Friday, August 18, 2017

Why your Commercial Real Estate loans don`t get funded

Lenders see hundreds of loan financing requests each month and apart from a referral from a trusted source, the documents you submit for financing are the only basis they have for deciding whether they are interested in providing financing to you. With so many opportunities, most lenders simply focus on finding reasons to say no, because in the lending business, protection of their capital in the number one priority.

Any one or several of the reasons listed below may cause a lender to reject your loan application. Here are the most common reasons:

Value inflation
On many occasions, borrowers come to us and say they are buying a property for $X but it is appraised for $Y which is many times higher than the purchase price. We usually see this primarily with land development deals where the borrower wants to get a loan based on the appraised value which would allow them to purchase the land and finance the construction. They are essentially trying to get 100% financing. This is an indication that the borrowers do not have enough equity to purchase the property. Most lenders will only lend on the lessor of the purchase price or appraised value.

Wanting the lender to conform to your terms
This is one of the most common reasons why commercial loans don’t get funded. I cannot tell you how many “borrowers” come to us with their list of terms of what they are “willing to pay” to get a loan on their commercial property and they are just not willing to budge off their requirements. Let me tell you something, folks — the lender is the one that controls the terms, not the borrower. There are billions of dollars of private money being invested in commercial mortgages and lenders still control the deal flow. After all it’s their money. Remember the “Golden Rule.” He who has the gold makes the rules!

Not willing to pay lender fees
Let’s get this understood once and for all:  lenders charge fees. We get lots of prospective borrowers coming to us and stating up front, “I don’t pay up-front fees.” Great! We don’t charge up-front fees, either. However, someone must pay for the up-front expense of underwriting your loan.
In any given transaction, the Client will be responsible for paying the Legal Fees, Appraisal Fees, Feasibility and Marketing Report fees, Environmental report fees, Quantity surveyor fees, Land surveyor fees, Site visit costs and any other fees related to due diligence and background checks. Most lenders will require you to pay a lump sum amount into an escrow account and then the fees and expenses are billed to that account. At closing the borrower will get credit for the monies paid and they will get a full accounting for the monies spent. This is similar to how a law firm works when engaged to do legal work on behalf of a client. Lenders prefer to do things this way so that there are no delays in getting the loan funded. Some lenders may allow the borrower to pay the fees/costs directly to a third party for the expenses incurred however this may result in a longer time to get a loan funded.

Did you know that lenders underwrite hundreds of loans that never get to funding because the borrower has misrepresented some fundamental aspect of their deal? Lenders expect you, the borrower, to put down some money in advance of loan closing to show the seriousness of your intent to actually close the loan with them. They call this a ``commitment fee``. A lender will charge you 1-2 points up front to cover the cost of underwriting your loan. So, if you want to get funded, get with the program and quit telling lenders what you will and won’t do. The second reason why lenders require a commitment fee is so that you do not ``shop`` the loan around while they are working on arranging your financing. No lender wants to put in the effort working on your loan only to have you go and get the loan from somewhere else. It is a waste of everyone's time and effort.

Borrowers that insist on paying absolutely nothing until funding will never get funded, it takes money to borrow money. Liquidity or cash on hand is definitely going to be required, and varies widely from lender to lender. Be prepared to pay lender fees/costs of some form.

Too much debt / too highly leveraged (not enough equity)
Occasionally, we get a request from an experienced investor who is looking to either refinance an existing property or add another property to his or her portfolio. The challenge we see here is that they are often too highly leveraged. All of their existing properties have mortgages at the maximum loan to value and there is very little additional equity that might be available to provide back-up cash flow or additional collateral to the lender. Lenders see this as a risky position because if one property develops a problem, it could potentially cause the entire portfolio to be at risk.

Not enough liquid assets
In addition to the reason given above, some borrowers come to us and they have a substantial personal net worth, however they have very little liquid assets. In many cases, especially with experienced real estate investors, their net worth is made up primarily of real estate assets which is an illiquid asset. Therefore, if one of their properties has a major problem, such as the basement flooded and they have to replace the furnace, or the roof got damaged in a storm etc., how are they going to pay to fix it if they do not have enough liquid assets (cash, stocks, mutual funds, bonds) that they can use. Lenders see this as having a “weak” net worth. Your loan would get turned down on this basis, because the lender would consider it to be too risky.   
                     
