Securing a Commercial Real Estate Loan: A Comprehensive Guide for Borrowers
Since the Great Recession, securing a commercial real estate or multifamily loan has become increasingly challenging, with current economic conditions and stress on banks adding further complexity. Rather than dwelling on how to fix the process, this guide offers practical advice on how private investors managing properties valued between $1 million and $15 million can optimally navigate and secure better loans more efficiently.
Most view the lending process as lengthy, stressful, and filled with unexpected demands for additional information. While many would rather visit the dentist than apply for a loan, borrowers have more control over the process than they realize. With strategic preparation, the outcome can be significantly improved and stress minimized. This guide is informed by feedback from both borrowers and lenders with the goal of streaming the borrower experience while setting them one up for success.
The Current Lending Environment & Bank Priorities
Today’s lending landscape is difficult for private investors seeking regional bank or bridge financing for amounts between $1 million and $20 million. To secure a loan successfully, it’s essential to understand the priorities that influence lenders:
Primary Priority: Government Regulations. Borrowers often believe that strong financials will guarantee an enthusiastic lender. However, for government-regulated institutions, compliance with federal regulations is paramount. Banks may leverage their loan portfolios up to 10-to-1 with government-backed capital, boosting profit margins but increasing regulatory oversight. Most do not realize how leveraged banks are as they are required to take minimal risk. The government oversees the assessment of risk and as a result, even the strongest credit may not meet regulatory requirements.
Secondary Priority: Shareholders and Depositors. For both regulated and non-regulated lenders, shareholders and depositors are key stakeholders. Lending has long been a driving force behind economic growth. Regardless of economic conditions, there is always a demand for loans. The real challenge lies in the fierce competition for deposits, which has recently become increasingly fierce. Borrowers willing to maintain substantial deposits with a lender gain increased negotiating leverage and become higher-priority clients. Establishing a comprehensive banking relationship beyond just obtaining the loan can improve your chances of securing better loan terms, especially during periods of tight liquidity.
Mortgage Brokers: A Valuable Ally. Mortgage brokers serve as intermediaries between borrowers and lenders, ensuring that your application is presented in the most favorable light. Contrary to the belief that bypassing brokers saves money, brokers have a fiduciary duty to represent the borrower’s best interests. Unlike bank loan officers who prioritize the needs of the lender they work for, a skilled broker can create healthy competition among lenders thereby securing better terms. With over 65,000 lending sources in the U.S., finding the best rate, terms, or bank relationship without professional assistance is challenging. When selecting a broker, pick one trusted broker to represent you. Using multiple brokers can dilute your application’s effectiveness and incentivize poor behavior when attempting to secure a Letter of Intent for the borrower. Look for a future article on how to select the best mortgage broker.
Final Priority: The Borrower. While borrowers seem to be last on the lender’s list of priorities, they should not be discouraged. Lenders care about their clients, but even significant personal wealth along with a good basis for a loan, does not guarantee loan approval. Each loan must meet regulatory guidelines plus the lending requirements for the specific bank.
Loan Strategy: Position Yourself as the Ideal Borrower
So, how can you secure the best possible outcome? Securing the best loan hinges on how well you prepare and position yourself. Three steps to improve your borrowing strategy:
Preparation Is Key. Work with your mortgage broker to compile all necessary documentation. Ensure that the property title is clear and address any potential environmental, credit, or legal issues upfront. Full transparency with your broker is essential as your experience, net worth, credit history, and property details all contribute to a strong application. Transparency and full disclosure will allow your mortgage broker to prepare a comprehensive application that builds credibility, speeds up approvals, and avoids the hassle of repeated requests for additional documentation. The documents to submit include:
Tax returns and K-1s
Property financials for the past three years
A complete real estate schedule
90 days of bank statements
Proactive explanations of any potential issues
Accuracy Matters. Overstating your net worth or property values is a red flag for lenders and can even be considered fraudulent. Some borrowers mistakenly believe that inflating figures will secure better terms, but lenders evaluate thousands of properties annually and can spot exaggerations. Losing credibility due to overvaluation can harm your chances. A conservative approach, such as slightly underestimating values, shows honesty and can build trust.
Focus on Terms, Not Just Rates. While interest rates are important, loan terms can have an even greater impact on your investment strategy. Discuss your goals with your mortgage broker and take factors like early termination penalties, personal guarantees, reporting requirements, and second lien flexibility into account.
Consider Alternative Lending Solutions: Bridge Loans as a Strategic Tool
Bridge loans are faster and simpler to obtain compared to traditional loans, and they serve as a short-term strategy for repositioning a property before seeking permanent financing. While some investors are wary due to higher interest rates, bridge loans can enhance returns and preserve cash flow when used effectively. Bridge loans were once thought of as "hard money" or a loan of last resort for distressed borrowers but bridge lending has evolved into a sophisticated tool over the past two decades. Even though bridge lenders require less initial documentation and are not bound by government regulations, transparency and thorough preparation are still essential.
The Takeaway: Embrace the Lender’s Perspective
Understanding a lender’s need to comply with regulations, satisfy shareholder expectations, and manage deposits can help you better navigate the lending process. By preparing thoroughly and partnering with an experienced mortgage broker, you can position yourself as a preferred borrower and secure favorable loan terms.
