Getting Results - How Experienced Lenders Underwrite Development Projects
— Capital Sources for Real Estate, December 1999
Mountain funding closes $10.5 Million financing with Cathertes Investments
— October, 1999
Mountain Funding Provides 99% Of Cost For Chicago Warehouse Conversion
— Crittenden's Developers Financing News, October, 1999
Mountain Funding To provide Take-Out For Tribeca Lofts
— Crittenden's Developers Financing News - June 21, 1999
Stuff Happens
— Florida Real Estate Journal - June, 1999
NJ Firm To Boost Lending With Smaller Loans
— Real Estate Finance & Investment - April, 1999
Mezzanine Expansion
— Commercial Mortgage Insight - February, 1999
Seizing Opportunities in this Volatile Marketplace
— Mortgage Press - February, 1999
Working Effectively With Lenders: A Primer For Borrowers
— Affordable Housing Fin. - January, 1999
Do's & Don'ts for Working Effectively with Hard Money Lenders
— Mortgage Press - January, 1999
Getting Results: How Experienced Lenders Underwrite Development Projects
— Capital Sources for Real Estate, January 2000
The formula for successful development is simple: build your project on time and within budget, lease and/or sell it out as projected, payoff or refinance your construction debt and move on to the next conquest. No big deal, right? After all, your appraiser has projected your success; your competitors on the other side of town successfully pulled it off; Even the town fathers have blessed the concept. Why then is your lender so tough to convince? Because, experienced lenders underwrite development projects devoid of emotion, pre-conceived assumptions, ego or dreams. Moreover, lenders assume that "stuff" will definitely happen. As a result, experienced development lenders actually underwrite projects back-to-front.
Astute lenders look many months down the road and imagine that typical difficulties will arise: construction is behind schedule, costs are over budget and sale/ leasing activity is slow. They struggle to ascertain the possible causes of these potential difficulties, and then tailor their underwriting to address their probability of occurrence. They will evaluate and predict the developer's ability to persevere through such difficulties (it is one thing to predict problems, it is another to structure the loan too effectively handle the challenges that may occur).
Lenders look at many things in their underwriting, all of which ultimately relates to two concerns: the developer's experience and the project's feasibility. The following due diligence is structured to address these two concerns.
- Describe the background, experience and reputation of the developer.
- Describe similar projects developed by this developer.
- Contact all developer references and report on findings. Contact lawyers, lenders, contractors, etc.
- Perform background check of developers as appropriate: D&B, lien and litigation searches, public records, financial statements, tax returns, etc.
- Describe how the job is going to be staffed (administration, construction, sales and marketing)? What is the experience of the staff? Is it suitable for this project?
- Describe the exact status of zoning and approvals, and describe the professional team (lawyers, engineer, architect, etc.) and their respective backgrounds.
- Describe and summarize all environmental studies and issues.
- Summarize the source of the developer's equity, existing and future.
- Summarize all appraisals and other valuations performed for the project: "as-is," "as-developed" and "as stabilized."
- List and summarize the most direct comparables.
- Summarize any market and/or feasibility studies that have been performed.
- Summarize findings of the site visit.
- Report on the condition of the property, local market, competition, discussions with local brokers and builders, impressions of the developers character, experience and operation.
- Summarize the developers short and long range marketing plan.
- Discuss the primary and secondary exit strategies to repay the loan.
- Describe the routine reports to be produced by the developer.
- Attach a detailed line item cost budget.
- Describe the developers' process in costing the job: bids, contractor-bonding requirements, contract requirements (GMP, etc.).
Other things to consider include: Has the G&A and overhead been realistically projected, and do they include costs solely related to the project? How is the developer fee calculated? Is it fair relative to the nature of the project and to the market? Describe any other fees or cost reimbursements due to the developer or any affiliate of developer.
Keep in mind that describing the overall development and phasing plan, timeline and critical path is crucial. Are these realistic, conservative and efficient? Is the loan assumed to revolve based on anticipated sales or alternative financing? If so, how will progress of the project be affected if such sales or alternative financing are slower than anticipated?
While it may seem the above checklist/questionnaire may result in a prolonged underwriting process, the reality is that feasible project loan requests presented by experienced, well prepared developers, could be underwritten very quickly. Choosing the right lender can literally make or break the transaction. Experienced lenders can often complete their due diligence in just a few days
Applying for development financing can be a frightening experience. However, if the developer understands what the lending community is seeking, and does some homework beforehand, the process can be -- money in the bank.