Not being prepared with the right paperwork/ documentation
If you own a commercial property, you must keep separate books on each property you own. Period. End of conversation. We’ve seen a number of investors who hold property in their own name, don’t pay themselves to manage the property, don’t keep records of their tenant leases, don’t charge themselves rent if they personally occupy the property, and co-mingle funds with their personal accounts. When it comes to commercial loans, lenders want to see a clear and accurate history of the property’s performance. They need to know that the property alone can support the costs of servicing and repaying the debt. If you cannot provide historic profit and loss statements, rent rolls, details of capital improvements, as well as your own personal financial statements (excluding the property being refinanced), then you will likely not get funded.

Insufficient cash flow from the property
Another big mistake that commercial property owners make is overstating their income from the property and understating the true expenses. Lenders want to see that the property can support the amount of debt the borrower is seeking. Pretty simple. They do this by calculating the Debt Service Coverage Ratio (DSCR). DSCR = Net Operating Income / Annual Debt Service. The two biggest mistakes we see here are i) not subtracting a vacancy allowance from the Gross Rental Income; and ii) not adding a property management fee when you manage the property yourself. Change these two numbers and you may discover that your property actually doesn’t cash flow to cover the amount of debt you are seeking.

Asking for too high a loan amount
Some borrowers have unrealistic expectations about how much debt they can put on a commercial property. Unlike residential property, where you can usually borrow 80% of the property value in first mortgage, commercial lenders will loan 65%-70% LTV (loan to value.) If you are buying a property, some commercial lenders allow the buyer to carry a 2nd mortgage on the property; however, they require the borrower to have at least 10% “skin in the game”. For most of the commercial property owners whose income is generated by leases to tenants, you are limited in the amount of money you can borrow. Asking for more than the maximum LTV will cause your loan to be denied.

Lack of experience with commercial property
We often get requests for loans from people who are beginning their career investing in commercial real estate. If you are inexperienced in commercial real estate, or are new to investing in a particular asset category, the best thing you can do is partner with someone experienced in managing this type of property. There are any number of problems in the day-to-day operations of your property and an experienced manager is your best insurance against fraud, lazy employees, costly expenses or missed income opportunities. Your loan would get turned down on this basis unless you had someone with good experience on your team.

Sales and Marketing strategy is not clear - No go-to-market strategy
For new construction projects, the borrower’s business plan fails to explain the sales, marketing, and distribution strategy. The key questions that must be answered are: who will buy it, why, who is your competition, what is the best price to sell it at, and most importantly, how fast will the sales occur (called absorption)?

For larger projects, a Feasibility study done by an independent third-party firm will be required in order to address these concerns. In many cases borrowers come to us after ``shopping`` their loan to many lenders without understanding that the reason why they keep getting denied a loan is because they do not have a proper Feasibility study which shows there is a demand and need for the type of project they want to build.  

You must explain how you have already generated customer interest and obtained pre-sales – and describe how you will leverage this experience through a cost-effective go-to-market strategy.

Exit strategy is not clear
Borrowers must be able to clearly show the lender how they will be repaid their loan. This could be from sale of the building on completion of construction, sale of the individual units, generation of sufficient rental income over several years to easily refinance the loan or pay it off in full etc. If you can’t demonstrate to the lender how they will be repaid their loan then you will not get the loan. 
Executive summary too long

Lenders are very busy, and do not have the time to read long business plans. They also favor borrowers who demonstrate the ability to convey the most important elements of a complex idea as simply as possible. An ideal executive summary is no more than 1-5 pages. An ideal business plan is 20-30 pages (and most lenders prefer the lower end of this range).

Remember, the primary purpose of a business plan for a loan request is to motivate the lender so that they want to fund your loan. It is not intended to describe every last detail. Document the details elsewhere: in your operating plan, marketing plan, feasibility study etc.

