report you can refer
to, but not every lender requires every document.
5. After all of the documents are reviewed, the lender will issue a Letter
of Intent, or a Term Sheet (sometimes referred to as a conditional
loan approval.) This is their offer to you, the borrower, with what
interest rate they want you to pay, term, points, fees, and other
details of the loan. Unlike a conventional mortgage lender where the
loan offer is “take it or leave it”, there is usually room to negotiate.
6. Once the terms are agreed upon, the package undergoes
underwriting, including an appraisal, and the loan moves toward
closing.
This entire process can take anywhere between 30 day and 120 days, but
is more typically closer to 45-60 days from start to finish, assuming the
borrower has all their documents ready to go.
Confidentiality
In the world of private lending, protecting and respecting relationships is a
big key to success. We protect relationships in multiple ways.
1. Non-disclosure: Before I reveal the name of my lender to you, I ask
you to sign a non-disclosure, agreeing that you won’t share that name
with anyone else. We further agree that any details you reveal to me
about your project will only be shared with the lender and the lender’s
team in order to facilitate getting your loan done.
2. Non-circumvention: We further agree that once I reveal my lender’s
name to you, you won’t go around me and approach the lender
directly and cut me out of the deal. I also agree that if I’m working
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 11
with you, and you’re a broker, I won’t try to go around you and do
business with your client directly, cutting you out of the deal. We
respect our relationship.
3. Fee Agreements: In the conventional mortgage world, mortgage
brokers get paid by the borrower, out of the proceeds of the loan,
disbursed at closing. In private lending, all agreements as to how
much each party is going to be paid and how they are going to be
paid must be made in advance of submitting the loan request for
consideration. This is especially important when there are brokers
involved, to protect the integrity of all parties.
Working with brokers
As a borrower, you have probably not had a lot of experience seeking a
loan for your commercial real estate deal. You may have already turned to
a mortgage broker for help. That mortgage broker may have led you to
Sofia Capital Ventures or another private lending group.
As I mentioned above, the broker is planning to get paid by you, the
borrower, at the conclusion of the loan process. The broker usually charges
you 1-2 points (percentage of the total loan amount) and may also want to
charge other fees.
Be aware that in private lending, you may have to take care of the
mortgage broker yourself, after the deal has closed. Here’s why.
In private lending, the lender is going to charge an origination fee and has
already built into the loan pricing a certain number of total points they are
going to allow on the deal, including their fee to the party who referred the
deal to them. There is often not enough room in the deal for your broker to
get paid from these points. Further, the lender may not allow the broker to
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 12
get paid from the proceeds of the loan, on the closing statement even if the
borrower says it’s okay.
Please be aware that if you have been working with a mortgage broker who
has been trying to get your deal funded and now you have been introduced
to a private lender, your broker may feel that he/she is being cut out of the
deal. After all, they’ve been working very hard on your behalf even though
they could not fund your deal.
Be respectful of the broker, but understand that if a private lender is funding
your deal and they have no prior arrangement with your broker, then your
broker may need to take a step back and be happy with a smaller referral
fee that is paid out after the loan is closed and funded.
NOTE: I’ve seen more deals involving private funding go “south” because
of intermediaries who would not step aside or who wanted too big a fee.
Remember, the name of the game is protect and respect relationships.
Make sure everything gets negotiated up front!
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 13
Insider Secrets:
What the Lender Really Looks For
Ok, so now we’ve finally gotten to the heart of the matter. What do lenders
really look for?
This is kind of back to borrowing basics. Lenders want to see good deals
and good borrowers. What I mean by this is that the project makes sense
and the borrower makes sense.
As we stated earlier in this report, private
lending is “portfolio” lending. Investors who are
lending their money secured by commercial
real estate want first and foremost to protect
their principal. Then they want to know that the
monthly payments are going to be made on a
consistent basis. Finally, they want to know
that the loan will be retired in a reasonable
timeframe.
So, here are the Keys to Private Commercial Lending.
Key #1. Do you have a deal?
If you’re buying a property, are you getting it at a good price? (or are you
paying full “retail”?) Have you made your offer based on the current income
of the property? (or are you buying based on future pro forma?)
If you’re seeking a refinance, is there sufficient equity in the property, after
the refi? Is the current income of the property sufficient to handle the
higher level of debt? Or, are you cutting it so close to the margin that if
something goes wrong, you’ll be in trouble?