Mountain Funding Closes $10.5 million Financing Transaction with Cathartes Investments
— October 1999
Funds represent 99% of cost for Chicago warehouse conversion
East Brunswick, NJ/Chicago, Ill. - October 21,1999 - Mountain Funding LLC, a private real estate lender based in East Brunswick, New Jersey, announced today the closing of a $10.5 million financing transaction to Cathartes Investments, a Boston-based real estate development firm.
Mountain's financing was divided into a senior first mortgage of $9.2 million, and a junior equity loan of $1.35 million.
The funds represent 99% of the cost of acquiring and renovating a 104,000 SF vacant industrial property located at 601 West Polk Street, in Chicago, Illinois. The 1920s industrial property will be re-designed as a telecommunication center, specifically for companies which house telephone and internet switching equipment.
"Cathartes needed to close their acquisition in three weeks, or they faced losing a major tenant," explained Mountain's CEO Peter Fioretti. "Fortunately, Cathartes has an excellent track record, and we were familiar with telecommunications centers. Even though Cathartes had only approached us for a first mortgage, we offered to fund most of their equity as well, which resulted in an overall funding of 99% of their total cost. We were even able to structure our financing as a non-recourse construction loan."
Transaction closes in 19 days
In order to accommodate the tight time schedule, Mountain's due diligence was completed simultaneously with Cathartes' lease and construction contract negotiations, all of which were completed just one day before closing.
"Frankly, I didn't think it was possible for the transaction to close in such a short time frame," states Ruben Moreno, Cathartes' managing director. "We absolutely had to close by a certain date, or we would lose the opportunity to sign a major lease. Mountain Funding was able to have the appraisal completed in just two weeks, and the attorneys were able to complete some of the non-critical closing items on a post-closing basis."
MOUNTAIN FUNDING PROVIDES 99% OF COST FOR CHICAGO WAREHOUSE CONVERSION
Crittenden's Developers Financing News, October, 1999
Mountain Funding LLC, a private real estate lender based in East Brunswick, New Jersey, has recently funded $10,550,000 to Cathartes Investments of Boston, Massachusetts, representing 99% of the cost of acquiring and renovating a 104,000 square foot vacant industrial property located at 601 West Polk Street in Chicago. Mountain's financing was divided into a senior first mortgage of $9,200,000, and a junior equity loan of $1,350,000. Cathartes, a national developer specializing in the repositioning of underused properties in major urban locations, plans to convert the 1920's industrial property into a telecommunications center to be rented entirely to companies which house telephone and internet switching equipment for their own use and for sublet to others.
"Cathartes came to us with a very tight closing schedule, needing to close their acquisition in exactly three weeks or they would lose a major tenant," explains Mountain's CEO Peter Fioretti. "Fortunately, we were somewhat familiar with telecommunication centers having reviewed similar transactions this past year. And we were very impressed with both the project and with the experience of Cathartes.
In fact, although Cathartes had only approached us for a first mortgage, we additionally offered to fund most of their equity resulting in an overall funding of 99% of their total cost. We were even able to structure our financing as a non-recourse construction loan."
Mountain specializes in non-conventional loans requiring quick closings. Each transaction is overseen directly by a principal of the firm, all of whom are both investors and developers. Credit committees are non-existent, and Mountain's third-party professionals are trained to approach each assignment immediately, efficiently and without needless "fluff".
"Frankly, I didn't think that it was possible for the transaction to close in such a short time frame," states Ruben Moreno, Cathartes' President. "We absolutely had to close by a date certain or we would lose the opportunity to sign a major lease. And, to complicate matters, Mountain had to conduct its due diligence simultaneously with our own internal due diligence, lease negotiations, and construction contract negotiations, all of which weren't completed until a day before closing. Fortunately, Mountain Funding has both the understanding of real estate development and the system necessary to perform due diligence and close a loan quickly. I have never witnessed a lender act with such urgency and commitment and with such tight control over their professionals. I am still shocked that they were able to have a national appraiser drop everything and even cancel vacations during a holiday week in order to deliver a complete appraisal within just two weeks, and convince their attorneys that certain non-critical closing matters can be completed post-closing."
