COVER STORY, APRIL 2007

FRIENDS IN LENDING PLACES
Borrowers benefit from solid relationships with lenders and intermediaries.
Jaime Lackey

While the days of sealing a deal with a handshake may be past, solid business relationships are still important. And in commercial real estate, a good relationship with your lender or financial intermediary is critical.

“Relationships are underrated by many borrowers today, in large part due to the abundance of capital,” says Robert LaChapelle, senior managing director with CBRE|Melody (an intermediary). “Relationships allow borrowers to more quickly execute transactions. Lenders are more receptive to the borrower’s request knowing that they are likely to secure the loan and both parties benefit from previously negotiated documentation.”

Mark Gould, an administrative vice president with M&T Realty Capital Corporation (a direct lender), agrees. He says, “A client that has a true relationship with a lender always has an advantage over a customer that hops from lender to lender looking for only the lowest rate. Once a lender gets to know a customer and develops confidence in the company’s abilities, the lender is more likely to make problems go away than to create problems. Also, in the event that there is a serious problem, either with a deal in progress or with a loan already made, a customer who has developed a relationship has leverage to lean on the lender for help.”

Repeat borrowers can even score better loans, according to Paula Ingram, director with Cohen Financial (an intermediary). She explains, “Lenders can develop a level of comfort as they understand the borrower’s business plan and many times offer superior deal structures and terms.”

“Future deals also become easier,” Ingram says. “Information flows through to enhance decisions and the process is streamlined.”

Having a good relationship with a financial intermediary can also help with real estate transactions. “The developer/owner benefits from having one source in the lending community, which has control of the transaction,” explains Howard Taft, managing director with Cohen Financial. “The lenders who receive the packages know that the borrower is serious and has hired a competent mortgage banker to obtain the best terms and conditions.”

Real estate companies should interview lenders carefully. “Borrowers should seek a lender that has an experienced origination team,” says LaChapelle. “These professionals should be experienced in the property type as well as financial analysis and credit disciplines. Borrowers should also seek an expedited approval process from their prospective lender.”

 Borrowers should not be shy about letting lenders know what they need. “We tend to adapt as our clients’ needs change,” says Gould. “For example, over the last year we have had more requests involving multiple apartment property acquisitions with a business plan that includes significant renovation and repositioning of the properties. As a result, we have developed a structure using agency first-mortgage debt combined with construction/rehab mezzanine loan that can be repaid with an agency supplemental loan in 3 to 5 years. The agency first-mortgage can be underwritten as low as a 1.0 DSCx if the sponsor has good credit. The combined DSC, first plus mezz, is sometimes below break-even if the deal has substantial upside potential.”

Intermediaries help borrowers find lenders who offer the loan products that best meet their needs, and they share information with lenders about how to meet the needs of the market.

“Every day, securitized lenders add different features to their loan programs, which the mortgage banker needs to stay on top of,” says Taft. “For example, one borrower wanted flexible prepayment penalties. We were able to get the lender to waive their prepayment penalty after the third year in a 10-year deal. Each borrower has wants and desires, and we need to create a loan proposal based on the specific goals of the client. We then go to the market and obtain the best terms and conditions for said client.”

Ingram adds, “We are heavily involved in the capital markets on a daily basis, which allows us to share information with both users and sources of capital. It is both market- and client-driven as clients’ needs and demands change and as lenders’ goals and underwriting criteria move with the market. As a financier, we understand each side’s point of view and how to find middle ground to get deals done.”

Developers and owners should also strive to see a lender’s point of view before applying for a loan. If borrowers understand what lenders are looking for, it will help them to present a solid application and avoid having that application denied.

Taft encourages borrowers “to prepare a complete package that tells a story regarding the deal (whether development, acquisition or refinance) supported by factual information and an explicit loan request.”

He notes that two reasons for loan application denials include poor explanation of the exit strategy/business plan for the subject deal, and an incomplete or sloppy loan application package.

LaChapelle says that weak sponsorship — in terms of experience or financial strength — and fundamental flaws in the subject asset are key reasons that loan applications are denied. (He describes asset flaws as “functional obsolescence or a change in ingress/egress that cannot be overcome with the sponsor’s asset plan.”) Further, he says that it is important that the economic proposal be supported by current market conditions on either the income or expense side of the cash flow model.

Gould says that buyers should have realistic expectations. He says that buyers who overpay and then have unrealistic expectations regarding the amount leverage that they can get are often disappointed.

Poor ownership philosophy is another reason that Gould sees for denying loan applications. As an example, he explains that loans are often denied “if the borrower is not maintaining the property appropriately or completes a poor rehab in anticipation of selling.”

Too many borrowers can also create problems with the loan application process. Gould says that “excessively fragmented ownership” causes some loans to be denied. “For example, too many TICs [tenants-in-common] to be underwritten efficiently can be a reason loans are declined at the application stage.”

Ingram says, “An inconsistent deal ‘story’ with multiple parties shopping the deal to the same lenders can break down the confidence level of both the deal and the borrower.”

She also notes that it is important that the information provided to the lender be consistent, organized and in the desired format. And she says that it is beneficial for the borrower to understand the capital market options and how debt and equity structure affect an investment objective. She explains, “Lack of understanding can lead to unexpected and undesirable results. Most important, the borrower is unable to maximize proceeds.”

Gould says that prospective borrowers should consult a lender with multiple financing programs to best understand the loan packages available.

Taft and LaChapelle encourage borrowers to consult intermediaries. Taft says, “The best way for borrowers to educate themselves would be to hire a competent, nationwide mortgage banker that has access to various lender programs. The market is too fluid and national — it needs the attention of an expert who is fluent in providing capital market solutions on a daily basis.”

LaChapelle explains, “In the age of information, a prospective borrower is best served by carefully interviewing intermediaries and exclusively engaging such a firm. They should demand broad market coverage and reporting as well as an advocate who will serve the account well. A properly orchestrated capital markets search will educate a prospective borrower and deliver optimum terms.”

And how does a borrower realize when its relationship with a lender or intermediary is no longer working? According to Gould, if the lender is no longer willing to stretch for creative financing solutions, the borrower might want to start interviewing other lenders. He also notes that borrowers should be concerned if they no longer get the benefit of the doubt regarding subjective underwriting decisions.

Ingram encourages borrowers to be wary if there is turnover in senior management staff or if the lender does not have a strong presence in the market or shows signs of pulling out. The lender should show a desire to solve problems and further the relationship, she says.

Taft adds, “The developer/owner recognizes a lender is not the right lending partner when they start changing terms and conditions that were agreed upon in the original application or when the lender does not understand the deal transaction. An owner never wants to have its transaction be the first one closed by that subject lender.”


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.