Commercial Real Estate Portfolio Trap

Both CMBS pools and commercial banks are typically not happy to own property or to hold non-performing loans in their portfolio.  This often motivates them to be willing to consider taking a discounted pay off on their loans. However the CRE borrower faces a difficult Catch 22 scenario.  Before  CMBS and commercial bank lenders are willing to discuss discounting their notes they want to know that their borrower has a new lender who can close a payoff in a relatively short time frame.  The CRE borrower has to find a new lender without knowing (for sure) if they can actually get a discount but can’t get a discount without a new lender.

Bridge Lenders  – Start Looking for Options Now

The best solution to this dilemma is for a borrower to work with a group that is experienced in dealing with these types of discounted note pay-off loans.  Hedge Funds and Investment Banks can be good choices but they typically will not look at loans under $5,000,000 (or in many cases even larger amounts).  National private capital lenders have experience in these types of loans but the borrower, for obvious reasons, must use extreme caution in dealing with out of state lenders.

Colorado Bridge Lenders

If a CRE borrower can find a local private capital lender with experience in working on discounted note pay off loans then this may offer the best choice in today’s lending climate to get the job done.  The borrower needs to exercise due diligence in working with the local lender, but by using their own attorneys and other professional resources, this due diligence can establish a lasting relationship with a Colorado hard money lender.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

Refinancing Commercial Real Estate Debt

Refinancing CRE properties today may not be easy.  Lenders at the height of the bubble relied on rental income streams that were substantially higher (in many cases) that today’s rents.  Vacancy rates were also lower then and buyers were looking at purchase using cap rates that seem like part of a different world than we live in now.

Many properties today will have values significantly lower than they did in “the old days”.  Some are underwater.  Some may be worth more than the loan but not by much. Some may already be in or facing foreclosure. CMBS are coming back slowly but underwritten with much more caution than 5 year ago.  The same thing can be said for commercial banks and life companies.

Part 2 coming soon…

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

For issue number 1, we suggest talking your deal over with a trusted colleague who is not as actively involved in the proposal. This consultation can provide a more objective view as well as bring up questions to your attention that need clarification.

For issue number 2, here is our viewpoint (as a Colorado hard money lender) as to how people in our business consider loan requests.

Thinking Like a Hard Money Lender.

Does this loan meet our criteria? If a loan does not meet our criteria, most likely we will not even consider the loan request.

What is the real value of the property?  What the value of a property is often depends on who is giving the opinion and whether or not their judgment is swayed by self-interest.  Many private money lenders tend to rely on objective third party appraisals. These appraisals are based on the “as is today” standard:  What is the property worth today in “as is condition?” Not, what will it be worth in the future when certain things may happen or conditions may change?

What is the time frame of this deal?  Compared to banks or life insurance companies Colorado hard money lenders fund loans quickly, but certain time frames are out of lending realities.  Be careful of hard money lenders who claim to be able to fund in a few days – it could be a “bait and switch” type of offer.  Between two to four weeks is standard for Colorado hard money lenders.    The more orderly the borrower has their documentation, the more quickly a loan may close.

Finally, how transparent is the borrower? As a Colorado hard money lender with 41 years’ experience in this arena, our priority is to be open and candid with our borrowers.   In those cases where the borrower is open and candid with us, things proceed smoothly and quickly.  When the borrower does not take this path and attempts to conceal important information, the procedure takes longer and the outcome is less likely to be good.   When the borrower lays out all issues on the table at the beginning, we are comfortable.  Good communication is key.  Contact us with any questions and see what we can do for you.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

If the investor in commercial real estate has a great banking relationship, then go for it.  If your property is in Colorado and your bank is not helpful, you may want to consider working with a Colorado hard money lender.  How best to present your loan to a Colorado hard money lender?  Here are a few suggestions:

1. Organize your loan request.  Prepare an Executive Summary that gives the relevant facts: who are you – what size loan you want – what is the security for the loan – describe the property as simply as possible – discuss your exit strategy.  A short (no more than one page) description of the basic facts is essential for every Colorado hard money lender.
2. Include all relevant information in your loan package.  The Executive Summary is the first item but also include a current personal financial statement, a more detailed description of the property that will be the collateral property, income and expense (if appropriate) data on the collateral property for the past two years and current year to date, a copy of your purchase contract (if you have one), a copy of any surveys or ILCs, a copy of a title commitment (if there is one), a copy of your resume if available, etc.  A complete and professional package will make the right impression on any Colorado hard money lender – an incomplete disorganized package will do the opposite.
3. Before sending anything to your Colorado hard money lender, do some basic research before you apply.  Check out their website and find out what type of loans they like to fund.  Structure your application in a way that places you in the lender’s “sweet spot”.  If possible, get a referral from someone you know that also knows the lender (i.e. your banker, your attorney, broker or CPA).
4. Be open and honest in your presentation.  Don’t try to hide the fact that the taxes haven’t been paid on the property.  Disclose any environmental issues or if there are physical problems in the property that must be repaired.  Nothing works better than full disclosure – nothing is more negative than the Colorado hard money lender finding out serious issues after the fact.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

However, in today’s fast changing world of commercial real estate finance, private money loans are becoming ever more important as banks are being increasingly regulated to death by the various Federal agencies like the FDIC and the OCC.  As banks become unable to fulfill their traditional role as primary lender on commercial real estate, a new area of financing is becoming more important.  This new type of commercial real estate lending is sometimes called the shadow banking community.

