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The
following are some do's and don'ts to think about as you undertake a
loan with any invester or investor:
 Don't send the invester an enormous pile of disorganized
papers. Prepare the short deal synopsis, called the executive
summary, which addresses the project and the loan requirements.
Imagine a neat 2-page submission as compared to a 40-page
disorganized pile of papers.
Do describe the transaction:
type of real estate project or business loan; 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 property.
Don't ignore or try to hide the "hair" on the deal. This will come out through the due diligence carried out by
the investor, 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 projects entire
life at the onset of your submission. Rather, start with the conclusion
(project, loan amount, purpose and term) and then support the
conclusion 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 invester 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 invester is interested in being repaid, not in repossesing your real estate or business.
Do provide 2 to 3 year's profit and loss statement showing net
operating income, 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 invester will want to see.
Don't make the invester 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 requirements for a management fee since
the project is self managed is not useful. In the event of a
default, the invester will most likely call in a professional
management firm, and the cash flow must allow for this contingency.
Do provide a detailed rent roll,
(list each vacancy) list every tenant, lease term, rental rate, pass
troughs, 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 hire an environmental assessment firm or an appraiser,
if you don't already have the reports on file. The borrower will
expect your invester to automatically accept your selected third party
consultant. Routinely, the invester will prefer to engage one of their
own selection, later, if they elect to pursue the deal.
Don't send a full set of architectural and working drawings
with your preliminary submission. What do you think your invester will
do with another 5 pounds of paper?
Don't send the invester originals.
A busy, successful invester, (the kind you want also) 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 invester. 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 spreadsheet will not help the
invester 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. Put your information on a CD Rom.
Don't, at the outset, demand that the invester make a site
visit. The invester's time is of prime importance, and a site visit
will not influence the invester 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 invester will probably
want a direct conversation with the borrower. Offer a 3-way
conference call including the invester, borrower and broker fairly
early in the transaction based on your invester's preference, to
permit the invester and borrower to evaluate each other's interest,
style and objectives.
Don’t permit the mortgage broker to reply to questions
directed by the invester to the borrower during telephone conference
calls.
The invester 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 expect anybody to provide 100% financing.
Do expect to invest between 10% and 30% in cash and
genuine equity to purchase a property. You have heard, often enough, that there are no money down
deals. Do rely on this rule, particularly in the recent economic
climate. There are some exceptions depending on the type of property and borrower.
Don’t expect the invester 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 invester’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 invester will
probably congratulate you for your accomplishment, but the purchase
price will nevertheless be the demonstrated market value.
Do expect the invester 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, or
you have newly negotiated signed leases, or have physically improved
the property, and you can prove it.
Don’t expect your invester 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 invester is also your business partner,
why should you be loaned the start-up money for your own business.
Don’t expect your invester 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 invester has serious interest in your
project.
As invester’s, 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
invester and the borrower has to coincide. The site visit puts the
entire project into perspective. Only then, has the loan a high
probability of closing.
These are time proven suggestions and
observations that will help you have a higher probability of success
in closing the loan.
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