In this instalment of our commercial series, I’d like to talk about one of the more crucial elements of building a great commercial application: compiling the needed documentation.
As I’ve said before, no two commercial transactions are alike. It’s your job as the submitting agent or broker to tell the full story about the transaction and all of its components. Documentation is a big part of how you do that. Tax and zoning confirmations, borrower financial statements, copies of lease agreements – all of these documents are important in helping your lender assess the deal.
Far too often, however, I see agents not submitting a full set of documents upfront because they want the lender to ask for them first. There’s a perception that this means the lender is serious, but those who think holding back documentation can help in some way have it completely wrong. All you’ve done is set yourself apart in the lender’s mind as a newbie rather than an experienced professional and reduced the chances the lender will want to do the deal. For them, it’s a sign that they’re going to have to struggle to get the deal completed or, if the deal does get funded, that they’re going to have problems with the borrower post-funding.
Do your client a favour by getting them off on the right foot with the lender, and do yourself a favour by being a professional and getting more deals closed.
All documents can and should be brought into the narrative you’re creating for your lenders. Don’t just add them as attachments without explanations. Make sure you include the information they present directly into your sales pitch for the funding.
While there are any number of documents required, depending on the type of commercial submission, I’d like to hone in on two standard documents used for virtually every type of rental property application: rent rolls and building operating statements. Let’s take a look at what they are and, more importantly, talk about how they can be used to strengthen your submissions.
Rent rolls are a pretty straightforward form. You can build your own in Excel, or we have a sample on the Financing Hub that you can download.
A typical rent roll will identify each rental unit, the tenant, the unit’s square footage, and the net and gross rents. Net rent is the rent the tenant will pay over the course of the lease before additional or common charges are added. For example, I might be paying net rent of $9,567 per month on a five-year lease. That amount doesn’t usually change unless there are specific conditions for an increase in the lease terms.
Gross rent adds in common charges such as taxes, common area charges and maintenance. Each year, the common charges can change. The lease will likely state what the common charges are, but the yearly amount allocated to them can change. These floating common charges protect the net income of the building from fluctuating from year to year if something like utility rates change. This is important to both the owner and the lender, who are counting on stable cash flows to ensure timely mortgage payments.
Rent rolls will often set out other details as well, such as tenant start dates, when the lease expires and if there are renewal options.
Let’s take a look at all the information you’ve provided your lender in just that one document. You’ve given them important details on the income that’s going to be used to pay back their loan. The lender now has a view of the stability of those rental revenues. They also have a picture of the type of tenant occupying the property and whether they are long-term tenants or more transient. They can identify an anchor tenant by what percentage of the building they occupy, and they know how long they can rely on the anchor to contribute to rental revenues. The lender can also see from the net and gross rents if the rents are competitively priced. With this, they can get a sense of whether the building will have trouble attracting new tenants in the future.
But the best thing about providing all of this information is that you get to see it all first. With just a short review of the rent roll, you can see the strengths and the weaknesses it identifies, and you can make sure both are properly addressed in the submission.
These are all points the lender will uncover in their due diligence anyway, but a good commercial broker understands the advantages of addressing weaknesses and proposing solutions upfront, in addition to really selling the strong points.
Whether you’re trying to secure funding for a multi-family property, an office building or an industrial space, the underlying property should cover its expenses and debt servicing from stand-alone building revenues. This is why the building’s operating statement is an essential document to provide your lender as part of your initial submission.
For those of you not familiar with building operating statements, they are a specific form of income statement that, in most cases, reports on the financial accounts of a single property. Your borrower might own multiple properties; the financial results of all of those buildings get accumulated and reported in the borrower’s financial statements. The building’s operating statement provides the lender with a clear view of just the building they are being asked to finance.
The operating statement will show all of the building’s revenues – rents, parking revenues if the building charges for parking, etc. – along with the common charges like taxes, utilities and maintenance fees. It will also report all of the expenses not captured in the common charges, including separate lines for mortgage interest.
You should review the operating statement for items that need to be highlighted in the submission story. Are parking fees or other revenues substantial? If so, you should bring them to the lender’s attention. Do common charges capture almost all of the annual expenses outside of mortgage interest? Add a note about this positive aspect of the building’s cash flow. By segregating the interest charges out, does that give you the ability to assess whether P&I payment options are right for your funding request?
Again, this is great information for your lender to use in their adjudication process, and therefore great information for you to use when developing your submission.
If you haven’t been providing these two documents with every commercial submission, start today. Come across as the professional you want to be recognized as. Learn to recognize the insights these two documents will give you and use them to compile even better commercial mortgage applications.
In closing, I’d like to thank everyone involved in our recent follow-up webinar to my article in the last issue about telling the right story for a successful commercial submissions. It was a great success. I personally would like to thank our panellists, Michel Durand from Mortgage Alliance Commercial Canada and Justin Kowal from Firm Capital. I’d also like to thank our sponsor, Merix Financial. For those of you looking to join us at our next webinar in June, the registration form is on our website, thefinancinghub.com
Paul McGill is president of The Financing Hub, which is dedicated to delivering effective digital solutions for commercial real estate financing.