Private Real Estate Funding Sources – Private Money Loans

The money for these private money loans comes from hedge funds and other groups that assemble capital for commercial real estate lending.  These types of loans are also called private equity loans, soft money loans or asset based real estate loans.  Today’s commercial borrower can access money from private money loan sources at interest rates that range from slightly above  bank rates (i.e. rates at 6 to 9%) or rates that are more commonly thought of as hard money rates (i.e. 10% to 12%).  There are still lenders out there that are looking for the 13% to 15% rate but they are less common in today’s markets with many more capital providers entering the commercial real estate lending market.

Lenders who are offering more rational rates are tending to shy away from the hard money label in favor of other synonyms.  At the end of the day, the borrower needs to understand that no matter what the name attached, private money loans from private capital sources are likely to be more expensive than loans from banks. But, they can provide the kinds of creative structuring, rapid underwriting and closing response that banks are no longer able to provide.  The wise borrower will not be deterred by the somewhat pejorative term “hard money,” but will shop carefully and choose wisely among the ever increasing pool of private money loan sources that are now available.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

Good private money lenders know exactly what type of loans they will consider and what they won’t consider. Too many private money lenders say they can fund almost any loan under the sun. False statements like these waste borrowers’ time and can cause missed opportunities through false hope. Montegra offers Colorado commercial real estate loans. Let’s narrow this down a bit. Montegra considers loans institutional lenders won’t. When occupancy rates are below bank underwriting standards… when a former bad deal tarnishes a borrower’s credit history… when a borrower need cash fast to capitalize on an opportunity… when foreclosure is eminent… Montegra is willing to tackle difficult lending situations and do it better than any other Colorado hard money lender.

Up Front and Transparency Regarding Lending Fees and Rates

Far too often private money lenders are willing to engage in the old “bait and switch” game. This is a significant danger for a borrower, and the borrower needs to be cautious. Get your loan terms in writing. Use an attorney to represent you when you negotiate a commercial real estate loan with any private money lender. Montegra puts everything in writing from day one. This is the gold standard. Don’t deal with hard money lenders that will not do this. Be aware that there are private money lenders that have a habit of taking large up-front fees for “due diligence” when they know the deal flat out can’t be done. To help you avoid this very dangerous practice, we suggest dealing with a lender from your area – not an out of state lender. Check references from your advisors (attorneys, accountants, real estate Brokers, etc.). Due diligence up front is vital to avoid expensive mistakes. Check a private money lender’s website for negative comments and reviews. We don’t want to blow our own horn, but choosing Montegra as your Colorado hard money lender is a smart thing to do!

What to do if a borrower encounters difficulties in their hard money loan:   Communication – Communication – Communication.

Obviously, once a loan is closed, the ideal situation would be to make the payments and move on to the next deal. This is usually the case, but what about when things don’t go as planned? The earlier you open communication, the faster a reasonable solution can be found. This is a reciprocal process, a discussion, which leads to agreements rather than lawsuits and foreclosure.  If you have chosen the right private lender, then the lender does not want to own property – and will typically do so only as a last resort.  Unfortunately, bad things can happen to good borrowers. Begin the conversation with your hard money lender today. If they don’t want to talk to you, it might be time to find people who do.

For example:  a borrower has missed several monthly payments and the commercial real estate lender has the legal right to put the loan into default and begin foreclosure.  However, the borrower for various reasons is convinced that they can resume making payments to catch up on the amount in default over a period of six months.  The lender puts into writing that they will agree not to declare a default and agree not to file the foreclosure so long as the borrower lives up to their side of the deal and makes the normal scheduled payments along with a certain additional amount added to each over the following six months.

This can be a win/win scenario for both parties.  The lender doesn’t end up owning the real estate and the borrower avoids having the real estate foreclosure show up on their credit. Also, the borrower avoids actually losing title to the property.  In Colorado it is important to put this type of agreement in writing.  This formalizes the “deal” and can avoid serious legal issues that might occur if the lender and borrower end up disagreeing about what how the “workout terms” should be interpreted.

The moral to this story is to follow the single most important rule for borrowers who run into difficulty in their commercial real estate loans:  communicate – communicate – communicate! Without good communication between borrower and lender the chances for a good outcome are very poor.  With it, the chances to save the property are greatly improved.

When banks and institutional lenders evaluate borrowers, the criteria or lending guidelines they scrutinize can be broken down into three categories: cash flows, timing, and risk. If a borrower is deficient in any of these broad categories, then their profile will be outside what institutional lenders are comfortable with.