Mountain Funding Provides Take-Out For Tribeca Lofts
— Crittenden's Developers Financing News - June 21, 1999
Mountain funding, Inc. a private real estate lender based in East Brunswick, New Jersey, has recently funded a $2.9 million take-out loan for an 8-unit luxury loft conversion in the historic Tribeca district of Manhattan. Mountain has been the original construction lender for the developers, Louis Greco and Lewis Horowitz, providing over $4 million for renovations of the 1800's industrial property. Once the improvements were complete and units were available for sale or rent, Mountain closed on a new take-out loan to be paid back from the sale of the units. The building renovation is 95% complete and 6 of the 8 units have CO's. There is no current project cash flow, and interest was accrued in the loan.
"We have made construction loans to these developers before, and have seen them successfully replace our debt with low rate permanent financing upon the completion of their conversions", explains Mountains CEO, Peter Fioretti. "In the past, Mountain didn't have the right "pot" of money to make such loans, so we weren't able to offer conversion of our development and construction loans. Now as a result of a recent expansion of our lending program, we are able to compete in this area. Our borrowers on the Tribeca project found that our rates were competitive, and we were easier to work with because we understood the project better than conventional take-out Lenders"
Mountain funding offers participating first mortgages, mezzanine debt and preferred equity structures on all forms of real estate nationwide. As a private lender, the firm is able to underwrite and close all loans quickly, and is able to creatively structure its transactions to fit the needs of the borrower. Not being an institutional or conduit lender, Mountain offers flexibility on term, payment, recourse and loan-to-value. Its first mortgages range from $2-$50 million, and its mezzanine and equity transactions range from $1 - $10 million. Term sheets can be presented within 24 hours, and closings within 5 days from receipt of all required documentation.
Stuff Happens:
How Experienced Lenders Underwrite Development Projects
— Florida Real Estate Journal - June, 1999
The formula for successful development is simple: build your project on time and within budget, lease/sell it out as projected , payoff or refinance your construction debt and move on to the next conquest. No big deal! After all, your appraiser has assured your success; your competitors on the other side of town successfully pulled it off; even the town fathers have blessed the concept. Why then is your lender so tough to convince?
Because, experienced lenders underwrite development projects devoid of emotion, pre-conceived assumptions, ego or dreams. Moreover, lenders assume that "stuff" will definitely happen. As a result, experienced development lenders actually underwrite projects back-to-front. We look many months down the road and imagine that unexpected issues and typical difficulties will arise: construction is behind schedule, costs are over budget and sale/ leasing activity is slow.
We struggle to ascertain the possible causes of these potential difficulties, and then tailor our underwriting to address their probability of occurrence. We also use that future analysis to evaluate the developer's ability to persevere through such difficulties ( it is one thing to predict problems, it is another to structure your loan effectively to handle them).
Lenders look at many things in their underwriting, all of which ultimately relates to two concerns: The developer's experience and the projects feasibility. The following due diligence checklist/questionnaire used by Mountain Funding LLC, a private lender experience in development financing, is structured to address these two concerns.
- Describe the background, experience and reputation of the Developer.
- Describe similar projects developed by this Developer.
- Contact all Developer references and report on findings. Contact Lawyers, lenders, contractors, etc.
- Perform background check of Developers as appropriate: D&B, Lien and litigation searches, public records, financial statements, tax returns,etc..
- Describe how the job is going to be staffed ( administration, construction, sales and marketing)? What is the experience of the staff; is it suitable for this project?
- Describe the exact status of zoning and approvals.
- Describe the professional team (lawyers, engineer, architect, etc.) and their respective backgrounds.
- Describe and summarize all environmental studies and issues.
- Summarize the total proposed capitalization structure, including all amounts to be contributed by the Developer(cash and value).
- Summarize the source of the Developers equity, existing and future.
- Summarize all appraisals and other valuations performed for the project, "as-is" and "as-developed." List and summarize the most direct comparables.
- Summarize any market and/or feasibility studies performed.
- Summarize findings of the site visit. Report on the condition of the property; local market; competition;discussions with local brokers and builders; impressions of the Developers character, experience and operation.
- Summarize the Developers short and long range marketing plan.
- Discuss the primary and secondary exit strategies to repay the loan.
- Describe the routine reports to be produced by the Developer.
- Attach a detailed line item cost budget. Describe the Developers process in costing the job: bids, contractor bonding requirements, contract requirements (GMP, etc.).
- Have G&A and overhead been realistically projected; do they include costs solely related to the project?
- How is the Developer Fee calculated? Is it fair relative to the nature of the project and to the market? Describe any other fees or cost reimbursements due Developer or any affiliate of Developer.
