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.

This pressure on banks creates an unusual opportunity for commercial real estate borrowers subject to bank loans.  Banks are now frequently willing to discount loans on commercial real estate (even performing loans) to borrowers who can pay off their loan in a relatively short time frame.  If you owe a bank $1,000,000 on their note and they accept a payoff of $850,000, then you have just made $150,000 without any risk.

Montegra Capital, a Colorado hard money lender, is seeing an increase in this type of loan request with banks offering anywhere from a 10% to 25% discount on loans that can be taken off their books in approximately 30 days.  Even loans that are of institutional quality are being discounted but ironically institutions such as life insurance companies and other commercial banks typically cannot react fast enough to allow the owner of the real estate to get the discounted pay off.

Because of the time frame disconnect many property owners are turning to private capital real estate lenders who can move quickly to allow them to make this risk free debt reduction happen.  Owners increasingly understand that it makes sense to pay the higher loan rates charged by private capital hard money lenders to obtain the financing that allows them to pay off their bank loan at a discount.

However, owners need to be sure to consult with their CPA to structure a discounted pay off in a way that will avoid certain tax penalties that can occur through this type of debt forgiveness.  Failure to structure the payoff correctly can be expensive.

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.

• Step Four : The Rule 120 Hearing – Colorado law requires that the Lender schedule a hearing in District Court in the county in which the property is located.  The purpose of this hearing is to determine if there is, in fact, a default and if the owner of the property is a member of the armed forces.  Other issues concerning borrower’s claims against the lender are typically not able to be heard in this hearing and the borrower would have to bring a separate case against the lender to raise these concerns.  The borrower is notified of the hearing and may file an answer to Lender’s claim of a default through their counsel or on their own. 

• Step Five:  Receivership – If  the property in foreclosure is an improved income producing property the Lender may ask District Court to appoint a Receiver.  The Receiver is an agent of the court and takes over management and control of the property. The Receiver will collect the rental income from the property and has wide authority to maintain the property in good condition and can even rent vacant space.  The borrower must surrender control of the property to the Receiver when this order is entered.

• Step Six: The Cure Period – The borrower may “cure” the default for ___ days after the filing of the Notice of Election and Demand (see part I).  To cure a default means that the borrower must pay the Lender all past due interest rate (including default interest and other charges) as well as pay the Lender’s legal and other costs incurred in the foreclosure process.  Once the Borrower pays these fees and costs the loan is taken out of default and the Public Trustee cancels the foreclosure.

• Step Seven: Transfer of Title to Lender – After the ____ day “cure” period ends, assuming the Borrower has not cured the default the Public Trustee issues a
  “Certificate of Purchase” to the Lender which is the next to final step in transferring Borrower’s title to the property to the Lender.  There is an additional ___ day period during which any junior lienor (i.e. a second mortgage holder or anyone who has a recorded interest in the property that was recorded after the first deed of trust) may “redeem” the property by paying off the first mortgage Lender in full.  This right does not extend to the borrower.   Once this ___ day redemption period expires the Public Trustee issues what is called a “Confirmation Deed” which officially transfers ownership of the property to the Lender.  The Borrower loses all rights to the property once the Conformation Deed is recorded and this brings the foreclosure process to its conclusion.

This posting is not intended to provide legal advice to anyone.  If you are the subject of a foreclosure Montegra urges you to retain your own attorney and follow their advice on the best way to deal with the default and/or foreclosure.  These postings are only meant to give a general overview of the foreclosure process in Colorado and are not written by an attorney.

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.

Each state has its own foreclosure rules and regulations.  The following explanation is intended for Colorado hard money borrowers only although certain aspects of Colorado’s foreclosure process may be applicable in other states.

• Step One:  The foreclosure demand letter – prior to initiating a foreclosure, a lender almost always sends a “demand letter” to the borrow “demanding” that defaults in the loan are cured.  These defaults may be non-payment of interest, failure to pay taxes or insurance, or placing a lien on the property without the lender’s permission.  The default letter typically gives the borrower a certain number of days to cure the default and states that if it is not cured within that time frame the loan will be put into foreclosure.