Too repetitive
All too often, a business plan covers the same points over and over. A well written plan should cover key points only twice: once, briefly, in the executive summary, and again, in greater detail, in the body of the plan.

Poorly organized and lack of specific details
Your presentation should flow in a nice, organized fashion. Each section should build logically on the previous section, without requiring the reader to know something that is presented later in the plan.
Too many executive summaries contain mainly ``marketing fluff`` of pictures and hype and with very little detail on what is important, which is: what are you going to do with the money you borrow, how you are going to make money to be able to repay the loan and what previous experience do you have with that type of investment.

Unrealistic financials and insufficient financial projections
Basic financial projections consist of three fundamental elements: Income Statements, Balance Sheets, and Cash Flow Statements. All of these must conform to Generally Accepted Accounting Principles (GAAP). 

Lenders generally expect to see five years of projections. Of course, nobody can see five years into the future but the lender primarily wants to see the thought process you employ to create long-term projections and if you used reasonable assumptions. An example of wrong assumptions would be running at 90% occupancy on a hotel every year or underestimating your food and beverage costs for a restaurant or factoring in unrealistically high annual rent increases for an apartment building.

“We have no competition”
No matter what you may think, you have competitors. Maybe not a direct competitor – in the sense of a company offering an identical product – but at least a substitute. Fingers are a substitute for a spoon. First class mail is a substitute for e-mail. A coronary bypass is a substitute for an angioplasty. Competitors, simply stated, consist of everybody pursuing the same customer dollars. To say that you have no competition is one of the fastest ways you can get your plan tossed – lenders will conclude that you do not have a full understanding of your market and you don’t know what you are doing.

Lack of understanding of the lending parameters
We facilitate loans primarily from private sources. Unlike banks that bundle their loans and sell them on Wall Street, these private lenders are portfolio lenders. Their first concern is the monthly loan payment. Does the property have sufficient cash flow to handle the monthly debt service? Their 2nd concern is the property’s ability to repay the debt principal over time. If you, the borrower, came to us and tried to sell the merits of the deal based on how great the property is, how terrific you are as a person, how much you’ve already invested, or how much interest you’re willing to pay, you’re not going to get anywhere. The lender is not very interested in these things. Know your lending (and borrowing) basics!

Asking the wrong person to get the loan for you
Probably the second biggest reason that we’ve seen perfectly good commercial loan request go south and never get funded is taking the deal to the wrong person. Generally, this person represents themselves as someone who can get you a commercial real estate loan. Ask them a key question, “Are you direct to the money?” We get a lot of intermediaries bringing us deals. Sometimes they have a second intermediary who brought them the deal. We charge a 1 to 2 percent fee, at closing, as our success fee. We are direct to lenders, these lenders charge 1 to 2 points (at closing) for their efforts in getting you the loan that you need. Some of these “brokers” will charge you 2 points for their efforts. Their intermediaries (the person you brought your deal to) charge you 2 points. Come on, folks, you do the math! By the time the deal gets to the actual person who can make the loan, it has gotten so expensive for you, the borrower, that you will never want to close on this loan. Similarly, don’t bring your loan request to your accountant, your attorney, your neighbour, your friend, or someone you heard about from some other source. Bring your loan to the people who can actually get it done for you!

Going to the wrong lending source.
The number one reason why, in our opinion, commercial real estate loans get denied is that they are not brought to sources that can actually fund them. Most often, if your deal has been turned down, it is likely that you brought it to a bank, credit union, or other mortgage lender, that a) doesn’t do commercial loans; b) doesn’t do your particular type of loan; or c) has no room in their current portfolio for your loan. Banks, etc. are regulated by FDIC, Fannie Mae, Freddie Mac, CMHC, CDIC etc. These oversight agencies regulate not only the rate and term that banks can offer you, but also the mix of loans they can hold on their balance sheet.

Here are some mismatches we’ve seen – stand-alone single tenant buildings e.g. restaurants or non-flagged hotels (too many in the lender’s portfolio); rural apartment building (not enough population density for major banks); depressed economic area (most banks not lending there.) Other reasons banks won’t lend to you no matter what - property underperforming-expenses are too high; need a discounted payoff; wrong asset category (e.g. no car washes or golf courses); Government tax lien issues; property taxes in arrears; vacancy rate too high. In other words, if your property isn’t “perfect” banks are more likely to turn you down.