- Describe the overall development and phasing plan, timeline, critical path. Are these realistic, conservative, efficient? Is the loan assumed to revolve based on anticipated sales or alternative financing; if so, how will progress of the project be affected if such sales or alternative financing are slower than anticipated?
While it may seem the above checklist/questionnaire may result in a prolonged underwriting process, the reality is that feasible project loan requests presented by experienced, well prepared developers, could be underwritten very quickly. Experienced lenders like Mountain Funding can often complete their due diligence in just a few days!
Mountain Funding LLC is able to take a practical, efficient and expedient approach to development loan requests due to the actual development experience of its professionals. Development. redevelopment and repositioning financing of $1-$15 million can be funded nationwide, structured as either participating first mortgage, mezzanine debt or joint venture equity. Non-recourse programs available. Term sheets can be presented within 24 hours, and closings within 5 days from receipt of all required documentation.
N.J. Firm To Boost Lending With Smaller Loans
— Real Estate Finance & Investment - April, 1999
Mountain Funding anticipates originating $75-$100 million in new commercial mortgages this year, compared to the $115 million in loans it originated in 1998, as it refocuses on smaller loans, according to Arthur Nevid, director of lending. The East Brunswick, N.J. lender, which provides short term construction loans to developers, lowered its threshold to target loans in the $5-$15 million range after setting its sights on larger loans last year. Nevid said, noting that last falls global volatility, which led to a credit crunch in the real estate market, has opened a window into the smaller loan sector. "Many conventional lenders are providing less and mezzanine lenders are not there either" He added.
The lender has no strong regional biases, making loans for development projects across the country. Mountain Funding Tends to originate loans for projects in developing urban areas rather than rural regions because there is more opportunity for development in urban centers, Nevid explained. In addition the lender is excited by the prospect of making loans to developers who want to upgrade commercial properties, he noted. "We like situations where developers can purchase a Class C property and upgrade it to a Class B (property) through improvements" he said.
Mountain Funding makes loans against virtually all property types. Its loans hold an average term of one to three years and carry interest rates of 12-15% based on an average loan-to-value ratio of 70-90%, which is higher than its peers, Nevid noted.
Mezzanine Expansion
— Commercial Mortgage Insight, February,1999
Last year's credit crunch opened the door for Mountain Funding to expand into mezzanine financing, which is structured as a second subordinate mortgage or preferred equity in which the company becomes an equity partner but can be taken out of the deal after achieving its desired return, Nevid explains.
Until recently, Wall Street had dominated that niche despite relatively high rates, shutting out players like Mountain Funding, he says. "We couldn't get the loans because of a certain stigma attached to our money."
But now Wall Street firms are out of that area, either for good or temporarily, and the company is seeking higher quality projects and experienced developers.
"There are fewer games in town and we are one of them", he states. In 1999, the company expects both more business and a higher class of borrower that is usually able to get conventional financing, but may be missing gap equity.
That type of gap funding is needed more because lenders, now more conservative, want lower loan-to-values, he reveals. Even the best developers, used to adding 10% to 20% in equity, must bring more to the table.
With Manhattan office renovations and warehouse-to-loft conversion projects on tab, Nevid feels the first quarter will be the time for deal making "after a washing out and feeling out process in the fourth quarter."
Seizing Opportunities In This Volatile Marketplace
— The Mortgage Press, February,1999
Mountain Funding, a private commercial real estate lender and investor operating nationwide, routinely examines the marketplace to evaluate its lending programs and make adjustments based on the various economic forces driving commercial real estate. In Mountain Funding's view, the immediate future of the real estate market offers terrific opportunities.
Credit Crunch and Price Reductions
The financial markets have been hit hard since late August, primarily due to deteriorating foreign markets and their spill over into U.S. markets. This immediately resulted in a credit crunch which we expect to continue for the next 3-6 months. Currently, there is an estimated $25-$35 billion of CMBS paper on the shelf with limited demand from investors, putting upward pressure on returns. Also, REITs and other real estate owners have been backing off from acquisitions due to the shortage of immediate capital, causing commercial property prices to fall between 10%-20% in most places. The credit crunch and price reductions are further aggravated due to a slowing economy, bumpy stock market, and concerns about a possible recession.
Players Flee the Capital Marketplace
Certain large real estate owners, lenders and investors have suffered substantial losses. Many have retreated from the marketplace, while others have gone out of business.
