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Commercial Loans Not Out of Reach


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:

  • What business are the prospective borrowers in?
  • What is the property's intended use?
  • Is it a new purchase or a refinancing?
  • What is the business motivation for the loan? How does it fit with an overall strategy?
  • What is the property price or value?
  • What is the legal structure of the business (incorporated, limited-liability company, partnership, etc.)?
  • What documentation do the borrowers have (corporate tax returns, Internal Revenue Service Schedule C, personal tax returns, etc.)?

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:

  • Purpose of the loan;
  • Type of business the client is in; and
  • Business and personal tax returns.

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.

Jeff Gorman

Vice President sales

Boost Business Without Breaking the Bank

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

  1. and build a reputation: Before you do anything else, take the time to learn the commercial business. Learn the terms. Make sure you know the difference between net operating income (NOI) and debt-service-coverage ratio (DSCR). There is a great deal of information available, from Web sites to magazines — read it. Become a student again and learn where to ask the questions. The Internet is a great resource, and so is your lender representative.
  2. Start with the basics: Things as simple as adding a tagline on your e-mail signature will do wonders for establishing your business. Adding “commercial loan specialist” or “commercial loan officer” after your name is instant credibility. Do this to your business cards as well. Along that line, add “We do commercial loans” to all of your e-mails and outgoing correspondence. You never know who will see those words and call. Of course, the same applies to your Web site.
  3. Network: Networking still works. It is a tested method of offering your services to a specific group of like-minded individuals. All Boost Business Without Breaking the Bank By following seven steps, you can create a strong database of viable clients communities offer networking opportunities at functions such as after-work mixers and special events. Those who participate in these groups are generally business-owners. Become a vocal member of your local chapter and seek not only business from the other members of the group but also referrals to other business-owners. Networking has been incorporated into the Internet, where your reach can be larger. Join networking sites that offer online networking capabilities. Not much effort is required to set up your profile, and the sites frequently offer tips for maximizing your contacts.
  4. Institute a daily telemarketing campaign geared to business-owners: This doesn’t have to be elaborate or time-consuming. Spend at least one hour per day making calls to local businesses and build your database. A simple introduction and offering your services is all it takes. Ask for an e-mail address. This call is not necessarily a sales pitch but an opportunity to network with other businessowners. Make sure you get the information you need for growing your business. This includes the primary contact’s name, e-mail address, ownership status and desire to discuss financing options. Again, your goal here is not to take a loan application but to have an opportunity to build your database.
  5. Take it to the streets: In addition to your telemarketing efforts, institute a day each week when you meet and greet your prospective clients. Walk into local businesses in your area. Dress the part. You are competing with bankers, so model your appearance after them. Above all, be professional. When you dress well, you gain instant credibility, and you are more likely to get the call when a loan opportunity arises. Leave your business card and take one of theirs — and make sure to add it to your database. In addition, go to your local banks, talk to commercial banking officers and ask what they do with turndowns. Ask if they would be willing to hand out your business cards when they have an applicant they cannot qualify. Banks generally will do whatever they can to better serve their customers, and a quality referral from a bank goes a long way with a borrower. The banks often are willing to do this because their primary business is depositors, and you offer them no direct competition. Now that you have spent time and effort getting your name out there, capitalize on every contact that comes your way as a result.
  6. Start big and finish smart: Although a localized, grass-roots marketing plan will provide you with a qualified database, you can market effectively to a wider audience if finances allow. Your title company can provide lists and labels of commercial property-owners. By instituting a statewide or targeted nationwide direct-mail campaign, you can build your database of potential borrowers and get loan applications along the way. A simple direct-mail piece — such as a postcard informing a buildingowner that you would like to discuss financing options — could provide leads, as well.
  7. Use your database: As your database grows, send regular e-mails to your clients. Create and follow a timeline so there is an e-mail in front of your client at least once every 30 days. Experts say repetition is the key to marketing.  There are services available that can assist you with creating, managing and sending professional e-mail campaigns for a fairly small price. A good e-mail campaign will reap significant results with the right database.

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.

SBA 504 Basics


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.

Maximum Debenture
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.

Andrew Martinez
Vice President
Commercial Capital Funding

Selling Commerical Mortgage Loans


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.

Dan K

Account Executive



Testimonials (read more)


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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