949-392-1999
Locating financing for every commercial project is not always an easy feat. Many items can affect the acceptance of a loan, how much is loaned, and under what specific terms the loan is given. As a commercial real estate insider, it is important to always be completely prepared when approaching a lender, whether it is a commercial bank, savings and loan company, or a private investor.
The key to success in commercial real estate is maximizing all aspects of the business. This includes resources, energy, time, return on investment, as well as financing. Without good financing and a dependable lender, commercial real estate is not a business to be in, unless, of course, you happen to have millions of dollars lying around just waiting to be invested. In some cases this may be true, and, it that’s your case, congratulations! However, for most of us, we rely on other people’s money (OPM) to build our little real estate empires.
In order to get the financing you need, absolutely every time you apply for it, you must take some necessary steps and precautions that prove your project is worthy of the money loaned to you.
I must insert here, that because of the amounts of money that are loaned in commercial real estate, almost everything can be non-recourse, and written that way in the contract. Non-recourse means that no one must personally sign for the loan. In fact, the borrower is often secondary to the actual property and project in question. The property acts as the guarantor of the loan. After all, this is where the actual money and value lies, not in the borrower’s pockets.
Always remember that the property is responsible for returning the money loaned to the lender, because that is where the value is found. The lender must trust the borrower and his or her assessment of the property, its intended use and projected income or profit of the property in order to feel completely comfortable with loaning the money.
However, even though the property is looked upon as the main source of value, if you have no experience with commercial real estate, have a net worth less than the value of the property and inadequate liquidity, you will need someone else on your team that meets those requirements.
So what are some steps and precautions you need to take in order to yield the results you want with the lender every time?
What you want to do is build a development or loan package for every property you want financed. This package is much like a business proposal, and must be done professionally, accurately, and clearly. This loan package should have everything the lender needs to make a decision whether or not money should be lent on the project.
The most important aspect of this loan package is the reason for the loan. Generally, it must be a solid, economic reason that shows the projected income and exactly what funds will be available to pay the lender back. After all, the number one concern of the lender is that the loan will be paid in full, with the interest agreed upon in the contract.
Your economically solid reason should be shown through strong financials, income and expense sheets, comparisons to other properties similar to the one you will be working on, and any other important economic information that proves you can pay the money back.
Because every project is different, it may require varying criteria that must be met. For example, if it is a corner lot for a shopping center, traffic counts, whether or not there is a light on the corner or a four lane road, and the location of the closest residential development that will support this shopping center area are all facts that must be included in this loan package. Population, growth, any future changes in infrastructure that might affect your project and so on must all be addressed, as it is necessary to your specific project.
Bottom line, you must have every ounce of supporting detail regarding your property, project and projected income. This loan package should be like you are optioning your first born child, and he means everything to you. I know this simile is extreme, but that is how money is borrowed by the commercial real estate insider.
Impress the lender with a profitable project, quality and accurate information, and you will get your money.
Many lenders, especially if they are local, may know an area well, and will automatically be able to assess your project as something they will or will not support. There may be other lenders that are thousands of miles away, and know nothing about your area of interest. The distance of the lenders can affect the feasibility of a project, and some would say you would not need to provide as much information for the local lender as you would the far distanced lender. However, if you want the money, do it the same for each lender.
Look at it this way. If your local lender does not finance the project, then you can easily transfer your loan package to another lender no matter where they are located.
Consistency in quality will earn you a reputation as someone to do business with. This is exactly where you want to be in this business: reputable, honest, and one good real estate insider.
As you increase the amount of financing you need, build rapport with the lenders you have and seek to continue to work with. Always present yourself to these lenders in a professional, intelligent manner, and be perfectly prepared to do business.
Always follow a specific lender’s application process and guidelines. If you do everything the way they want you to do it, they look to you as someone who is dependable and willing to make things easy and straightforward, without a lot of road blocks along the way. The smoother you can facilitate the process, the more likely you are to get the money you need.
Lenders are concerned with one thing, making profits by getting their money back with interest. The object is simple. Show them your project can do this, and you will get your money. Have a defined amount of money you need, and stick to it. Don’t ever be wishy-washy, and stand your ground on what it is you want to accomplish.
Maximizing your financing is an asset to the commercial real estate insider. Your ability to conquer more and more opportunities relies greatly on your ability to get funding; so master this skill, and you will be on your way to a real estate fortune!
Bill Manassero is the founder/top dog at the “Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing.
