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What To Look Out For In Good Commercial Mortgage Lenders

Seeking a good commercial mortgage lender can be challenging and time consuming to say the least. It can be quite a responsibility making sure that you have acquired the deal most suited to your needs and the best terms. Anything, or anyone, that can make this task easier must be worth investigating.

How are Commercial mortgage lenders different?

Commercial mortgage lenders are individuals or privately owned business entities that seek high yields on their investment capital by lending it out against commercial real estate. Previously also called “hard money” lenders they are now well accepted and represent the fastest growing segment of real estate finance. There are literally hundreds of organisations that operate commercial mortgage lenders. The challenge is knowing which ones will truly come through with the money on any day. Working with a legitimate private lender can be extremely rewarding, they identify with property owners and investors and write loans based on the merits of the deal not a set of Government imposed rules.

Does the lender sell or portfolio their loans?

When seeking financing for commercial real estate ask a simple but important question. Does the commercial mortgage lender sell their loans or portfolio them? If they hold their loans for their own account in their own portfolio, you’ve found someone who can afford to ignore the credit crises and write you a check no matter what the market happens to be doing.

Reacting to the liquidity crisis in the credit markets commercial mortgage lenders and brokers are taking a grass roots approach to underwriting loans. Lending standards have been tightened and all deals are being thoroughly checked out.

Commercial real estate investors, property owners and developers should understand what banks and commercial mortgage lenders look at as they decide which loans to fund and which loans to decline.

What lending criteria do the lenders favour?

In the current environment, cash is king in the commercial property sector. Lenders favor loans against income producing assets such-as apartment buildings, office buildings or retail outlets. Cash flow needs to be consistent and sustainable and backed by strong lease agreements with good tenants. Underwriters look at past income generation and will consider future cash flow projections. Find out what operating income you need to qualify. The ideal requirement is to have a properties net operating income (NOI) each month of at-least 20% higher than the mortgage payment would be if they were to make the loan. This translates into a ratio that lenders refer to as the “debt-service-coverage-ratio” (DSCR). In simple terms, the DSCR amounts to NOI divided by the debt service. A DSCR of 1.2 and above gets lenders interested.

Do the lenders follow sound credit policies?

In commercial lending it is the building that gets scrutinized first and, ultimately it is the building that qualifies for the loan. Finance companies will not, however, ignore the credit history of the borrower. Credit equates to character and lenders will, rightly, stay away from borrowers with questionable character. For obvious reasons, lenders will frown on past delinquent payments or other repayment failures. Information on the credit report will give them an idea about how effectively a borrower manages business operations. Poor credit can be a disqualifying factor unless it is somehow mitigated by other, positive factors.

Can the lender close the deal fast?

One strategy that smart real estate investors apply when bargaining with sellers over price and terms is offering a 3 week close in exchange for some concessions. Sophisticated real estate investors know that the competition is probably offering a 45 day due diligence period plus 60 days to find a loan and close the deal. That is more than 3 months, and the seller has no real assurance the sale will actually close. Check with your commercial mortgage lender the kind of deal they can close on in an instant, so you have a significant advantage.

Can you get a lower price?

Most commercial mortgage lenders will only lend up to 65% of the purchase. Can the commercial mortgage lender assist you in a situation where a lower purchase would allow you to make a larger down-payment, qualifying the deal for a private loan that can close in weeks instead of months; the seller might just be interested. This is highly relevant if the seller needs the cash in-order-to get involved in a new project or building.

Choose Deals Wisely

Commercial mortgage lenders have been forced to become more risk adverse. There is no market for weak loans today. Only quality deals can be sold into the capital markets, so only quality deals are receiving funding. Choose deals with strong fundamentals as deals weak in one area or another can still get done but will require some creativity and flexibility on the part of the investor and the lender.