REIT stock values have dropped 20% to as much as 50% in some cases; Nomura suffered a reported loss of $1.6 billion, one of the biggest financial hits on Wall Street so far. Industry leaders such as Credit Suisse First Boston, Lehman Brothers, DeutcheBank and Washington Mortgage (WMF Group) quickly pulled back from the market.
Hedge funds, led by Long-Term Capital Management, experienced reversals in emerging markets and subsequent collateral calls. Other hedge funds have gone out of business. Criimi Mae has filed bankruptcy because of the sudden decline in the value of its loan portfolio. Simply, many of the large firms that helped fuel the recent real estate rally are not there today. As a result, today's sources of capital have become somewhat limited to private investors, and to lenders with unleveraged capital, such as Mountain Funding.
Real Estate Fundamentals are Solid
Although institutional capital has fled the marketplace, we are confident that the "bricks and mortar," supporting real estate fundamentals, are sound. Unlike the previous real estate downturn, there has not been substantial overbuilding this time around. And although a possible slow-down or recession may decrease demand, vacancies are relatively low while rents remain relatively high. Housing starts are down but still remain at a very healthy level. This credit crunch will stall potential speculative building for the near future, maintaining equilibrium in most real estate markets after the initial shock and related price reductions.
This equilibrium will be supported by continued high employment, low inflation and very low interest rates. In summary, although the road to a stable market is now somewhat bumpy, the real estate fundamentals remain solid.
New Opportunities
This volatile financial market with stable real estate fundamentals will offer new opportunities which can be especially profitable for real estate owners and developers with some cash and local market expertise. Recently, we are seeing deals with significant price reductions, which include re-negotiations of executed contracts, pressured quick-sale cash transactions, discounted loan payoffs, and stalled but partly completed projects, to cite some examples. These situations offer new opportunities, and can be healthy for well-positioned real estate owners and developers.
Time to Seize Opportunities
Owners with local market expertise will be able to seize opportunities not seen in the last few years, with the private lending arena one of the few sources available to provide additional capital and close deals quickly.
We at Mountain Funding encourage owners and developers to take advantage of the present financial market turmoil, and join forces with private lenders and investors to maximize profits. When others are backing away, now is the best time to invest in solid opportunistic real estate transactions, especially event-driven or added-value projects.
Working Effectively with Lenders, A Primer For Borrowers
— Affordable Housing Finance, January,1999
Recent economic events internationally and on Wall Street have created a sudden shortage of capital to finance many worthwhile commercial real estate transactions. This has resulted in many borrowers seeking financing from lenders with privately raised and administered capital - sometimes called "hard-money lenders." These lenders fund a wide range of transactions - from local to national; loans from under a million dollars to under $100 million; construction loans to refinancing loans; and more. Most have one major theme in common - we are very busy (particularly lately). We need to review prospective projects quickly; and then speedily but carefully price, quote, finalize and close transactions.
The following are some do's and don't's to think about as you undertake a loan with a hard-money lender.
DON'T send the lender an enormous pile of disorganized papers. Prepare a short deal synopsis, not more than two pages, which addresses the project and the loan requirements. Back this up with brief financial analyses, a map, photos, information on the borrower, and other supporting documents. Imagine a neat 6 page submission as compared to a 40 page disorganized pile of papers. Which do you think will receive the most attention the quickest?
DO describe the transaction: type of real estate project; location of real estate; type of loan; loan amount; equity available and source; term of loan; exit strategy; amount and types of debt that exist on the property; payoff situation; description of the borrower.
DON'T ignore or try to hide the "hair" on the deal. This will come out through the due diligence carried out by your lender, and will cast a negative shadow over the deal. If there is "hair" on the deal, a brief overview of the "story," or the events leading up to the story should be included.
DON'T tell the story of your life and the project's entire life at the outset of your submission. Rather, start with the conclusion, the "therefore", (project, loan amount, purpose and term), and then support the "therefore" with the supplemental information you will provide. The details of the "story" will probably come out during a telephone conversation at a later date.
DON'T expect your lender to be willing to do your deal unless there is an exit strategy in place. You should identify the exit plan in your initial submission, and be prepared to defend the strategy. Two exit plans are better than one. Your lender is not likely to be interested in not being able to be repaid when your loan matures.
DO provide last year's profit and loss statement showing NOI, as well as this year's year-to-date profit and loss statement.
DON'T include mortgage interest and depreciation in the financial or P&L statements. Net operating income (NOI) before depreciation and debt service is what the lender will want to see. Don't make your lender do the arithmetic.