• Step Two:  Filing the foreclosure – if the lender’s demands are not met by the required date, the lender files what is called the “Notice of Election and Demand” (NED) with the Public Trustee (PT) of the county in Colorado in which the property is located.  Colorado is the only state that uses the Public Trustee system.  In Colorado, when documenting a loan the borrower signs the lender’s Deed of Trust form.  A Deed of Trust literally transfers ownership of the collateral property to a Public Trustee (an appointed county official) during the term of the loan.  So long as the loan is not in default, the Public Trustee does not need to exercise its ownership of the property. On the other hand, when a default is declared by the filing of the NED, the Public Trustee must follow certain regulations created by the state legislature. Unless the default is cured, the Public Trustee will transfer its ownership of the property to the private capital lender.

• Step Three:  Notification of the borrower and other creditors by the Public Trustee – according the rules set up by the legislature the Public Trustee must send a letter to the borrower and to any other creditors that are junior (i.e. that have an interest in the property like a second mortgage) to the lender that a foreclosure has been commenced.  This notice must also be published in a newspaper on three separate occasions to give the public notice that a foreclosure is in process.  The entire foreclosure process takes approximately four and one half months from start to finish.

These three steps are the first part of the foreclosure process.  The last part of the foreclosure process will be discussed in the next installment of Montegra’s Foreclosure series (part 2), including the rule 120 hearing, receivership, the cure period, and transfer of the title.

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.

1. Google the lender you are thinking about working with.  Don’t just look at their web site or other sites that are created by the lender – look for other Google links that may have titles like:  XYZ Lender – borrowers who have been ripped off / XYZ Lender sued in District Court/ XYZ Lender accused of fraud, etc.  /   Check specific sites like:  www.complaintsboard.com –www.scam.com – www.mortgagegrapevine.com – and www.ripoffreport.com.  Do your internet homework before you give money to a hard money lender, not afterwards when it will be too late.
2.  Whenever possible work with a lender in your area.  Not all cities have hard money lenders, but many do.  Checking references for a local lender is much easier than for a national lender.  Most of the really large hard money lenders operate nationwide and are able to afford substantial advertising and spend lots of money on getting the best positions in search engine lists.  Just because a lender is near the top of Google (with their own web site) doesn’t mean they are ethical or safe to deal with.
3. Be very afraid when lenders ask for a large sum of money up frontto “look into your loan request”.  It is one thing to pay an appraisal deposit when you have a written commitment letter – it is another thing altogether to pay large up front “due diligence fees” just to get a lender to “look at your request”.  Use common sense in this matter.
4. Always use an attorney to represent you in these kinds of private lender transactions.  Although you will pay some legal fees this is probably the best way to prevent being totally ripped off and lose not only a loan but also tens of thousands of dollars in up-front fees that you will never see again.  The scam lenders have great legal documents that they make you sign before they take your money and once you sign them you will almost never recover anything from the lender.  Your attorney needs to review all documents before you sign anything and before you send a lender any up-front money.  Don’t be penny wise and pound foolish when it comes to safeguarding yourself against lender fraud.
5. Ask around to get input from others about the reputation of the lender you have contacted.  Talk to your attorney, your CPA, real estate brokers, your commercial banker.  Don’t deal with a lender that no one has ever heard anything about or that has not gotten good recommendations from people that you know.
6. Find out of the company you are working with is a direct lender or a loan broker.  This is something you must know before you proceed to work with them.  A direct lender controls the money and actually funds the loan.  A loan broker takes a fee (from you!) to put you in touch with a direct lender.  On the internet is it often hard to tell the difference.  Many loan brokers hold themselves out as lenders.  You should ask the company you are talking with to tell you (preferably in writing) whether they are a direct lender or a loan broker.  The difference can not only save you some fees (typically 1 to 2%) but also headaches.  Lenders make decisions.  There are good brokers and not so good ones.  The good ones will let you know clearly up front their role in your loan request.

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.

Describe your loan request.    This is the single most important item to provide.  If possible you should write up a short (one or two paragraph “Executive Summary” which tells the basic information on what this loan request is all about.  The summary should answer the following questions:

• What is the reason for the loan request?  Is this to pay off an existing lender – to purchase a property – to buy out a partner?  Describe.

