BRIEFINGS
By Gregory J . Porter , CCIM
IMPROVING LOAN PACKAGES
A lot of detail goes into an ideal loan package , but securing favorable terms can pay off for decades .
Every business , including the business of owning and operating commercial real estate properties , requires operators to become skilled in various aspects of a commercial operation to be successful , such as customer service , marketing , operations , and management . Commercial real estate ownership also requires operators to understand and ideally excel in managing property and obtaining favorable mortgage financing terms , adding a new dimension of necessary experience . While this complexity can allow commercial real estate owners to be creative and add value to their business , it can also be overwhelming .
CRE owners must be proficient in the specific but critical business application of putting together a great loan package for lenders — one that will not only get approved , but also help achieve the best possible mortgage financing terms . No activity during the CRE ownership cycle will impact an owner ’ s cashon-cash returns more profoundly than securing the loan terms , including the interest rate and amortization schedule . In addition , many CRE owners don ’ t realize the wide range of available loan terms . For example , a CRE operator may decide that a 25-year amortization schedule offered by local commercial banks is the norm — but in reality , 30-year amortization schedules are widely available for “ full ” loans ( even partial or full-term interest-only schedules are available for loans less than 70 percent loan-to-value ). You just need to know where to look and which lenders to approach . This is important because a commercial real estate owner will not only need to obtain a mortgage at the time of property acquisition , but unless the owner obtains a rarely offered long-term , self-amortizing loan ( similar to residential home loans ), commercial real estate operators will also need to refinance their loan balloon three to five times during their
No activity during the CRE ownership cycle will impact an owner ’ s cash-on-cash returns more profoundly than securing the mortgage loan terms .
ownership cycle before it is fully paid off . Furthermore , many CRE owners have recognized the benefits of utilizing CMBS loan financing to obtain a cash-out refinance mortgage as a unique way to harvest the equity they have created to buy or build additional commercial properties without having to sell assets and pay capital gains taxes . In that case , the need to refinance their loan balloon every 5 to 10 years continues into perpetuity .
A professional and effective loan package includes an offering memorandum and a description of the property ’ s annual financial results ( or cash flows ). The offering memorandum sometimes includes a table or image of the financial results ; other times a separate Excel-based sizing or underwriting model is prepared and submitted to the loan officer . The offering memorandum provides the loan officer with a narrative description of the property , history of ownership , current business plan , demographic information , competitive market information , a description of the owner / borrower , and — most importantly — the loan request .
Pictures . Bright , attractive pictures are one of the easiest , most powerful ways to create a loan package that will not only get approved , but also improve your mortgage loan terms . After all , commercial real estate is a business that you can touch and see .
Description . Behind the photo on the cover , the loan package should include the address of the property as well as a description including the total number of units , square footage , and occupancy . You will also want to describe the acreage and any amenities the property offers customers . The loan package should also have the loan proceeds you are seeking along with the associated loan-to-value based on what you think the property is worth .
Loan Ask . Sometimes owners feel apprehensive to include a loan ask , but loan officers appreciate having a sense of what you are looking for . In terms of the estimated
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SPRING 2022