DO show actual vacancy information clearly, as well as management fees, reserves for replacement, etc in the budgets. Assuming there will be no requirement for a management fee since the project is self managed is not useful. In the event of a default, the lender will most likely call in a professional management firm, and the cash flow must allow for this contingency.
DO provide a detailed rent roll, (and list each vacancy), list every tenant, lease term, rental rate, passthroughs, etc. Be sure that the numbers are all totaled and add correctly.
DO make certain that the total square feet of the rent roll is equal to the total square feet of the building; or the number of units and the number of tenants plus vacancies, are equal, etc.
DON'T send a complete appraisal report with the preliminary submission. Rather, copy and send the "Opinion of Value" or "Value Reconciliation" page, (be sure it includes the date) and perhaps the 2 or 3 pages of worksheets that explain how the value was determined. At this point in the deal evaluation, your lender has little interest in the neighborhood characteristics of the town or the largest employers where the property is situated!
DO include a page or two from the phase I environmental assessment (including the date), if available. The section showing "Conclusions" is sufficient, plus the cover page or letter of transmittal, showing the name of the firm that carried out the study and the date of the report.
DON'T hire an environmental assessment firm or an appraiser, if you don't already have the reports on file. You will expect your lender to automatically accept your selected third party consultant. Routinely, the lender will prefer to engage one of their own selection, later, if they elect to pursue the deal.
DO send along a copy of the local town's vote(s) on zoning, permits, and other approvals, only if a to-be-built or expansion project, as applicable. Don't send the entire package of minutes; extract the vote and note clearly the purpose of the particular document.
DO include a few select color photographs. Obviously, a picture is worth many words, as well as a locator map, and 81/2 x 11 site plan.
DON'T send a full set of architectural and working drawings with your preliminary submission. What do you think your lender will do with another 5 pounds of paper?
DON'T send the lender originals. A busy, successful lender, (your preferred source of capital), probably receives dozens of deals every week. Keeping track of them is challenge enough, without being concerned about protecting your valuable originals. Also, returning them, if required, is time consuming and an unnecessary expense to your lender. Finally, you should be aware that it is your risk to send originals with your first submission.
DON'T package up a number of different properties into one deal analysis. Each property must be evaluated and stand alone. A consolidated financial analysis and spread sheet will not help the lender to identify and study each property separately. Even if the properties must be consolidated so that the "losing" property is supported by a "winner", each will require its own underwriting.
DON'T, at the outset, demand that the lender make a site visit. The lender's time is of prime importance, and a site visit will not influence the lender to make a loan that is of little interest based on the documents. If the numbers and documents are a fit, the site visit will likely cement the deal, but not until then.
DON'T rely solely on your mortgage broker to make the deal. Shortly into the evaluation of the deal, the lender will probably want a direct conversation with the borrower. Offer a 3-way conference call including the lender, borrower and broker fairly early in the transaction based on your lender's preference, to permit the lender and borrower to evaluate each other's interest, style and objectives.
DON'T permit the mortgage broker to reply to questions directed by the lender to the borrower during telephone conference calls. The lender usually has a specific purpose in inquiring of the borrower, and is expecting the borrower to respond. Failure, or inability, to respond, is as powerful a reply as a timely and detailed response. The broker's input is valuable when he/she is called upon during such a telephone call, and also to follow-up when appropriate, perhaps later, as the deal develops.
DON'T arrange to do a deal with a selected lender until you have completed your initial due diligence on the lender, including the lender's interests, experience, qualifications, and references. If, after a week or two of negotiations, you then suddenly determine that you are uncomfortable with the selected hard money lender, you have wasted a great deal of time for each of you as well as your borrower, and the lender will not be pleased with this sudden revelation. If the lender resists providing evidence of their ability to make the loan being contemplated fairly early, move on to another who is more cooperative.
DON'T expect anyone to provide 100% financing.
DO expect to invest between 15% and 25% in cash (or legitimate equity in the property's value if the property has already been acquired.) You have heard, often enough, that there are no more no-cash deals. DO rely on this rule, particularly in the recent economic climate.
DON'T expect the lender to accept the difference between the price you actually paid for a recent acquisition and the appraised value if higher, as your share of equity. From the lender's perspective, the price you paid in an arms length transaction is the market value, You may believe that you "stole" the property for substantially less than the appraised value. Your lender will probably congratulate you for your accomplishment, but the purchase price will nevertheless be the demonstrated market value.