• What is the address (including city and state) of the property?  What kind of property is it – multifamily, industrial, office, retail, single family?   Is the property an income producing improved property, or is it land?

• Is the security for the loan a first mortgage or second (or third) mortgage?  What is the amount of the loan requested?  If it is not a first mortgage describe the details of the underlying financing.

• What is the time frame within which you must close?  The more specific you can be the better.

• Try to outline the reasons   you are applying to a private lender instead of a bank or institutional lender?

• What is your business plan for this property?  Are you going to fix it up and sell it – hold for the intermediate term – are you an owner user, etc.

Provide a summary of factual information on the property:  the size of the improvements, the lot size, the zoning, and the age of the property.  If it is an income property detail the income it produces and the expenses it incurs.  Information on vacancy rates is important.

With the information above the typical hard money lender will be able to assess if this loan fits within their business plan and respond appropriately to you.  If they want to move forward you will need to prepare a full package on your loan request.  This package should contain the following:

• If this is an income property then the past 2 years and current year to date income and expense statements are essential.  A lease summary of the tenants is very helpful if you can put it together.

• Photos of the property are always welcomed by the lender.

• If this is a loan to purchase a property a copy of the Purchase Contract must be provided.

• Some lenders require personal guarantees and some don’t.  You should try to find out before sending any personal financial information.  If your lender does require a guarantee then you could send a copy of your PFS along with a copy of your credit report (if you have it).

Doing some upfront work before you apply for a private capital loan will pay dividends in getting you the best rates possible and the shortest turn around.

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.

“Hard money” is a term applied to real estate loans obtained from a private capital lender as opposed to a bank or institutional lender such as a life insurance company or pension fund.  The name originally derived from the fact that private lenders were willing to look at loans that had complications and were more difficult (or “hard’) to do than normal real estate loans that banks fund.  Sometimes this difficulty is called “hair” as in this loan has a lot of hair to it.

In 2011, with the break down in the financial system, hard money loans are becoming more common as banks are increasingly paralyzed by lack of capital and governmental regulations.  This shift in sources of funding is sometimes referred to as the “Shadow Banking System” and the underlying term for this type of underwriting is “Asset Based Lending”.  Hedge funds are becoming a significant source of capital for these types of loans.

How does hard money benefit a borrower?

Private capital lenders can make a decision quickly – generally in a few days as opposed to banks that can take a few months.  They can fund quickly – sometimes in just a couple of weeks – again far more quickly than banks.  Hard money lenders typically ask for significantly less documentation than banks and they are often willing to overlook issues that would kill the deal for a bank.  Issues such as lack of significant cash liquidity or lack of guarantors with strong financial statements can kill a loan with a bank but the same deal may be funded by a private capital lender.

What are the downsides to a hard money loan?

The primary disadvantage to a private capital loan is that they are always more expensive than bank or institutional real estate financing.  Interest rates are higher – they can range from 9% up as high as 15% depending on the lender as opposed to typical bank rates in the 6% range (with life companies sometimes funding loans as low as 5%).  Loan fees for a bank are generally around 0.50% to 2.0% while hard money lenders may charge between 2% to as much as 5% or more as a front end fee.  Hard money loans are also funded for shorter terms than institutional loans.  A typical hard money loan term could be anywhere from 6 months up to 3 years while banks can fund up to 5 years and life companies can fund 15 to 30 year terms.

What are the risks to a borrower?

With the right hard money lender the risks can be managed.  With the wrong one the risks are high – ranging from being taken in by a fraudulent lender and losing up-front fees without getting a loan to ending up in foreclosure without appropriate reasons.  Doing up front research on a private capital lender is critical.

How do I find a hard money lender?

The best way to find a good private capital lender is by referral from a trusted source such as a banker or attorney.  The more common way is to search the internet for “hard money lenders”.  It is always better to try to find a lender in your area – so type in “hard money lenders Colorado”  -  if this is where your property is located – for example as opposed to just “hard money lenders” in order to locate a local lender.  Many large national companies are offering loans but they are much harder to check out than companies in your own geographical area.  See my earlier posting “Borrower Beware – 6 Ways Not To Get Ripped Off By A 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.