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 14
Key #2. Is it a good/great/outstanding/excellent deal?
Ok, so now that you’ve determined that you have a deal, let’s talk about
how good a deal it is. With banks doing relatively little commercial lending
and private money being concerned about protecting their principal, they’re
going to want to “cherry pick” their deals… and they do.
So is your deal a good deal? Is it a
little off full retail, or a few points below
maximum LTV. Did you manage to
find a property with a little upside
potential? Is the property already
cash-flowing, or are you going to have
to invest additional money to get the
property to break even?
Is the money you’re pulling out to
refurbish going to yield a 2X return? 3X? 4X? Have you found a completely
undervalued property in a hot market with tons of upside with a seller who
is willing to carry a note?
What is the quality of your deal? In today’s market, even a good deal my
not be one that gets funded. There may be better quality projects
competing for the same dollars.
Key #3. Do you have your ducks in a row?
Ok, so in this economy, it’s not enough to have a great deal. You must also
be a solid borrower. Virtually every lender is going to insist that you have
some “skin in the game.” The maximum they will lend out is around 75%
loan to value (LTV). So, you’ll also need to have the down payment
covered, or have sufficient equity for a refi.
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 15
Further, they’re probably going to want a personal guarantor (although, if
you’re strong enough, you may be able to get a non-recourse loan.) As a
personal guarantor, you’re going to have to show sufficient net worth,
credit-worthiness, income and liquidity. In other words, you have to be able
to demonstrate that you’re responsible with money.
Key #4. Can you substantiate?
Sooner or later, you’re going to be asked to “proof up.” At the end of this
report is a list of documents you will probably have to provide. Lenders will
ask for most of these.
One of the things they will ask you to provide is your credit report. If you do
not have access to one, there are a number of sites that give you a 30 day
free trial. The reason they ask you to pull your own credit is so that it
doesn’t appear as an inquiry which could lower your scores.
Another item you’ll be asked for is some estimate of the value of the
property. Yes, they will require a complete appraisal to close, but to get
started, you’ll need a recent appraisal, or a BPO (broker’s price opinion), or
comps, or even a tax statement showing appraised value.
In general, you’ll want to be able to document each “fact” on your
preliminary intake form, or project summary.
Key #5. How many other lenders have seen this deal?
Finally, the lender may ask if you’ve approached anyone else for funding.
If you’ve been at it for a while, and are tired of hearing lenders say “no”,
there may be a reason behind the negative response. Perhaps your deal
isn’t ready for funding yet. Or perhaps there is some fundamental flaw in
your deal – LTV too high, not enough equity, debt service ratio too low, not
enough cash reserves, etc., etc. If you’ve been getting consistent “no’s”
from other lenders, it’s time for you to take a good hard look at the merits of
© 2016, Sofia Capital Ventures. All Rights Reserved. Page 16
your deal, and the quality of your borrower, and see what needs to be done
to strengthen the deal.
On the other hand, some borrowers tend to “shop the deal,” which means
submitting it to multiple lenders simultaneously to get more than one offer,
so they can play one lender against the other and get you the best “rate.”
Private lenders frown on this.
Private lending is a relatively small world. Lenders do talk to one another.
If it becomes known that several lenders have seen your deal at the same
time, chances are you will never get funded. Again, it’s about respecting
relationships. This is a private world, and you have been invited in.
Understand the way we do business here, and you’ll be fine.
• • •
Sofia Capital Ventures is a privately held company that works with a small
number of private lending sources that fund commercial real estate
mortgages. We specialize in purchase money loans for cash-flowing
commercial property and refinances for existing mortgages. We also have
the ability to facilitate funding for other asset-based business projects.
Contact us at [email protected] or visit us on the web at
www.SofiaCapitalVentures.com
© 2015, Sofia Capital Ventures, LLC, www.SofiaCapitalVentures.com 1
FUNDING READINESS CHECKLIST
This checklist contains most of the information lenders are going to want to see in your funding proposal or executive summary. For the initial review, they generally do not want to see supporting documents or attachments. “Just the facts, ma’am!”
DEAL SUMMARY
Brief Overview of Loan Request: What are you looking for? How much? How long? Terms?
Asset Category (Property Type): Office, Apartment, Hospitality, Retail, etc.
Date Built:
# Units / Sq. Ft. / Acres:
Proposed Loan Amount: Just put a number here!
