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With many institutional and private lenders eager for small-balance commercial loans, programs are proliferating. Terms and service are improving, and the market is more transparent with considerable information online. Many mortgage bankers' clients and prospects already know the advantage is on their side, and they look to an experienced broker for help in making the most of it.
To gain experience in the small-balance sector, know how to find the right lender. For efficient comparison-shopping among these kinds of commercial lenders, start by getting as much information as possible about the client and the property. Brokers should be sure to know the answers to the following questions:
Because each lender has its own standards for loan-size range, property types, programs, terms and rates, this information will help to target the four or five lenders most likely to have interest in your clients. In most cases, brokers should talk to at least that many lenders to get a good range of possibilities. Lenders' criteria can change often, so it's up to brokers to stay in touch and keep up-to-date on their programs.
Most lenders analyze loan-size range and property type initially to screen for the type of loans they want to make. In the small-balance category, the low end of the loan range is usually $100,000, and the high end is $1 million to $1.5 million. Some programs consider loans as large as $5 million.
Lenders' interest in various property types depends on their underwriting abilities and their specialization areas. Underwriting standards for typical small-balance-loan properties -- auto-repair shops, restaurants, day-care centers and hotels, for example -- are vastly different than the underwriting standards for office, industrial and retail operations.
Depending on their business strategies, lenders will change their targeted property types occasionally. If a lender is not underwriting the property type that your clients want to buy, the business-development officer should be able to refer you to another source.
Generally, brokers should work with lenders that have more than one loan type to offer. This will increase brokers' ability to provide some customization for clients.
For example, you may want to look for lenders that offer investor loans as well as U.S. Small Business Administration loans. Working with lenders that can do stated-income loans in addition to fully documented loans also is an advantage.
Within the loan types, there may be options in terms of fixed and adjustable rates and length of amortizations. Loan-to-value ratios will be important for most clients. These will differ depending on the property type, whether the loan is stated-income or fully documented, and whether it's a refinance or original purchase. Brokers also must be aware of prepayment penalties and balloon payments, if there are any. As with all sizes of loans, the best outcomes occur when lenders' criteria fit well with the nature of the property and the borrowers' business.
To set reasonable expectations for clients, brokers also should be familiar with the details of each lender's process. Different lenders require funds at different times throughout the transaction, in some cases before the commitment letter or closing. As is the case with large-loan lenders, a small-balance lender should be able to provide a reasonable schedule for all parties.
When preparing to have the initial conversation with a lender, brokers should have at least the following information on hand:
After making this information available to the lender, brokers should expect the lender to provide a quote at the end of their conversation, if not soon after. The quote should include terms, conditions, options on terms and estimates of monthly payments in different scenarios. Once you have received information from the various lenders, you can lay out the alternatives and compare.
As with all sizes of loans, the lowest rate is not necessarily the best deal for your clients. Documentation requirements, terms and amortization periods can be equally important. Further, there may be room for negotiation.
Small-balance commercial loans can be big business and an important source of diversified revenues for mortgage originators who invest the time to understand the dynamic playing field. These days, lenders are eager to remain competitive by constantly reviewing rates and terms, expanding product lines and property types and improving processes to create lower costs and better terms.
Vice President sales
Although brokers still can profit in the commercial lending industry, current market conditions have depleted the average broker’s marketing budget. For a number of commercial brokers, it’s more difficult to establish themselves as viable professionals quickly and effectively.
For brokers, your goal is threefold: to establish yourself in the commercial marketplace, to garner immediate commercial leads, and to build a qualified database of business-owners who are familiar with you and your company.
By employing the steps below, you will be on your way to success in the commercial market. Become a student
Keep your database clean by following up with your potential clients regularly, as well. Update contact information with pertinent data, including the topic of your last conversation, and keep a diary of the contact for followups based on your conversation. There are many ways to build your commercial loan business without investing a financial fortune.
Time and effort are all it takes. Be smart with your time, and value each contact as if it were gold. A true grass-roots marketing effort and a well-maintained database will yield a treasure trove of future business.
