Peter Pays Paul

Commercial mortgage brokers would do well to take 15 minutes to get acquainted with the lenders on their lender list. While a rate sheet and lending matrix can be helpful, nothing beats a phone or face-to-face interview.

Here are nine questions that will allow a commercial broker to focus their efforts and to target properties to the right lenders.

1. What are your minimum and maximum loan amounts? - Calling a lender with a deal that is either too big or too small is a waste of your time and theirs.
2. Do you have a geographical limitation? – Some lenders can only lend in certain metropolitan areas. A loan outside of these areas is an automatic “No”.
3. What property types do you prefer? – You don’t want to take a loan on an auto body shop to a company that only finances apartments.
4. How long does your average loan take to close? What is the shortest amount of time you have personally seen a deal close? – This is very important to ask if you are dealing with 1031 exchange properties. It can help you weed out lenders for deals that need to close quickly.
5. What is your maximum loan-to-value ratio? – This helps you to eliminate lenders that cannot provide the leverage your borrower needs.
6. What is your minimum debt-service coverage ratio? – Along with the question above this helps you to determine the amount your client can borrow based on the properties income.
7. What information do you require from the borrower in a loan package? – It is frustrating for a lender to receive a trickle of information about a loan over a period of days, weeks, or months. Knowing beforehand what a lender needs, you can  assembled all the necessary documents before you send it to the lender for review and hopefully a quick answer or LOI.
8. What is the best way to contact you if I have a deal? – Contacting the lender through their preferred method shows a deference to working on the lender’s terms. It shows that you want to make things easy for them, not yourself.
9. What loans are you the most competitive on? – Sometimes lenders will tell you that they will lend on a certain type of property, and they probably will. However, the rate, LTV, or DSCR will make it practically impossible to get a loan from them. This question helps to narrow the scope to only the properties they can offer competitive financing for.

These are my nine suggested questions to ask your commercial lender. Do you have any others that you would recommend?

This month’s meeting for the Bay Area Mortgage Association was titled “What get’s financed in 2009?” The three panelists shared what each of their companies would be looking to finance in 2009.

Two life insurance companies and one national bank were represented on the panel. All three institutions expected higher cap rates, lower loan-to-value ratios, and stronger debt-service coverage ratios as requirements for new originations.

The bank is currently only planning to work with customers that have an existing banking relationship.

The life insurance companies face a difficulty because their global portfolio allocation have been skewed by the massive decline in the stock portion of their portfolios. For some of the life companies their portfolio is out of balance towards commercial real estate, as these assets have not lost value at the same rate the stocks have. This means that they will likely see a decrease in the amount of loans they can originate.

Survey Says

In a survey performed by Marcus & Millichap commercial financing ranked as the biggest concern for real estate investors in 2009 reported by Mortgage Bankers Association.

Financing availability, creditworthiness of tenants and rising vacancy rates top concerns for commercial real estate investors responding to a survey conducted by Marcus & Millichap Real Estate Investments, Encino, Calif.

…

Nearly 60 percent expected all-in mortgage rates to increase in the next year; nearly 75 percent believe financing will be as difficult or more difficult to obtain. While 60 percent of commercial real estate investors expected full recovery of the commercial mortgage-backed securities market, they said its return could take at least two years.

This provides a good opportunity for:

1. Commercial mortgage brokers and bankers that are able to find solutions for their clients,
2. Commercial real estate agents that are able to structure deals that get financed,
3. Real estate investors/lenders that have cash.

Creativity will be one of the keys to success in 2009 for those in commercial real estate. “Business as usual” is on vacation.

Photo Credit: The Pack

Calculated Risk’s post More CRE Woes: Multifamily housing details that loans on multifamily properties have seen an increase in delinquencies.

Apartment to Condominium Conversions

Some of this can be attributed to the reconversion of condominium conversion projects.

During the heyday of low interest rates and the housing bubble. Developers were buying apartment buildings, upgrading the units, filing a condominium map, and then selling the complex as condominiums to buyers. Often this was less expensive than buying land and building a brand new condominium project.

Condominium to Apartment Conversions

With lending criteria tightened, demand for condominiums has dramatically fallen.

Developers are being forced to offer these projects not for sale but for rent in order to make loan payments on their construction loans. These condominiums are being returned to rental status.

Rental Supply and Demand

Initially the condominium conversion projects decreased the available supply of rental housing, as apartment projects were bought for conversion. A decrease in supply lead to increasing rental rates.

Today, the opposite is happening. Condominium projects that are rented are increasing the supply of rental units and rental rates should decrease.

Calculated Risk’s post from Friday, The Residential Real Estate Market, details this exact scenario.

