* This blog is a special entry by our very own Darrick Brown – AFP Trainer, Broker, and Banker.
In the famous 1939 film the Wizard of Oz, Dorothy finds herself in a real life dream whereby she is caught in a tornado that takes her on a life changing journey to the Land of Oz. All Dorothy desires is to go back home to Kansas. But to get there, she must embark on a dangerous and costly journey to the Emerald City to meet the great and powerful Wizard of Oz whom can transport her home with his infamous “magic”.
However, Dorothy cannot make this journey alone. Along the way she meets three travel companions – the Cowardly Lion, the brainless Scarecrow, and the heartless Tin Man. These characters play an important role in finding her solution by taking the journey down the Yellow Brick Road which leads them to the Emerald City and to the Wizard of Oz.
But the road to Oz is not as simple as it may seem. There are many unexpected dangers and set-backs before Dorothy reaches the Emerald City. But in the end, everyone wins. Dorothy goes back home to Kansas, the Lion receives his courage, the Scarecrow gets a brain, and the Tin Man is given a heart.
Like the Wizard of Oz, many business owners, investors, developers and others are looking for financing solutions for their Commercial Real Estate. Only until they get past the denial stage – that their long-time bank and others will not offer financing; are they willing to try another route.
The challenge: Before a borrower can find the “Yellow Brick Road” and make it to the Emerald City where all their financing dreams come true, they must get bypass all the other dead ends that many borrowers continue to go down.
Let’s look at the three characters that could serve as the travel companions to accompany the borrower down the road to getting their financing solution:
- Bankers that have just declined you
- CPAs who have assisted with assembling your Pitch Deck or Executive Summary
- Commercial Real Estate Brokers- your conduit who has located the idea property
Each of these characters has their individual role and limitations within their respective professions which can make the borrower feel like they are on an endless journey with many pitfalls. For these characters to find you a financing solution they will need the help of another character that will move the borrower into the loan Placement position.
That character is the Commercial Loan Broker who acts like the Wizard of Oz. The Wizard himself did not get Dorothy home, but he made Dorothy realize that she already possessed the power to get herself home. Like the Wizard, the Commercial Loan Broker is able to bring different options to the table that enables the borrower to leverage their idea, plan, capacity and vision and make it a reality. The Broker works hard to provide you the alternative financing solution of getting your loan placed!
I recently, met a gentleman working diligently to obtain traditional financing for his start-up hotel project in a rural mountain town to no avail. I was blown away, by the fact that he had submitted his deal to over 15 banks, 4 credit unions and number of alternative lenders who each took a pass. While the project had great potential, he was trying to fit a round circle into a square peg – requesting an unreasonable amount of cash injection. Not to mention that lenders talk (the word spreads) and his deal had been over shopped.
It’s like the old saying goes, “The definition of insanity is doing the same thing over and over again, but expecting different results”. If you want to be funded, you need to accept defeat by your bank and try a alternative financing approach.
Commercial Real Estate Solutions
There are a host of different lenders that have financing solutions, but many have never been introduced to borrowers who take the reluctant “no” from their banker and work hard to force their project into the Banks Credit Box or scrap their project all together.
Let’s take a look at the various Commercial Real Estate Lenders that can facilitate the key forms of financing:
Unfortunately, bankers get a bad rap because their “Credit Box” can be very limited and non-conducive to the borrower depending on the time and scope of the request.
While many banks actively lend on commercial real estate, every project is different, and it is important to understand the bank’s lending profile, approval process, and/or if they are actively lending on commercial real estate. If a particular bank is only making one or two commercial real estate loans per year, there are numerous potential challenges that are unnecessary. Many banks will shy away from retail or non-owner occupied real estate loans, while others may jump at the opportunity. One final consideration is that many banks require that the borrowing entity’s operating account be held at their bank. For many borrowers, this is not an overwhelming concern.
Benefits of Working With Banks
- Advantageous for investors looking to sell in the next 3-5 years
- 75% loan-to-value max typical, may require borrower to move their money as well
- Amortizations are typically 20 years or less
- Banks require a personal liability guarantee for most transactions
Commercial Mortgage Backed Securities (CMBS) loans are underwritten and funded by a qualified conduit lender, then sold to a trust. Those trusts pool many single loans of varying size, property type, and location, then issues bonds that vary in yield, duration, and payment priority. Lenders are usually willing to do very high-dollar deals (for which it can be difficult to source qualified lenders).
Benefits of CMBS Solutions
- Up to 75% loan-to-value typical; 80% loan-to-value for multi-family
- Will lend wherever the real estate makes sense, regardless of market location
Fannie Mae / Freddie Mac Solutions
Fannie Mae and Freddie Mac are government affiliated agencies that do not actually lend money; instead, they insure loans against default by issuing government bonds. In general, agency-backed loans are available up to 80% loan-to-value, and loans are often available for older assets and properties in less populated geographic areas that other lenders may be unwilling to finance.
- Exclusively for multi-family property investments and assisted living properties
- Loans are non-recourse, have long-term fixed rates, and up to 30 year amortization
USDA Lender Solutions
Mortgages backed the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with below-average, offer 100% financing with reduced mortgage insurance premiums, and feature below-market mortgage rates.
- Fully Loan to Value: Up to 70% to 80%
- Each state’s USDA office sets the maximum loan to value based on its economy. In many states the maximum LTV for hotels is 80% but in some states it has been at 75%
- Each state’s USDA office sets the maximum loan to value based on its economy.
- In each case, we first check with the state’s B&I office to get an update on the maximum LTV before starting any project.
Life Insurance Companies Solutions
Life insurance companies make investments for long-term growth, generally due to the length of their policies and their desire to have sufficient capital available when payouts are due (often decades from the onset of the policy). Because of their long-term view of capital, life insurance companies usually offer the most favorable terms for investors looking to lock in historically low rates for many years, those who want to know their debt service for the next decade without fluctuation, and those who want local loan servicing without the hassle of dealing with multiple parties after closing. Life companies can be relatively conservative lenders, and typically prefer loans up to about 70% LTV.
- Inexpensive, long-term debt
- Fully amortizing, limited/non-recourse structures available
Credit Union Solutions
Credit Unions are often overlooked as lending sources for commercial real estate financing. While they once specialized in offering car loans, residential mortgages, and personal loans, credit unions are now carving out a significant piece of commercial real estate lending. As they are not-for-profit organizations owned by the customers (known as members), they tend to be most aggressive in terms of interest rates offered, as the yields they seek are generally not required to be as large as banks or other sources seek.
- Up to 80% loan-to-value available, generally without a prepayment penalty
- Relatively new to the commercial real estate mortgage arena, so it will be advantageous to work with an experienced loan originator at Venture Mortgage to facilitate the process