Understanding the importance of borrower preparation

Real Estate Weekly, May 21, 2003 by Henry Berliss

What a lender sees the first time they are presented with a deal can be key to the successful placement and closing of the deal. Sometimes this may require the mortgage broker to spend time working with the borrower either to prepare documentation or to further improve the property in order to make it easy for the lender to see why the deal makes sense.

The first loan submission may not need to be lengthy, but it has to address the major questions the lender is likely to have. A few examples may be helpful.

I recently closed a $21 million loan on a shopping center that required a holdback for rental achievement (where the lender does -not disburse a portion of the loan proceeds to the borrower until an agreed upon benchmark has been achieved) until the occupancy at the property increased from 87% to 93%. A year and a half ago, I had submitted the loan request to lenders who would have wanted the new tenants in occupancy and paying rent within 6-12 months from closing otherwise a portion of the loan would have had to have been prepaid -- a potentially unsatisfactory result for the borrowers.

At that point the borrowers had not yet identified the additional tenants. Rather than further waste the lenders' time, I advised the borrowers to withdraw the loan request from the market until they could be more certain of when the additional tenants would be in place. When the borrowers came back to me a few months ago, they had progressed, and now had sufficient tenants/income lined up. Thus we were able to quickly sign up with a lender who would provide 92% of the loan amount at closing and allow up to 18 months for the additional tenants to occupy. This provided the borrowers with a comfortable margin of "wiggle room," as they realistically expect the lease-up to occur within 6 months from closing.

I am working with a truck sales and servicing company on a $9 million refinancing that they have been unable to arrange for a year, although they have good cash flow and own excess land worth more than $10 million. When they first presented their financial history to me, they sent tax returns for three years on three separate companies all owned by the same shareholder -- one for truck sales, one for truck service, and one that owns the real estate. It would have been very time consuming for a lender to go through all the tax returns to determine whether the company made money and should be considered as a viable borrower.

It took more than two months working with the company's CFO to develop a consolidated statement on the overall operations that was supported by the figures for each of the three corporations. Being able to view the data in this format would make it easy for a Lender to see that the company has the cash flow and debt service coverage required to do the refinancing. Until that document was ready, I would not present or discuss the transaction with potential lenders. We now have several lenders vying for the deal.

Last year I arranged a $4 million loan for the renovation of a 66-unit loft building in Williamsburg that involved moving numerous tenants around in order to be able to convert upper floor commercial spaces to residential use. I worked closely with the borrower to help him produce detailed phasing plans for presentation to lenders, as it was otherwise difficult to get a sense of how the process would work. The initial goal was to get the lender interested enough to come and see the building in the context of this quickly evolving neighborhood, because then both the property and the business plan could literally sell themselves. Even in a transaction like this where the loan to value ratio is very conservative, it was important to accurately summarize and condense the story, supplying all the relevant data at once in order to overcome lenders' basic reluctance to get involved in a complicated deal.

There are times in our hyper-competitive business when we are tempted to put some paperwork in front of a lender quickly just to make the borrower think they are getting fast service, or to register the deal first with the lender before another broker gets there. In the long run, however, that approach will cause more harm than good. When the lenders stop taking a broker's submissions seriously, no matter how good the deal is, the broker has lost his credibility. Generally, the scenario that bodes the best outcome has borrowers first shopping and carefully selecting an intermediary, and then the borrower/broker team working to assemble a complete and professional presentation. This approach will produce the best results for the borrower, especially with complex transactions.