By Stephen A. Sobin, President and Founder of Select Commercial Funding
Every commercial mortgage loan applicant invariably asks the same questions: “What are commercial mortgages rates today?” and “How do I qualify for the best commercial mortgage rate?”
Before answering that question, commercial mortgage lenders need to fully understand the transaction, review the borrower’s credentials, and analyze the commercial property.
With a commercial transaction, lenders carefully review both the borrower and the subject property. Lenders and credit analysts usually look at the following items in order to determine the risk level of the transaction and the rates/term offered:
Borrower Credentials. Does the borrower have prior experience owning and/or operating similar properties in the past? Lenders will usually ask for a bio or resume detailing the borrower’s management experience. If a borrower has never owned or managed a similar property, most lenders will at least expect an experienced management company to assume that role.
What is the borrower’s overall net worth? Most lenders will want to see that the borrower has net worth equal to the loan amount in order to provide a sufficient guarantee to cover the new loan amount. What is the borrower’s cash liquidity after closing?
Lenders want to see a borrower with sufficient post-closing reserves to cover any unforeseen expenses that might arise after closing. Lenders do not want to see a borrower use all of his cash as a down without leaving a cushion for emergencies.
What is the borrower’s credit rating and credit scores? Lenders want to make sure that their borrowers have handled past debts properly. Items such as foreclosures, short sales, bankruptcies, judgements, and mortgage delinquencies are a serious concern for lenders. If any of these have occurred, the borrower needs to properly explain the details in a written letter of explanation, and explain why these situations are unlikely to happen again.
Property Fundamentals. Where is the property located? Lenders will look first at the property location to see if the property is located in an urban, suburban, or rural location. They will look at the population and demographics of the neighborhood. They will look at the employment base, proximity to roads and highways, market vacancy factors, and other demand factors in determining the viability of the neighborhood.
For example, if the subject property is an office building, and the property is located on a small side road in a neighborhood with high office vacancy, the loan will probably not be approved as the location is less than desirable given the market vacancy.
Who are the tenants? If the property is multi-tenanted, the lender will look at the quality of the tenants, length of the leases, and how long the tenants have been in occupancy. Lenders do not want to see a property where tenants come and go on a regular basis or where the leases are all short term. Turnover leads to higher vacancy rates and high vacancy rates negatively affect cash flow. Lenders will ask to see a current rent roll, and copies of all leases, to carefully review the tenant base upfront.
What is the historical occupancy? Lenders will ask for the last two or three years’ worth of operating expenses to verify rents collected and stability of expenses. Wildly fluctuating income or expenses will be very carefully scrutinized. What is the condition of the property? Lenders will expect to see a property in good condition.
Properties that are old, outdated, and in need of immediate repairs and renovation will usually not be approved by conventional lenders.These loans will probably need a short-term bridge loan, or hard money loan, until the property meets local lending standards.
As discussed, lenders perform significant due diligence on both the borrower and property before issuing an approval and before quoting rates and terms. What can a borrower do to improve his chances of receiving a quick approval and favorable rates?
The borrower (or the borrower’s commercial mortgage broker) should prepare a professional loan submission package to submit to the lender. The package should include a short executive summary explaining the transaction, current rent roll, historical operating statements, digital photos, borrower’s personal financial statement and resume.
A professional submission will speed the approval process and improve the likelihood of success.