Adding to the woes are the fact that thousands of vacant single family residences are still on the market. As these are absorbed demand for rentals is likely to decrease again pushing rental rates even lower.

Last week I spent 5 days 8 hours a day in the CCIM 101 course. It was quite an investment of time (and money).

It was worth every penny and minute.

The CCIM course is not for those that are mathematically challenged. (If you hate math, this course will be a challenge.) Much of the course is theoretical and analytical. It is also entirely practical.

The theory and analysis apply to real world situations.

What does CCIM 101 cover?

In the course we reviewed discounting and compounding cash flows, net present value, amortization, and a number of other financial calculations. You will become very familiar with your calculator during the week. (CCIM recommends the HP 10bII Financial Calculator and provides many of the keystrokes in the class text.)

The course briefly covers time value of money, appraisal, taxation, and provides two case studies to bring the calculations and theories to real world scenarios.

You will learn the difference between cap rates, cash on cash returns, internal rates of return (IRR), and capital accumulation and how to calculate each one.

Who should take CCIM 101?

I would recommend this course to commercial real estate professionals that want to provide an advisory service to their clients.

This course can add tremendous value to your clients. It will help you to competently evaluate competing investments and financing scenarios. Then you can advise your client on which is a best fit for their stated investment goals.

This is a great course for leasing agents, sales agents, commercial mortgage brokers, and real estate investors.

What did I take away?

I value CCIM 101 because it is not only, useful now as a hard money lender, but I can use it in my own real estate investments.

I will most likely use this in the short term for discounted note purchases. The discounting calculations will allow me to provide an adequate return on any notes that we buy as a result of the credit crisis.

The instructors were great. They came from different locals in North America and brought a breadth of backgrounds. They were able to convey the material with authority and wisdom that only comes from years of experience.

Straight Talk About Mortgages and Real Estate Investor Sues to Block Mortgage Modifications.

Diana Olick outlines some of the issues that are causing jitters in the commercial real estate world.

“As the market is now deteriorating, as vacancy rates are rising and as asking rents are moderating and in some places declining, gaps in cash flows, how much money is the property producing versus what the debt service payments are, that gap is widening in many cases and it’s making it really challenging to meet the debt service coverage payments.”

Fear Gripping Commercial Real Estate—But Question Is Why?.

Imagine that little retail center near your house.You know the one.

It has your favorite coffee shop, the weird home decor shop, a woman’s clothing boutique, the nail shop, and the national auto parts store.

Over the years you’ve seen the stores change. Different shop owners have come and gone. The coffee shop has been there for a while. The woman’s clothing store is only a year old.

As you drive by you notice a “Going Out of Business” sale going on in the home decor shop. You’ve talked with the owner of the woman’s boutique and she is having a rough time making a profit.

If these two stores close their doors, you wonder who is going to fill this space. What is going to happen to the owner of that little retail center? Where will he find tenants?

The Plight of Retail Stores

Americans are spending less money these days. We built our economy upon the model of consumption and borrowed to fuel that consumption.

With the well of cheap financing depleted, spending has come to a screeching halt. Retailers nationwide are taking a hit. The recent headlines have featured the likes of Circuit City, Mervyn’s, Shoe Pavilion, and Linens ‘n Things.

The Pain on Retail Center Owners

When a retail store closes or “goes dark” the landlord will feel the pain of having a vacant store. (Some leases do have a provision that stores can close but while the tenant continues to pay rent.) This means that she does not have as much rental income to pay the bills she faces for owning the property.

How Vacancy and Rental Rates Affect Value

I shared here the most common method to value income producing property. The most important numbers to determine value are Net Operating Income (NOI) and the Capitalization (Cap) Rate.

Rental rates and the assumed vacancy rate will affect the NOI. NOI is then used to calculate the value of the property based on an expected return to the investor, the Cap Rate.

Slight Changes with Devastating Effects

So how would a 10% decrease in rents, a 5% increase in vacancy, and a 1% increase in Cap Rate affect a properties value?

Notice that the value decreases by 26%.

Also notice that the change in the maximum loan amount decreases by $1.08 million. If the borrower needs to refinance under these new assumptions, the borrower will need to come up with over a $1 million to close the loan. The foreclosure process and bankruptcy are not far away.

The Current Credit Crisis

Currently, some institutional lenders have begun to underwrite retail loans along the lines of this scenario. They are forecasting decreasing rents and higher vacancy rates.

Some lenders are incorporating a higher cap rate as well. (One developer I know said that he hasn’t started a retail project unless it underwrote at a 8% cap rate or higher because of historical cap rates, even during the boom times.)

Unless, a retail property absolutely must be refinanced now, the wise real estate investor would be best served to hold off until cooler heads prevail.