Proposed Use of Funds (Describe): Summarize!
Entity's Amount and Source of Equity in Property:
Type of Loan: Purchase, refi, bridge, etc.
Terms Requested:
Any deadlines imposed by current seller or lender? Explain!
Special Considerations:
STRENGTH OF THE DEAL
If Purchase –
Purchase Amount:
Purchase Agreement in Place?
Amount of Down Payment:
If Refi –
Current Loan Balances (Total):
What is your Current Rate and Term:
Any State or Federal Tax Liens on property?
As Is Value of Property:
Do you have a BPO, CMA or Appraisal ?
Amount and Date:
Anticipated Renovation/Additions (Amount)?
% of Tenant Occupancy:
% of Owner Occupancy:
Anticipated ROI:
After Repair Value of Property:
LTV based on As Is Value:
Completed LTV (If applicable):
Describe intended Exit Strategy:
Is a Business Plan available? (Yes or No)
Who will Manage the Property?
What is their Experience and Track Record?
Do you have resumes for them?
© 2015, Sofia Capital Ventures, LLC, www.SofiaCapitalVentures.com 2
Special issues, problems or needs related to the property?
Primary Source of Loan Repayment?
Secondary Source of Loan Repayment?
STRENGTH OF BORROWER/GUARANTOR
List Owners of Entity and Percentage of Ownership:
1st Guarantor’s Name (If different from Contact for Entity):
Location of 1st Guarantor (City and State):
Phone:
Email:
1st Guarantor’s Tri-Merge FICO Scores:
BK or Foreclosure in past 10 yrs, if so Status
1st Guarantor's Net Worth:
1st Guarantor's Liquidity:
1st Guarantor’s last 3 years’ average monthly income:
Do you have past 3 years Personal Tax Returns?
2nd Guarantor’s Name:
Location of 2nd
Guarantor (City and State):
Phone:
Email: 2nd
Guarantor’s Tri-Merge FICO Scores:
BK or Foreclosure in past 10 yrs, if so Status 2nd
Guarantor's Net Worth: 2nd
Guarantor’s last 3 years’ average monthly income:
2nd
Guarantor's Liquidity:
Do you have past 3 years Personal Tax Returns?
If existing business, current NOI:
Do you have past 3 years Entity Tax Returns?
Current net worth of business:
Do you have Financial Statements (P&L) for the past 3
years?
Are they self prepared or audited?
Do you have a current year Financial Statement (P&L)?
Is it self prepared or audited?
Value of Entity assets or collateral (If any):
Have you or the person who brought this loan, sought
funding from any other sources? List all:
If so what was the outcome and reason given:
© 2015, Sofia Capital Ventures, LLC, www.SofiaCapitalVentures.com
1
Documents You Might Need To Support Your Loan Request
The following is a list of documents you might need to support your loan request. Not
every lender will ask for every item, but be prepared!
About the Property 1. Executive Summary
2. Business Plan
3. Color Pictures of subject property. View of outside four sides of building and the more
the better along with, street and interior color pictures. We grade the property with these
pictures. “A”, “B” or “C”.
4. Building Rent Roll for current month.
5. Copies of All Leases.
6. For Income Properties with Tenants. Historical and Current Operating Statements are
required.
7. 2008 1/1/08 - 12/31/08 Historical Operating Statement in the form of Schedule E’s, 8825
or Schedule C on the subject property from the current owner’s tax returns
8. 2009 1/1/09 - 12/31/09 Historical Operating Statement in the form of Schedule E’s, 8825
or Schedule C on the subject property from the current owner’s tax returns
9. 2010 1/1/10 – 12/31/10 Historical Operating Statement signed and dated by current
owner(s) or in the form of Schedule E’s, 8825 or Schedule C on the subject property
from the current owner’s tax returns
10. Current YTD 2011 - Current Operating Statement signed and dated by the owner
11. If subject property is a non-owner occupied single tenant we require review of the
occupying tenant’s year to date operating statement and last year’s P & L’s.
About the Borrower 1. Purchase Contract if Applicable
2. Current Personal Financial Statement of Borrower(s).
3. Borrower’s business and personal tax returns for the past three (3) years.
4. Current Credit Report if available.
Ready to get started?
Contact us at [email protected] or
visit us on the web at www.SofiaCapitalVentures.com