Till the next time

Bruce


Northern Range Capital Corp can help you with your commercial property financing needs. We have a proprietary database of lenders that we have compiled over the years which allows us to easily find the best and most appropriate lender for your project. We can structure your loan request so that the lender sees the merit in your project and wants to have a more detailed review. Give us a call to discuss your project requirements.

Wednesday, March 29, 2017

What do you believe?

What you think you create. What you feel you attract, and what you imagine you become.

The universe is governed by law. Success is governed by law. Your subconscious mind is also governed by law. Our personal beliefs define our choices, shape our lives and, collectively, determine our futures. Nothing is more important than belief. If you want to change the world, if you want to change your world, if you want to succeed at work, in the marketplace, or in any other social endeavour or organization belief is your Holy Grail.

The law of life is the law of belief. Belief can be summed up briefly as a thought in your subconscious mind. As a person thinks, feels, and believes so is the condition of his or her mind, body and circumstances. All of your experiences, events, conditions and acts are produced by your subconscious mind in reaction to your thoughts. Remember, it is not the thing believed in, but the belief in your own mind that brings about the result.

Many self-help books and motivational gurus talk about the power of belief. The general message they are trying to put across is basically what Napoleon Hill had said, "What your mind can conceive and  believe, it can achieve". Is it true that everything your mind believes can achieved or it is just some kind of motivational lie? Strictly speaking, the statement should be "what your conscious mind can conceive and your subconscious mind believes, it can achieve".

Here is the reason why.

Your subconscious mind power is like a magnet. It attracts things that resonate with its beliefs. To put it bluntly, if you have a certain belief in your subconscious mind, your subconscious mind will vibrate based on this belief and attract events and people that resonate with or correspond to this belief. This is the Universal Law of Vibration and Attraction. It is a law that exists whether you believe it or not, just like the law of gravity. Let me repeat. This law works on you whether you believe it or not!


If your subconscious mind believes that life is tough, surely, your life will be tough. You will meet people and events that give you a hard life. If your subconscious mind believes that money is hard-earned, money will be hard earned. You will only be attracted to opportunities that will take a super-human effort to make a penny! Let me twist the words around and repeat the previous paragraph. If your life is tough now, that's because your subconscious believes that life is tough. If you are finding difficulties in making money, that's because your subconscious believes that money is hard to earn. There is no other reason and there is no need to blame other people for your tough life or your financial situation!

The message I'm trying to put across here is this:

"Your subconscious beliefs create your realities"

The above statement is probably the most important statement that one must fully and thoroughly understand in order to achieve true success in life.

We use our conscious mind power to conceive an idea, but our subconscious mind power to attract the result. Most  people do it the other way around. They use their conscious mind to pursue the result, which often results in stress and worries. That's the difference between using your conscious mind power and your subconscious mind power.

What it means here is your reality or the life you are experiencing now is actually a reflection of the beliefs in your subconscious mind. Many people change from one job to another, but realize that they are still getting the same problem everywhere they go. What they don't understand is that instead of changing the external circumstances, they should change their inner beliefs.

Once their beliefs change, they will be attracted to new people, new jobs and the world around them will change according to the new beliefs in their subconscious mind. When participants of a workshop were told that their beliefs create their realities, a common negative response given was "I never believe in the kind of reality I'm facing, but why am I still experiencing them?"

You must understand that it is not what you think you believe that creates your reality. It is what your subconscious mind believes. You may think you believe that life is abundant, just because you've read some books about it. But subconsciously, you may not be convinced. So how do you know what your subconscious believes? The answer is fairly simple. Just look at your reality! Your reality is the mirror of your life. It reflects your inner beliefs.

Whatever order we issue to our subconscious mind, it promptly undertakes to carry it out. Whatever state of existence you declare yourself to be in, your subconscious mind assumes exists and works within you accordingly. If a friend asks you: How do you feel today? And you reply: I am not well I have a headache or I don’t feel up to the mark at all today, you are unconsciously setting the subconscious mind to work to realize the state you declare yourself to be in. On the other hand if you say: I am well, happy and strong, the subconscious mind undertakes to realize that state.