To be outside of a lenders borrower profile doesn’t take much. For example, properties in prime retail locations not currently generating enough cash flows will be turned down. In this case, a bridge loan could be an excellent option while stabilizing the property. Then, financing from a bank can more easily be obtained

Another situation in which bridge lending may be helpful is one in which the time constraints of a deal do not allow the necessary time to secure bank financing. Banks typically require between 30 to 60 days to underwrite a commercial real estate loan request.  Institutional lenders such as life insurance companies need even more time.  This offers a perfect example of the use of bridge financing.   The opportunity to   secure a property at a better price by acting quickly and then refinance later with a traditional lender is a scenario that is seen with increasing frequency in today’s market.

Numerous other situations exist when a real estate borrower may need to bridge the gap between two time periods. Call Bob Amter or Kim Skari at Montegra today to see how we can help you with your current bridge loan borrowing needs.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

Institutional Lenders Process

1. Collecting and Presenting Documentation – When applying to a bank for a commercial mortgage be prepared to provide the property’s income statements, balance sheets, statements of cash flow, and tax return information for the past 3 to 5 years. Other documents that will be requested are rent rolls, leases with financial statements from the tenants, borrower or guarantor’s personal financial documents, and all appropriate corporate documents. (Can take multiple weeks)
2. Underwriting Begins – Once all the necessary documents are collected, underwriters scrutinize applicants to evaluate the risk and the ability to repay the loan. (2-3 weeks)
3. Appraisals and Engineering Reports – Independent appraisals are done, environmental information is gathered, and engineers inspect the building for any major structural concerns. (4-8 weeks)
4. Commitment Letter Delivered – If the lender is interested, they typically deliver a written commitment letter. The commitment letter signifies intent to fund the loan, but normally contains multiple contingencies and is not binding. (1 to 3 weeks)
5. Loan Committee Evaluation – Approved loans are sent to the loan committee for evaluation. The loan committee has the authority to veto any loan based on a number of criteria, i.e. overall market forecast, overall loan portfolio balance, funding capacity, re-evaluation of risk factors, etc. (Up to 4 weeks)
6. Closing the Loan – Final paperwork is signed and the deal is closed.

The entire commercial real estate lending process is rarely completed in less than 3 months, and, more often than not, takes much longer. In the event that the final loan committee vetoes the loan, the borrower has to start all over after having wasted months of valuable time.  The prudent borrower will make sure to account for all the above mentioned variables when purchasing or refinancing real estate.

Private Money Lenders Process

1. Collecting and Presenting Documentation – Hard money lenders procedure is quite streamlined in comparison.  An initial interview will discuss where the property is, what the borrower wants to accomplish, the size of the loan, how the funds will be used, and the personal financial situation of the borrower/guarantor.   For more complex loans additional information may be required. A private capital lender will typically try to get all this information at the time of first contact with the prospective borrower. Our advise is to be prepared, both for direct lenders and institutional mortgage lenders.
2. Terms Sheet and Commitment Letter – After getting a feel for the mortgage request a private capital lender can provide a term sheet outlining the basic terms of a loan within 24 to 48 hours from initial contact. If the borrower approves the terms a more detail commitment letter should be provided by the lender and signed and approved by the borrower. (About 1 week)
3. Underwriting and Final Approval – Upon receiving a signed commitment letter, private money lenders start their due diligence, which includes appraisals, engineering reports, and final loan review. Underwriting can be completed much faster because of the efficiencies in dealing directly with the actual provider of the funds instead of going through a long process of working your way up the corporate ladder.   (2 to 3 weeks)
4. Closing the Loan – Final paperwork is signed and the deal is closed. (About 1 month total)

In addition to the obvious advantage of getting a loan closed in 30 days instead of in 90 to 120 days, there is another. Knowing whether a loan is approved or not within a matter of two weeks or less, rather than the 90 period of bank or institutional lender, saves both time and resources.

At Montegra Capital Resources, the person you speak to at your initial discussion is the same person who will evaluate, approve, and close your mortgage. We know our market, and what we can or cannot do for you.  By cutting out unnecessary red tape and loan committees, Montegra provides real estate professional the capital they need when they need it.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.

•  The lender can get title to a property in a shorter time frame than having to go through the full foreclosure process.  In Colorado this process takes approximately five months and frequently longer.
• The property owner can avoid having a foreclosure appear on their credit history.  This is important since a foreclosure will have a very detrimental impact on a credit rating agency’s credit score for up to seven years.
• In many instances the borrower can negotiate with the lender to avoid having the lender collect a deficiency claim under the borrower’s personal guarantee of the loan.  Lenders sometimes will agree to reduce the amount they will claim under a personal guarantee and sometimes may eliminate it altogether.  This is subject to negotiation between the lender and borrower.

It is advisable for a borrower to retain a competent real estate attorney to assist in the negotiation for a Deed in Lieu.  These are complex legal documents and need to be done correctly for them to protect both sides in the transaction.  There are also important tax implications to a Deed in Lieu and consultation with a CPA may be appropriate.

Borrowers should not hesitate to open lines of communication with their real estate lender when default is on the horizon.  Discussion of alternatives to foreclosure can be productive.  Lack of communication can only make a bad situation worse.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  Bob has been in the private capital lending business for 41 consecutive years.