Proper preparation is key for brokers and investors

by Kimberly Greene07 Oct 2019

As banks scaled back in commercial and industrial real estate lending in the decade following the financial crisis, non-bank lenders stepped in to fill the gap. Banks still hold the majority of commercial real estate loans (there are currently $2.3 trillion in commercial and industrial loans at U.S. banks, according to the Federal Reserve), but about one third of all commercial and industrial loans taken out by publicly-traded middle-market firms during the 2010-2015 period were extended by nonbanks, and that number has been growing.

In a recent webinar, Chip Cummings, founding partner and CEO at Red Oak Capital Group, LLC, outlined some of the roadblocks that brokers encounter when seeking these opportunities at various non-bank lenders. The bottom line is, when it comes to common sense lending strategies, being properly prepared is key.

Often, inexperienced brokers will fall short with the preparation aspect, and come to lenders with an incomplete executive summary or an inadequate understanding of the deal. Lenders are, understandably, unimpressed.

“I don’t care if it’s real estate, books, cars, computers—if you don’t know all aspects of the deal then you really have no business selling it,” Cummings said.

In order to make a deal attractive to a lender, a broker or an investor needs to tell the story of the property and the situation. A lender is most concerned about recouping the money that they put into the transaction, and the more information they have about the situation, the better.

Good executive summaries are going to prioritize the deal, whether it’s a rehab, refi, or purchase. Financials are a top priority: the net operating income, fees, and operating statements; include a budget for taxes, any repairs necessary, and also compensation. A proper executive summary includes information on the principals in the deal, who they are and their experience level. The lender is going to check on the principals anyway, so it’s useful if they have all of the information upfront.

Photos are a must, not only of the inside and outside of the property itself, but of its immediate surroundings. What aspects of the neighborhood are promising for the property itself? This includes any relevant market information and data on the local economy, including other businesses in the area.

What’s the exit strategy? Investors can be so consumed with the purchase of the property that they neglect to think through the plan for getting out, or, if they’re going to hold onto the property, the ongoing expenses that are going to impact their bottom line. Most importantly, an executive summary is well-formatted and easy to read. It is complete, concise, and there is no padding or “fluff”.

When a lender sees a winning deal, then it’s all systems go. Cummings said that there are three major ingredients to a successful deal: people, project, and numbers. A winning deal obviously has to make sense financially, but it has to make sense on a practical level as well. In addition to making a profit for the investor, the lender, and the broker, but it should also improve the community in some way.

“There has to be something else other than money that makes it tick,” Cummings said, and that could mean a aspect of the deal that makes a difference in the life of the borrower.

Sometimes, of course, things don’t work out. A bad deal can come in a number of different forms, such as being impractical when it comes to location or purpose, it could have a bad design, or a lender can foresee headaches when it comes to transforming raw land or dealing with permit approvals. Again, Cummings said, they look at the people involved: who benefits and who loses?

Lenders often run into the case where they have the right borrower and the wrong deal. The principals are strong and experienced, they look good on paper, but it’s the wrong business plan or area for that particular deal. In a case where an individual component of the plan is wrong, sometimes figures can be arranged to make it work, but not always. Other times, the deal will be great, but the wrong borrower is behind it. Borrowers with inexperience, Cummings said, don’t have the capabilities of running a $3 million hotel project, or whatever it might be. And in either of those situations, sometimes they’ll just have to walk away from it.

A great deal starts by choosing an experienced lender with the capacity to do the deal, and having the complete documentation necessarily to present a great case for the project.