DO expect the lender to recognize an appraised value that is significantly higher than the price you have recently paid for a property, if, and only if, you have successfully completed a significant number of bureaucratic accomplishments since the purchase date (such as obtaining full entitlement), have newly negotiated signed leases, or have physically improved the property, and you can prove it.
DON'T expect your lender to lend you operating capital. One of the best ways to demonstrate your capabilities as a developer/operator is to invest your own capital into the project to underwrite start-up expenses. And what is the collateral for a business start-up? Unless your lender is also your business partner, why should you be loaned the start-up money for your own business?
DON'T expect your lender to rely solely on your enthusiasm for your deal as the only reason why your project will be a success. DO generate pre-leasing, pre-sales, or other demonstration of marketability. Market studies alone are seldom sufficient. Real prospects will ensure that your lender has serious interest in your project.
As lenders, we often hear, "When you visit the property and see the market, the project will sell itself." No it won't. First the numbers have to work, then the due diligence has to confirm the numbers and the reports, and finally the chemistry between the lender and the borrower has to coincide. The site visit puts the entire project into perspective. Only then, has the loan a high probably of closing.
Do's & Don'ts for Working with Hard Money Lenders
— The Mortgage Press, February, 1999
Recent economic events internationally and on Wall Street have created a sudden shortage of capital to finance many worthwhile commercial real estate transactions. This has resulted in many borrowers seeking financing from lenders with privately raised and administered capital - sometimes called "hard-money lenders." These lenders fund a wide range of transactions - from local to national; loans from under a million dollars to under $100 million; construction loans to refinancing loans; and more. Most have one major theme in common - we are very busy (particularly lately). We need to review prospective projects quickly; and then speedily but carefully price, quote, finalize and close transactions.
The following are some do's and don't's to think about as you undertake a loan with a hard-money lender.
DON'T send the lender an enormous pile of disorganized papers. Prepare a short deal synopsis, not more than two pages, which addresses the project and the loan requirements. Back this up with brief financial analyses, a map, photos, information on the borrower, and other supporting documents. Imagine a neat 6 page submission as compared to a 40 page disorganized pile of papers. Which do you think will receive the most attention the quickest?
DO describe the transaction: type of real estate project; location of real estate; type of loan; loan amount; equity available and source; term of loan; exit strategy; amount and types of debt that exist on the property; payoff situation; description of the borrower.
DON'T ignore or try to hide the "hair" on the deal. This will come out through the due diligence carried out by your lender, and will cast a negative shadow over the deal. If there is "hair" on the deal, a brief overview of the "story," or the events leading up to the story should be included.
DON'T tell the story of your life and the project's entire life at the outset of your submission. Rather, start with the conclusion, the "therefore", (project, loan amount, purpose and term), and then support the "therefore" with the supplemental information you will provide. The details of the "story" will probably come out during a telephone conversation at a later date.
DON'T expect your lender to be willing to do your deal unless there is an exit strategy in place. You should identify the exit plan in your initial submission, and be prepared to defend the strategy. Two exit plans are better than one. Your lender is not likely to be interested in not being able to be repaid when your loan matures.
DO provide last year's profit and loss statement showing NOI, as well as this year's year-to-date profit and loss statement.
DON'T include mortgage interest and depreciation in the financial or P&L statements. Net operating income (NOI) before depreciation and debt service is what the lender will want to see. Don't make your lender do the arithmetic.
DO show actual vacancy information clearly, as well as management fees, reserves for replacement, etc in the budgets. Assuming there will be no requirement for a management fee since the project is self managed is not useful. In the event of a default, the lender will most likely call in a professional management firm, and the cash flow must allow for this contingency.
DO provide a detailed rent roll, (and list each vacancy), list every tenant, lease term, rental rate, passthroughs, etc. Be sure that the numbers are all totaled and add correctly.
DO make certain that the total square feet of the rent roll is equal to the total square feet of the building; or the number of units and the number of tenants plus vacancies, are equal, etc.
DON'T send a complete appraisal report with the preliminary submission. Rather, copy and send the "Opinion of Value" or "Value Reconciliation" page, (be sure it includes the date) and perhaps the 2 or 3 pages of worksheets that explain how the value was determined. At this point in the deal evaluation, your lender has little interest in the neighborhood characteristics of the town or the largest employers where the property is situated!
DO include a page or two from the phase I environmental assessment (including the date), if available. The section showing "Conclusions" is sufficient, plus the cover page or letter of transmittal, showing the name of the firm that carried out the study and the date of the report.