The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, with each covering a specific geographic area.Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped.
The maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal (see below).The maximum SBA debenture is $2.0 million when meeting a public policy goal.
The public policy goals are as follows:
· Business district revitalization.
· Expansion of exports.
· Expansion of minority business development.
· Rural development.
· Increasing productivity and competitiveness.
· Restructuring because of federally mandated standards or policies.
· Changes necessitated by federal budget cutbacks.
· Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
· Expansion of small business concerns owned and controlled by women.
The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has:Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and All of its production facilities located in the United States.In order to qualify for a $4 million 504 loan, the Small Manufacturer must1) meet the definition of a Small Manufacturer described above, and 2) either (i) create or retain at least 1 job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or (ii) improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].
What funds may be used for :
Proceeds from 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.
Terms, Interest rates and Fees:
Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately three (3) percent of the debenture and may be financed with the loan.Collateral:
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.Eligible Business:
To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
Commercial Capital Funding
We work with hundreds of brokers and a dozen in-office originators, so I see a lot of loans close and a lot of loans die every month. To help you avoid the latter, this article will address the single biggest mistake brokers make-the most significant reason brokers lose deals to the competition-and how to avoid this mistake. I will also share some highly successful techniques for selling commercial loans.
The No. 1 Most Serious Selling Mistake
First things first: The biggest mistake to avoid and the No. 1 reason perfectly doable deals die are faulty assumptions. Correcting it (if you are guilty) will supercharge your sales performance as a commercial mortgage broker. And it's really simple. Let me explain.
Instead of taking the time to discover a borrower's true priorities for the transaction at hand, brokers just assume that what would be most important to them would be most important to the borrower. Brokers see everything through the lens of their own biases. And more often than not, they are way off target!
For example, if you offer a 30-year fixed rate deal to a borrower who wants a six-month adjustable, you won't win many deals, even if you have the best and most competitive programs and lenders. It's not because you don't have the programs, but because you didn't do your job. You have to go to whatever lengths are necessary to figure out what the borrower's true priorities are for the deal at hand. You have to know what the borrower truly wants and is comfortable with-not guess or assume. This can be tricky because borrowers often won't tell you outright, but you have to find out anyway. Your success depends on it!
Faulty Assumptions Blew a Deal
Recently, a broker called me with a $3.4 million multifamily loan. We gathered initial information on the project, and based on what the broker said the borrower's priorities were, we quoted a very aggressive 10-year fixed rate loan with a 30-year amortization. We sent him a conditional commitment reflecting those terms. I trusted the broker's judgment, but I shouldn't have.
The commitment fell right before a weekend, so we didn't talk to the borrower again until the following Monday. When we called the borrower, he had already accepted another deal-one that we could have beaten any day of the week. The deal was a 14-year fully amortizing, fixed rate loan. It turns out that his main priority was to build up equity by paying down his principle as quickly as possible. He wanted to do that via the shortest amortization he could get. Unfortunately, we didn't know that when we should have! Even though we quickly regrouped and put together a new commitment for a cheaper 14-year fully amortizing, fixed rate deal (the shortest amortization the property's income could support), we lost the deal.
The borrower agonized over canceling the other deal because the lender hadn't cashed his check yet and our deal was significantly cheaper. In addition, we had already been out to the property, and the other lender hadn't, so the borrower felt more confidence in us. However, he was worried that there might be legal problems because he had already signed the other loan application agreement.
Faulty assumptions lost this deal that would have meant a large fee for the broker and me. We didn't dig deep enough with the borrower to understand his real priorities. We had better rates, a better handle on the property and better personal rapport, but we lost the deal anyway. The moral to this story is that you have to know what your borrowers truly want, what their real priorities are. Then, you can offer the program that best meets those priorities. You can even outsell cheaper lenders if you do a better job than they do.
Do not assume that this isn't happening to you. For every case where you actually discover your mistake, there are there are dozens of other cases where the borrower doesn't choose you and you never know why. Most of the time, faulty assumptions are the culprit.
