Taking the leap from residential to commercial brokering
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03/08/2010 6:30:00 PM
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Making the move from funding smaller commercial deals – in the $200,000 range – to multi-million dollar deals can be difficult. Not only do you have to understand the differences between residential and commercial clients, but you also need the confidence and know-how to win over even the most financially savvy borrowers. The one thing that all newcomers to commercial lending should know is to forget what they know about residential lending – it’s a brand new ball game with different rules. While most commercial lenders are happy to help newbies, it’s probably best to find a mentor who can guide you through the process. Here are some tips to get started.
Understand Your Client
Is the client an individual a partnership a corporation or a newly-formed company? If it’s a corporation, it’s important to know who the shareholders are and makes the decisions. Lenders want to hear a borrower’s “story” and many lenders want to meet the borrower. Also, determine if the loan will be used to complete a purchase or a refinance and equity take-out for other investments. Also, gets a personal profile of the operating principals outlining their experience in the industry. A business plan is beneficial to understand and present the loan request to the lender.
Understand the asset being purchased
It’s important to ask about the property and make sure it exists. If it’s a rental property, lenders will want to see the rent roll. Other documents you should have are copies of the purchase agreement, copies of leases, an environmental report, a building inspection report and an appraisal no longer than six months old.
Get the financial documents
Most lenders want to see the most recent financial statements -- at least two year’s worth – some require three years. They want to see how the loan will get paid and on the case of a default what security the borrower has to offer.
Discuss the timing
It sometimes takes a month or more to get an appraisal and other reports. You will need time to analyze the data, prepare and present your loan submission, have the intended lender issue a discussion paper for the client’s acceptance and then finalize the loan commitment.
This can be a lengthy process. In many cases, the prospect thinks a formal answer can be had in a few days, similar to the quick residential process.
Discuss broker fees
These fees should be payable once you have arranged a satisfactory loan commitment in accordance with the request. Normally, the fees are payable on or before funding but, in many cases, the fees are paid from the initial advance on a draw-type mortgage. The amount of fees will obviously vary, depending on the complexity of the transaction. A discussion of your expected fees and other related costs will often impact the amount of financing the prospect needs to borrow. It’s better to find out early if the prospect is not prepared to pay reasonable broker and lender fees.
Industry faces some challenges in 2011
CMP Magazine sat down with the Dale Klein, president and CEO of Canada ICI Capital Corporation to gain some valuable insight on the constantly changing commercial mortgage market and requirements for today’s lenders.
CMP: As a direct Lender in today’s commercial mortgage market, what would you say is the biggest challenge for brokers in the industry today?
DK: Finding reliable capital is the biggest challenge in today’s market. As a result of the fallout from the credit-crunch in 2009, an inverse relationship between the supply and demand for commercial mortgage capital was created where demand has out-paced supply for the last two years. This has inadvertently created a situation where lenders have become more selective with the types of mortgage investments they choose to participate in. With the number of great mortgage opportunities for lenders in the market, brokers today need to be on top of their game to ensure their deal gets the attention and time it deserves. Brokers should look to establish a strong rapport with lenders who are reliable and consistent in their credit decisions. At the end of the day brokers want to deal with a reliable lender who will be there come funding day.
CMP: What type of loans are you looking for today?
DK: We generally look for good, quality commercial and multi-residential loans. We are flexible in terms of duration and asset classes, but one thing that remains consistent in our approach is that we want to be sure that an exit strategy is always clearly defined. We have been fortunate to provide in-house mortgage servicing on behalf of several institutional capital partners. This has given us the latitude to fund a wide range of loans from $1 million to $20 million and to competitively price deals on the quality of the loan as opposed to internal yield requirements. We are currently offering the following commercial loan products:
CMP: What have you been doing to attract quality loans?
DK: We’ve stuck to our fundamentals of being consistent and concise with a quick yes or a quick no on deals that don’t fit our program. We’ve funded commercial mortgages inside of five business days from the date it was originally brought to us. I feel that our ability to make quick funding decisions is one of our biggest strengths.
CMP: What do you expect from mortgage brokers in the presentation of their loans?
DK: We want brokers to put themselves in the shoes of the lender. As I had previously mentioned, a clear exit strategy is our no. 1 underwriting parameter. An accurate and realistic loan presentation will go a long way in saving everyone’s time and money. Some key elements we look for in loan presentations are rent rolls, operating statements, construction budgets (if applicable), sales price list (if applicable) and up-to-date borrower financials and personal net worth statements
CMP: Where do you see opportunities for Brokers in 2010 and into 2011
DK: We are still operating in a market where there is a competition for capital, and where demand still outweighs supply. Given the considerable amount of uncertainty in the financial markets across the globe, the amount of reliable capital will continually be a challenge for borrowers throughout this year. A good mortgage broker is one who understands how to manage the expectations of borrowers and lenders – it is crucial to be realistic with timing, loan amounts, and deal structure.