DON'T hire an environmental assessment firm or an appraiser, if you don't already have the reports on file. You will expect your lender to automatically accept your selected third party consultant. Routinely, the lender will prefer to engage one of their own selection, later, if they elect to pursue the deal.
DO send along a copy of the local town's vote(s) on zoning, permits, and other approvals, only if a to-be-built or expansion project, as applicable. Don't send the entire package of minutes; extract the vote and note clearly the purpose of the particular document.
DO include a few select color photographs. Obviously, a picture is worth many words, as well as a locator map, and 81/2 x 11 site plan.
DON'T send a full set of architectural and working drawings with your preliminary submission. What do you think your lender will do with another 5 pounds of paper?
DON'T send the lender originals. A busy, successful lender, (your preferred source of capital), probably receives dozens of deals every week. Keeping track of them is challenge enough, without being concerned about protecting your valuable originals. Also, returning them, if required, is time consuming and an unnecessary expense to your lender. Finally, you should be aware that it is your risk to send originals with your first submission.
DON'T package up a number of different properties into one deal analysis. Each property must be evaluated and stand alone. A consolidated financial analysis and spread sheet will not help the lender to identify and study each property separately. Even if the properties must be consolidated so that the "losing" property is supported by a "winner", each will require its own underwriting.
DON'T, at the outset, demand that the lender make a site visit. The lender's time is of prime importance, and a site visit will not influence the lender to make a loan that is of little interest based on the documents. If the numbers and documents are a fit, the site visit will likely cement the deal, but not until then.
DON'T rely solely on your mortgage broker to make the deal. Shortly into the evaluation of the deal, the lender will probably want a direct conversation with the borrower. Offer a 3-way conference call including the lender, borrower and broker fairly early in the transaction based on your lender's preference, to permit the lender and borrower to evaluate each other's interest, style and objectives.
DON'T permit the mortgage broker to reply to questions directed by the lender to the borrower during telephone conference calls. The lender usually has a specific purpose in inquiring of the borrower, and is expecting the borrower to respond. Failure, or inability, to respond, is as powerful a reply as a timely and detailed response. The broker's input is valuable when he/she is called upon during such a telephone call, and also to follow-up when appropriate, perhaps later, as the deal develops.
DON'T arrange to do a deal with a selected lender until you have completed your initial due diligence on the lender, including the lender's interests, experience, qualifications, and references. If, after a week or two of negotiations, you then suddenly determine that you are uncomfortable with the selected hard money lender, you have wasted a great deal of time for each of you as well as your borrower, and the lender will not be pleased with this sudden revelation. If the lender resists providing evidence of their ability to make the loan being contemplated fairly early, move on to another who is more cooperative.
DON'T expect anyone to provide 100% financing.
DO expect to invest between 15% and 25% in cash (or legitimate equity in the property's value if the property has already been acquired.) You have heard, often enough, that there are no more no-cash deals. DO rely on this rule, particularly in the recent economic climate.
DON'T expect the lender to accept the difference between the price you actually paid for a recent acquisition and the appraised value if higher, as your share of equity. From the lender's perspective, the price you paid in an arms length transaction is the market value, You may believe that you "stole" the property for substantially less than the appraised value. Your lender will probably congratulate you for your accomplishment, but the purchase price will nevertheless be the demonstrated market value.
DO expect the lender to recognize an appraised value that is significantly higher than the price you have recently paid for a property, if, and only if, you have successfully completed a significant number of bureaucratic accomplishments since the purchase date (such as obtaining full entitlement), have newly negotiated signed leases, or have physically improved the property, and you can prove it.
DON'T expect your lender to lend you operating capital. One of the best ways to demonstrate your capabilities as a developer/operator is to invest your own capital into the project to underwrite start-up expenses. And what is the collateral for a business start-up? Unless your lender is also your business partner, why should you be loaned the start-up money for your own business?
DON'T expect your lender to rely solely on your enthusiasm for your deal as the only reason why your project will be a success. DO generate pre-leasing, pre-sales, or other demonstration of marketability. Market studies alone are seldom sufficient. Real prospects will ensure that your lender has serious interest in your project.
As lenders, we often hear, "When you visit the property and see the market, the project will sell itself." No it won't. First the numbers have to work, then the due diligence has to confirm the numbers and the reports, and finally the chemistry between the lender and the borrower has to coincide. The site visit puts the entire project into perspective. Only then, has the loan a high probably of closing.
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