Using a Cheat Sheet
To avoid such costly mistakes, my originators and I use a little cheat sheet that lists possible "hot buttons" for borrowers (see Page 28). We try to ﬁgure out and prioritize the most important things to the borrower. For example, the cheat sheet includes the loan amount or LTV, the interest rate, time frames, application fees, etc. The borrower usually can't have it all, but one or two real priorities often pop out after a good conversation.
Sometimes, when dealing with brokers, I send them my little "application questionnaire" sheet. However, many times brokers will just complete the questionnaires themselves without even asking their borrowers. Then they wonder why they couldn't sell the deal!
Remember, everything has a flip side. So when talking to borrowers, you want to ascertain their priorities as well as their main concerns. Then address those concerns. In other words, their main priorities or concerns might be that they don't want something (i.e., a pre-payment penalty for more than two years or fees before they know they are approved). Sometimes, their biggest concern is not the terms but another issue, such as your credibility or your company's reputation. You also have to address these issues, or you won't get the deal. For example, you may want to supply references to borrowers to gain their trust. Therefore, in your initial interview, you really have to work to understand both priorities and concerns.
Selling Commercial Loans: Two Kinds of Borrowers, Two Approaches
The following comes from my experience selling multifamily, mobile-home park and mixed-use mortgages, so bear that in mind. However, I believe my experience applies to selling most other types of commercial loans as well.
First, always begin with an initial interview to ﬁnd out the basics: the loan amount and LTV needed, the property details (type, size, number of units, location), the ownership experience of the borrower, the borrower's credit and ﬁnancial strength, etc. (To gather this information, I use the same cheat sheet I mentioned previously.) At this point, verbal answers are enough. The initial interview should only take ﬁve or 10 minutes. To determine the borrower's true priorities, the most important questions are the "hot button" or "priority" ones previously discussed.
After the initial fact-finding, the most successful brokers divide their borrowers into two camps and use a speciﬁc approach for each type of borrower. If you determine that borrowers' transactions, personalities and priorities ﬁt better with what I call a "residential-style" commercial loan, they are Camp No. 1 Borrowers. If these factors indicate a better ﬁt with a conduit or agency-style "true" commercial loan, they are Camp No. 2 Borrowers.
The Camp No. 1 Borrower
The Camp No. 1 Borrower typically has a residential mortgage mentality. They probably never have taken out a commercial loan, or if they have, only with a local bank. They really have a "residential" paradigm. "Residential-style" programs are more comfortable for them, as are bank loans whose process is similar to the residential loan process. Your Camp No. 1 Borrower would have a hard time swallowing conduit or agency loan terms, such as the application fees that cover appraisals, environmental and engineering reports ($10,000 or more), defeasance or yield maintenance-style prepayment penalties, rate-lock policies, loan commitment deposits and reserve requirements. This kind of borrower would rather pay a higher interest rate for a comfortable, familiar process. They want the lower application fees (just an appraisal). They will give up the longer term ﬁxed rate or might even prefer a ﬂoating rate.
So what you should do with the Camp No. 1 Borrowers? First, sell them a loan that's comfortable-a "residential-style" commercial loan. And how do you sell it? By giving a quote via a Letter of Interest that outlines every term, fee, cost and step involved in the process. Be speciﬁc and be quick about it. Of course, this requires a high degree of familiarity with the loan program you're quoting (or a very quick and cooperative lender), but it pays off in spades.
When selling to the Camp No. 1 Borrower, the keys are: 1) offering the kind of terms and process with which the borrower is comfortable, 2) doing it quickly and speciﬁcally via a detailed written document such as a Letter of Interest, and 3) hitting the target by quoting the program that ﬁts with the borrower's true priorities. For example, quote a long-term ﬁxed for a borrower planning a long-term hold who is more at ease with a ﬁxed than a ﬂoating rate. You can learn to be very accurate with these quick quotes provided on your "residential-style" commercial loans. By deﬁnition, they have predictable rates, terms and costs that you can determine with a minimum of information.
