appraised value you present in your offering memorandum , generally , I would haircut a recent broker opinion of value by 10 percent because you don ’ t want to set a hurdle so high that it ’ s not realistic . You also don ’ t want to either give the impression that your facility is worth less than what a loan officer would assume or present a loan-to-value that ’ s too high .
Narrative . If you already own the property , an ownership history narrative lets you describe the year ( and , ideally , the month and year ) that you acquired the property and the purchase price . Describe all the major capital improvement projects completed with a timeline or schedule . This illustrates to the loan officer that you have made ongoing financial investments to your property to increase its long-term value . Make sure you provide a total cost basis ( or your capitalized interest in the facility which would be located as your basis in your tax returns after you add back depreciation ) and spend the time to include any material capital improvements . You should also describe the non-capital ways you have added value ( that is , sweat equity ). Describing your business plan along with your tenancy will provide the lender with the confidence that you understand how to operate a commercial real estate facility . Lastly , include any strengths you know of . Keep in mind that a loan officer is focused on term risk ( or the possibility of default during the term of the loan ) and balloon risk ( or the possibility of default at loan maturity ).
Market Information . Whether you are seeking financing terms from a local lender that understands your immediate market well or a Wall Street CMBS lender that provides 10-year fixed rate non-recourse mortgages but may not know your market , you want to describe the demographics and demand drivers for your property . This includes important items like median household income , population growth , and current population . Furthermore , it is important to describe the top employers in your town , city , or county . Also , describing any new developments ( for example , a newly built hospital 3.2 miles north of your facility or a new townhome development 1.6 miles south ) will help the lender understand the current commercial real estate and economic activity .
Additionally , you will want to outline how your commercial real estate facility fares within its competitive submarket , including how your rent levels are relative to the market — particularly if there is upside in revenue .
Be sure to provide a description of the ownership and sponsorship information , including a full breakdown of everyone with an ownership interest , their respective interests , and managing members ( presumably you and possibly others ). You will want to provide a resume focused on your commercial real
Describing your business plan along with your tenancy will provide the lender with the comfort that you understand how to operate a commercial real estate facility .
estate ownership and management experience with all the commercial real estate properties you own and manage , the locations , and total number of units and square footage . Your financial wherewithal is important for lenders to consider your proposal , but an approximate net worth and your approximate liquidity are enough . Remember the adage to “ underpromise and overdeliver .” Be conservative if you are giving estimates .
If you have any credit blemishes such as foreclosures , deeds in lieu , bankruptcies ,
or significant litigation , proactively disclose this to your loan officer . Be sure to describe the applicable mitigants or circumstances . Be transparent — lenders tend to find more than you think . Finally , a low credit or FICO score is important to local commercial lenders , so you will want to describe the circumstances relating to a low score .
Along with a narrative offering memorandum , you will want to include an underwriting cash flow that includes historical ( i . e ., multiple years ) financial performance , your next-year budget , and an underwritten cash flow . An underwritten cash flow represents a lender ’ s annual estimate of your facility ’ s next-year financial performance . Lastly , you should include cash flow notes , which explain year-over-year variations like any significant variation in a specific line item and the basis for your underwritten revenue and expense line items . If providing an underwritten cash flow is beyond your current capabilities , you can provide three years of historical operating statements with a current rent roll along with the offering memorandum . With these tips , you should be on your way to improving the quality of your mortgage loan terms .
Gregory J . Porter , CCIM President at Summit Real Estate Advisors Inc . Contact him at gporter @ summitreadvisors . com .
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