So, Santa might not have given you a commercial property in your stocking, but it’s a whole new year! There’s always property for sale, and the commercial real estate lending market is prime to climb even higher this year.
Why? Well, between a post-pandemic uptick in demand for entertainment, the federal government getting concerned about economic recovery, and just good old-fashioned acquisitions, it’s the perfect storm within the industry.
We wanted to dig in a bit deeper in terms of lending practices. The "how" to get a commercial real estate loan has been done to death, so we thought about talking about something a bit different: the refinement phase.
See, the difference between good lending and great lending is summed up in one word: flexibility. A good loan gives you what you need, but a great loan gives you the flexibility to achieve your mission while leaving space for the future.
We are entering a new era of real estate where deals are flying, the world is changing rapidly, and new entrants are creating different opportunities. The height of the pandemic, for example, created an immense boom for the life sciences field, to the point where it’s one of the hottest commercial real estate sectors around.
Nuveen Capital dropped 620 million dollars to pick up a portfolio heavy on the life sciences development, a clear indicator that this is a sector to watch this year. When companies are spending close to a billion dollars to expand their footprint in a real estate market sector, it’s wise to pay attention.
Commercial real estate is truly so different from its residential counterpart. This often throws people off in their early journey through the industry. Since the idea behind CRE is to generate income, the focus from the lender’s standpoint is whether or not the deal itself will be successful.
To underwrite a loan, the lender is going to look not just at the tangible data but they will also look at the intangibles as well. What’s the biggest intangible yet important element of any deal? Past experience. It’s easier to get financing for a project where you have some experience that can raise the chances of success.
Getting funding to buy a restaurant, for example, is much easier when you can demonstrate that you have handled some element of running a restaurant in the past. A few years as a general manager at a restaurant gives you a better idea of the bigger picture than someone that has never even washed a dish inside of a busy restaurant.
So when you submit your documents to the lender, make sure that you also submit statements showcasing your previous experiences, as well as previous purchases you’ve made. It can make the difference between a file that’s "on the fence" and a file that is processed and ready for closing.
Do you want to close more deals? Make sure that other parties understand what role you’re playing inside the deal.
For those that are working as part of a larger syndication group, past experience can often appear a bit thin. But if your job within the syndicate is to gather the others, that too is something valuable. You can make it clear that you are actively working to tie the deal together and that there are other monies in play than just what’s requested for financing.
So we talked about the intangibles involved in the lending process. But what about the tangible stuff? We wanted to include the documentation that gets overlooked often on the lending side of things. Either people rush through these documents, or they forget them and create unnecessary delays.
Remember that the underwriter is going to look at everything. Large cash deposits? Gotta explain that. Slow pays on your credit report? Gotta explain that too. The goal here is to make the best first impression possible, so a strong explanation letter covering the oddities in your data reports is better than ignoring them.
After all, you have a valid reason behind the things that look strange. Large cash deposits aren’t illegal; you could have other ventures going on. Just make sure that you document things accurately and back it up with the other documents (bank statements, escrow paperwork from sale of properties, etc.).
This is less important as you build up your relationship with lenders, but a strong business plan that outlines your plans for the property is incredibly important. Take the time to share the vision, and you’ll find that the lender is much more likely to go forward with financing.
How far back should you go with tax returns? Well, loan documents will call for the last three years. While there are lenders in the market that don’t need that much documentation, it never hurts to present it.
Keep in mind this is the case even if you haven’t been doing properties that long. Your personal and business tax returns both come into play. The mortgage company is trying to get the clearest picture possible of whether or not they can extend financing to you.
Having the documents ready right from the beginning sets you up for success.
Even if this isn’t the year where you add to your real estate portfolio, we think that there are some important reasons to continue to watch commercial lending trends. One, seeing what the big fish acquire can still give valuable data useful in multiple markets.
Brokers and analysts should continue to study this stuff because it helps produce great insights to share within your own networks. The professionals who can crunch data and present it in a curated format for the network at large will generate plenty of attention and new leads.
The best reason to watch the industry fireworks this year, outside of everything else? It’s just plain fun. Stay tuned.
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