The Camp No. 2 Borrower
Camp No. 2 Borrowers have been around. They have done commercial loans before. They understand the typical conduit or agency loan process or are mentally and emotionally ready to move up to this level after doing several "bank-style" deals. They are not afraid of the application fees, reserves or other features if they can save overall. In addition, they are willing to deal with these inconveniences to get substantially cheaper ﬁnancing or ﬁxed rate ﬁnancing for a longer term. In short, they are more sophisticated, more objective and less emotion-driven borrowers.
The selling approach to these borrowers is exactly the same through the initial interview. Get the basic facts and determine the priorities, as previously discussed. But from this point on, the approach is the exact opposite of the one you use for Camp No. 1 Borrowers.
Keep in mind that "commercial-style" commercial lenders don't publish rate sheets. Most don't have set programs where every borrower or property gets the same rate. Numerous factors determine rates and terms, but these factors don't surface until you have some hard data. So, rather than giving your Camp No. 2 Borrower an immediate quote via a Letter of Interest, you ﬁrst gather detailed information: rent rolls, operating statements, ﬁnancial statements, photos. You let them know that there are many different variables that affect the ﬁnal rate and terms, so you can't give them a quote without all the key information. At this time, you can just give a range. Tell them that once you've received the information, you'll get a speciﬁc loan amount, rates and terms nailed down by having the deal reviewed by your underwriter. It doesn't cost anything or obligate the borrower. If they are true Camp No. 2 Borrowers, they will accept this process.
Then work like crazy to build rapport and trust as you and your borrower work together during this process. Make sure you know who else the borrower is shopping with and what other offers are out there. Pass on everything you know to your lender so it can act or react accordingly and compete, if necessary. Once you get the speciﬁcs from your underwriter, present it to your borrower. If you're working with the right lenders, you'll win more than your share of deals this way. At this point, great lenders will often jump in and help you sell or negotiate a deal if it's a deal they really want.
What If I Can't Tell?
Finally, what if you can't figure out whether your borrower is Camp No. 1 or Camp No. 2? What if he or she doesn't quite ﬁt either way? Give two written quotes: one with a Camp No. 1 program and the other with a Camp No. 2 program (using ranges instead of hard numbers). Your borrowers will tell you with which one they are more comfortable. When in doubt, start out with this double quote technique and go from there. If you can't even narrow it down to two programs to quote, you haven't learned enough about your borrower's wants and priorities, so go back to step one, the initial interview.
Property Type: Office
Located in: Los Angeles CA
Loan amount: $2,100,000
Property Type: Light industrial
Located in: Oakley CA
Loan amount: $925,000
Property Type: Restaurant
Located in: Washington DC
Loan amount: $850,000
Property Type: Multifamily
Located in: Fayetteville NC
Loan amount: $380,000
Property Type: Multifamily
Located in: Washington DC
Loan amount: $650,000
Property Type: Retail
Located in: Woodbridge VA
Loan amount: $434,000
Property Type: Warehouse
Located in: Boulder CO
Loan amount: $640,000
Property Type: Light Industrial/Warehouse
Located in: Bakersfield, CA
Loan amount: $865,000
Property Type: Retail
Located in: Schertz, TX
Loan amount: $380,000
Property Type: Retail/Office
Located in: North Dartmouth, MA
Loan amount: $760,000
Property Type: Mixed Use
Located in: New Orleans, LA
Loan amount: $582,000
Property Type: Mixed Use
Located in: Philadelphia, PA
Loan amount: $220,000
Property Type: Automotive
Located in: Bronx, NY
Loan amount: $510,000
Property Type: Office/Warehouse
Located in: Boynton Beach, FL
Loan amount: $450,000
Property Type: Motel
Located in: Stockton CA
Loan amount: $230,000
Property Type: Multi-Family,
Located in: High Point, NC
Loan amount: $398,000
Property Type: Retail refi
Located in: Upland, CA
Loan amount: $750,000
Property Type: Office
Located in: Los Angeles CA
Loan amount: $2,100,000
I really appreciate your hard work on Mr. Jerebie's loan. I look forward to working together on ...
- Bill Choi | SBA/Commercial Loan Officer | Eagle Investment & Finance.
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