Hence you can see what a wonderful power is within your control for your happiness or unhappiness, your condition of body and mind, and how necessary it is for you to use this power always in a positive direction. You are, in a word, what you think you are. This is not a theory, or a fad. It is a universal law.

Till the next time

Bruce



Thursday, September 8, 2016

Success

The foremost stumbling block to success in life is cowardice, the dreaded fear of failure “Nothing ventured, nothing gained”. Spectators never won a baseball game. If you are to win at anything in life, you must first be in the game, you must place yourself on the firing line.

History tells us that the doors of opportunity are always closed. They have been that way since the world began. At no time when you walk down a street will you find any doors of opportunity standing open and inviting you to come in. Doors that are worth entering are usually closed, but the resolute and courageous knock at those doors, and keep knocking persistently until they are opened.

Working hard and applying the principles of success can help you attain your goals, but much of success is by chance – being at the right place at the right time. In light of that, my advice is to give it all you've got and don’t let up, for you never know when opportunity will come knocking. Waiting for perfect conditions usually causes a person to get very little accomplished.

Achievement never comes to the uninspired. To the man or woman that has always "thought small" it is frightening to "think success" or to "think big". It is too easy to entertain doubts, procrastinate, delay or make excuses. Success is not a thing – not a reward that awaits you at some far off time. Success lies in doing well whatever thing you are doing now. It is more a matter of mental attitude than of mental or physical capacity. Every successful man or woman has had more failures than successes in life, but the winner concentrates on his or her strengths and successes while the loser in life dwells on his or her miscalculations and misfortunes.

You have all the fundamentals in you to succeed right now. But it is only the USE of them that can make you successful. It is the way you use what you have. You can succeed with what you have at this moment, if only you learn to use it correctly. Ask of yourself what ability you have which can be made to develop into something worth while. Great successes are simply a group of little successes built one upon another.

You have all that the greatest of men have had
Two eyes, two ears, two hands, two feet
Whether they were explorers or scientists or builders or speakers or motivators
They came here with no more or no less than you
The difference between the mighty and the mundane
Is what you do with what you have.

Why you are sometimes not successful

Did you know you can actually limit your life by dwelling on the wrong things? So often, wrong thinking keeps people stuck right where they are. If you think you’ll never accomplish your dreams, then your life will follow your thoughts. If you think you don’t have the talent, the connections or the money, then you are limiting yourself.  

Your failure to get results may be a consequence of mentally making statements as:

  • Things are getting worse
  • I will never get an answer
  • I see no way out
  • It is hopeless
  • I don’t know what to do
  • I am all mixed up
When you use such statements, you get no response or co-operation from your subconscious mind (the universe).

You must remember that whenever your subconscious mind accepts any idea, it immediately begins to execute it. It uses all its mighty resources to that end. It mobilizes all the mental and spiritual laws of your deeper mind. This law is true for good thoughts, but it holds true for bad thoughts as well. Consequently, if you use your subconscious mind negatively, it brings trouble, failure and confusion. When you use it constructively, it brings guidance, freedom, and peace of mind.

Our words have creative power. Whenever we speak something out, either good or bad, we are giving life to what we are saying. Too many people go around saying negative things about themselves, their family, and their future. Things like, “I’ll never be successful", "This sickness is going to get the best of me",  "Business is so slow I don’t think I’m going to make it", "Flu season is coming. I’ll probably get it.” They don’t realize they are prophesying their future.

The Bible says, “...we will eat the fruit of our words.” That means we’re going to get exactly what we have been saying.
Here is the key: you've got to send your words out in the direction you want your life to go. You cannot talk defeat and expect to have victory. You can’t talk lack and expect to have abundance. You will produce what you've been saying. With your words you can either bless or curse your future. Make sure your words are what you want your future to be so that you can move forward in a life of success.

Till the next time.



Bruce

P.S. Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy. - Dale Carnegie