Continuing our discussion from (part 01) of this mini series covering large-scale commercial mortgage financing (If you have not read part one you should do so). It is helpful to have a general idea how mortgage lenders view commercial income producing properties for financing. When considering projects for financing in excess of one million dollars, lenders are not so concerned with the principles initially. Rather, they are more concerned about the operating economics of the property. Lenders (mortgage brokers and mortgage bankers) will want to see a detailed rent-roll (leases), with pro forma projections, income statements and copies of income taxes for the last two years and maybe some pictures of the project. This is enough preliminary information for a lender to pre-qualify the project for further consideration.
Once the determination that operating economics work, the lender will look to the quality of the tenants and the length of the leases. Mortgage banking firms like to see rent rolls having long-term leases (equal to or greater than the term of the proposed financing). Ideally, the project will have at least one or more anchor tenants (Wal-Mart, Target, Kroger, or multiple smaller strong tenants like McDonalds, Radio shack, and the like). The stronger the tenant, the longer the leases, the more likely they will be interested in the financing.
The bottom line to permanent commercial mortgage financing is that grade-A projects with grade-A tenants and grade-A principals will get the most favorable rate and loan terms from life companies for properties requiring financing in excess of a million dollars. While it is possible to get life financing for projects around the million-dollar range, the truth of the matter is Life companies tend to like deals from about 2 million and up.
Once the determination to pursue financing has been preliminarily made, mortgage brokers and bankers will request a host of information from the principal including resumes, financial statements, tax records, etc. If the principal’s are a partnership or corporations the request for information becomes more detailed. In essence, you should be prepared to give a full accounting of your financial picture (audited by a CPA at some point along the spectrum).
Formal loan applications are comprehensive legal documents covering a whole spectrum of concerns to both the borrower and lender and will require you to have legal review before acceptance and signature. The application fees you can expect to pay for the loan are typically around one percent (1%) of the amount of financing you are seeking. Example, if you want to borrow 2.5 million, you can expect to pay around $25,000.00 when you sign the application. From this application fee, an MAI appraisal will be ordered (unless it is a separate fee to the borrower).
Because of the financial and legal details associated with commercial mortgage financing are complex, you are strongly urged to have both legal and financial counsel representing you. Most people who are in this league of financing are already well represented but I set forth this statement for those of you who are relatively new to the game. It’s big league.
This is why I cautioned people in part one of this mini series to avoid paying up-front fees to mortgage brokers. Often times these people are crooked and swindle people out of money and add another layer of fee-costs to an already expensive project. Stay tuned, I will be discussing ways to protect your self when dealing with mortgage brokers in my next article.
To your success!
Do you like this tip? You haven’t seen anything yet! Check out our Smart Books Business products by clicking the link below. We have business kits, books and ebooks to help you get smart-fast. Check us out…. We’ll save you a TON of time and money.