The NY Times has an interesting article on the California town of Mountain House that sprang up during the housing boom. The first homes were sold in 2003 and according to the article 90% are underwater on their mortgages.

Read the Article

The NY Times also has a map of the locations where homes are worth less than their mortgages.

Interactive Graphic – NYTimes.com.

No, I’m not writing about NASCAR or the IndyCar Series. And no it is not the video game.

I’m talking about those rare occasions where you need money and you need it fast.

If you are a commercial real estate sales agent or commercial loan broker, what do you do? Do you know who to turn to in a pinch?

In baseball many teams have the left-handed specialist who will come into the game to get one batter out.

Basketball teams have their specialists as well. The Chicago Bulls had Michael Jordan. The Lakers, Kobe Bryant. Who is your “Go-To-Guy” when time is short and you need a “sure thing”?

“Clutch”

Coaches depend on “clutch” players that will perform when the game is on the line.

Do you have a lender you can depend on when there are 10 seconds left and you are down by two? Do you have a “clutch” lender that understands real estate and can salvage a deal when your client’s deposit is on the line and close of escrow is days away?

Built for Speed

Most hard money lenders are built for speed. Some models of business are faster than others, but in general this is one of the advantages of hard money.

Because most private money lenders don’t have FDIC and state banking guidelines to follow they can underwrite and make a decision much faster than a bank. This allows them to fund deals much faster than a bank.

Always Be Prepared

No one plans on a deal going sour at the last minute, but it is good to have a plan for a “what if” scenario.

Like the Boy Scouts’ motto Be Prepared, commercial real estate specialists should have a tool for every situation. Having a relationship with a hard money lender for deals that require them is just another tool in the commercial real estate professional’s belt.

The Essence of a Professional

Which do you think sounds more reassuring to a client and more professional?

“I never have seen this situation happen before. I’m not sure what to tell you Mr. Borrower. I will have to get back to you on our options.”

Or

“Mrs. Borrower this situation rarely happens. However, I have developed a relationship with a lender that specializes in closing loans quickly. They are a more expensive than bank financing, but they will allow us time to find a more permanent solution.”

Quick Close Scenarios

Mr. O’Skool Mr. O'Skool is an experienced real estate investor. He is very "old school" and doesn't like much leverage. He speaks slowly and always has interesting anecdotes about life. He drives a late model station wagon and brags that he has a second matching station wagon at home in the garage. You are not sure you have seen him without a sweater on.

Mr. O'Skool owns a variety of properties He owns two apartment buildings free and clear. Through his network he learns that another apartment house is available for purchase. He knows that he can purchase it from the current owner if he closes in 15 days time at a 15% capitalization rate, otherwise the owner is going to list it on the market.

Can you get Mr. O'Skool the money he needs to purchase the property in 15 days?

Ms. Forshewnat

Ms. Forshewnat is a very successful real estate investor. She began with a few properties her late husband left to her and has parlayed that into a multi-million dollar real estate empire.

Through the grapevine you have heard that she is not extremely pleased with the service she has received from her previous lender. You have been courting her business for a while and she has finally agreed to allow you a chance at winning her business. She tells you that she is has other notes coming due in the coming months.

She has asked you to finance an office building she owns as the note is coming due in 120 days. You take Ms. Forshewnat to one of your lenders that has a great program for office buildings.

Everything is moving along without a hitch until the lender runs a new credit report 20 days before closing. It seems that Ms. Forshewnat co-signed a loan with her 23-year old son who has missed two of his payments. Now her credit score has dropped and the lender is unable to extend financing.

Can you find a lender to close in 20 days in order to keep Ms. Forshewnat from having a default and jeopardizing future loans?

Buying Time

In general, hard money is not a long-term solution. But it can buy you time to find that permanent solution.

Having a reliable, direct hard money lender can be invaluable to commercial real estate professionals.

Reuters is reporting that GMAC’s mortgage unit, ResCap, has reported its 8th straight quarterly loss of $1.91 billion. GMAC, LLC, the financing arm of GM, reported its 5th straight quarterly loss.

The unit speculates that GMAC may convert to a bank holding company in order to receive funds from the TARP.

This as well as the previous post do not bode well for the residential real estate recovering soon. Fewer lenders equals less competition. Less competition means higher interest rates. Fewer borrowers will qualify for loans at higher rates and fewer houses will be sold.

Long-term this is a good sign because it is the removal of inefficient competitors from the marketplace. It will also be beneficial because it will help with the deleveraging of the economy and it will force those of us in the market for a house to save or build equity the old fashioned way.

GMAC has $2.52 bln loss; ResCap unit may fail | Reuters.

(HT: Agent Genius News)