Often times, when discussing a new commercial deal with a potential client, I hear the following: "I'm looking for a 30 year fixed at (insert market rate for residential loans)" and/or "I have excellent credit...what rate can you offer me." While it might be simple to answer those questions if I were doing a residential-type (i.e. Fannie/FHA/VA loans, which I write as well), it's very difficult to answer on any commercial product.
Typically, if someone is looking to get a quote on a residential loan, I will review a few parameters (loan amount, LTV, transaction type, property type, occupancy, credit score, etc) and I'll get a rate and that's that. I then lock that rate in or the client can "shop around." The funny thing is, so many people want " the best deal," or "the best rate," when neither of these things exists (but that's a topic for another day).
On a commercial loan, the lender wants to see financials...for both the subject property (operating statements, rent rolls, Schedule E's, etc.) and yours (personal financial statement, asset statements, tax returns, etc.) They'll then review all of this to get a better picture of what they're lending against, taking into account the soundness of the property, the debt-service ratio, stabilization, and the borrower's ability to repay. Then they'll come back with terms they're willing to offer you. And there is usually not any room for negotiating.
Commercial financing is more expensive than residential financing. Points are usually standard whereas on residential loans you usually have a choice on paying points or not.
Once a residential loan, an underwriter reviews the file when all the conditions are cleared, the loan is approved, it goes to closing and everything is finalized. On commercial financing, most loans will go to a credit committee, (a panel that meets approximately once a week) on average two times through the loan cycle. The initial review occurs when all preliminary documentation has been gathered and the deal is presented. The committee then makes a decision on whether or not they are interested in the deal. The second review occurs after the underwriter has approved the file. Now the committee is confirming that they're still willing to proceed with the transaction. Of course, this is just general overview; every lender is different in their protocol.
One of my clients suggested I write this post. And it was good timing, as I've dealt with many clients, both novice and experienced investors alike, get frustrated because they think getting financing for a commercial project is as much of a commodity as a residential loan. As lenders, we cannot assume that our borrowers understand how things work on the commercial side, just because they've obtained residential -type financing before. Education is key: inform your clients how things really work and if you give your client the right guidance, they will appreciate that immensely.
Thanks for reading...
