Commercial Lending ? Getting to Know Loan Types by Andy Bogdanoff

by 02 Jun 2008
It?s a well known fact: a skilled broker can help a good business deal secure great financing. Some of the most significant value a broker can bring to the table can be seen in the early stages when a borrower is deciding what type of loan to pursue for a particular business deal. A skilled broker can help sift through the borrower?s circumstances and requirements in order to approach his investment banking partner with a deal that makes good sense for a particular kind of loan. Collect Information to Provide Educated Guidance That first phone call with a borrower is full of opportunity to make an initial recommendation on the type of loan a borrower should seek. Brokers should use this as a Q&A session that ultimately provides information to help make this important decision. Questions that should be asked include how quickly the loan needs to close, what percentage of the total budget is going to be borrowed, and details on the property type as well as the condition of the property. With answers to each of these questions, a broker can make an educated recommendation to both the borrower and the lender about the type of loan that will satisfy the borrower?s needs. It?s important to note that this is also an ideal opportunity for the broker to weed out those opportunities that are simply not a good fit for the broker himself or his investment banking partner. The broker should effectively analyze the client?s needs and provide realistic counsel to them. In a perfect world the broker will be able to identify a loan type that effectively meets the borrower?s needs, but he or she must be able to tell the client if the objective is off the charts. By making sure that he is only sending quality loan requests through the system, the broker is able to protect a well-earned relationship with his investment banking partner. Loan Types ? A Guide to Making a Recommendation The best way for a broker to accurately recommend a loan type to a client is to be intimately familiar with each loan and the circumstances under which it is normally offered. Let?s take a look at some of the more common loan types to understand what they mean and when they are most often used: o Hard Money Loan This is typically always an asset based loan, which means that it will generally require a tremendous margin of collateral in order to protect the lender. Most times this type has a very low loan to value (anywhere from 25 percent to 60 percent of the value of the collateral the loan is being lent against), and is often recommended when a borrower needs to close the loan quickly. For instance, a hard money loan might be appropriate for a commercial property owner that is facing foreclosure if he doesn?t pay in the next 30 days. Or, a borrower that has been hit with a surprise situation ? perhaps his original lender has backed out of the deal just prior to closing ? might consider a hard money loan. Because a hard money loan normally does not entail a full credit review, it does not have to go through the complete underwriting process. This means that the loan can be closed in as few as three to four days. o Bridge Loan This is a temporary loan that is meant to bridge the gap from Point A to Point B, which is usually defined as a finite point of time. These loans are not generally high priced, though the bridge lender might charge more because he is only earning interest for a defined, often short, period of time. A bridge loan would be appropriate for a commercial property owner that wants to sell one property and purchase another. This property owner might take out a bridge loan based on the equity of his existing property, which has not yet sold, in order to cover the gap of the funds needed to purchase the new, more expensive, property. Using the equity in the first property to bridge to the new property enables the property owner to solve a temporary need. Bear in mind that if a borrower requests a bridge loan, but can not define an exit strategy for how and when the lender will be paid back, the lender will most likely convert the loan to a hard money loan. o Permanent Financing Much like a home mortgage, permanent financing is a loan type with a long term payout. It is normally used for stabilized income producing properties ? office buildings, apartment houses, shopping centers ? where there are contractual obligations to make payments every month on the part of a tenant that gives the owner enough money to pay the mortgage. Permanent loans have low, fixed rates and long-term amortization where principal and interest are paid every month. Permanent commercial loans provide a caveat to protect the lender from offering a below market rate for too long a period of time. Unlike a mortgage loan, which offers the same rate for a long period of time such as 30 years, a permanent commercial loan generally requires the borrower to pay a balloon payment after a five, seven or ten year term. The lender often will offer the borrower a new loan, but at a higher rate so that the lender is protected for another term but with a more current interest rate. o Construction Loans Obviously stated, construction loans were created to assist in the building or remodeling of commercial properties. These loans generally require the borrower to have expertise in the construction business, are normally interest only and carry a short term. Construction loans are often considered glorified bridge loans because the construction lender provides a loan to cover the period of time that the project is being built, but not afterward. In many cases, a construction lender will not provide a loan until they know that permanent financing has been secured and understand all the details of that loan. In short, construction lenders only want to absorb the risk that the project will not be completed, nothing else. o Mezzanine Loans Mezzanine loans are, in essence, second mortgages on commercial properties. With a mezzanine loan, a lender is making a loan behind another loan. For instance, if a borrower is purchasing a property for $10 million and has secured $7 million in permanent financing from his bank and $1 million from private investors, a mezzanine lender might fill in the remaining $2 million investment. Because the risk to value of a mezzanine loan is high, interest rates are typically higher, too. This makes sense when you consider that a mezzanine lender does not receive one cent of payment until the senior lender is paid off in full. Funding Deals That Make Sense Every day, hundreds of times a day, brokers request one or more of these specific loan types from their investment banking partner. No specific type of loan is in vogue or is more popular than another, since defining a loan type truly depends on the circumstance of the borrower and the specific details of a commercial project. That?s why it?s critical that brokers are well educated about loan types and under what conditions each is typically used. Brokers must be able to work with their clients in realistic ways to share the details of different loan types in order to meet the borrower?s needs. Brokers would be doing a disservice to their customers, their banking partners and themselves by taking a loan application that they know will not receive financing. The same is true if a broker walks away from a deal without exploring if an alternate loan type might be appropriate. The best strategy is for a broker to know the lending options and work with a reputable investment banking partner to fund deals that make sense. Andrew Bogdanoff has more than 35 years commercial lending experience and founded Remington Financial Group in 1993. He has served as the company?s president since its inception, and under his leadership the company has grown to a closed transaction rate of well in excess of $2 billion. Andy can be reached at or 480-905-3239. For more information on Remington Financial Group, please visit



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