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The Power of Packaging

You’ve heard it said,

“You only have one chance to make a first impression.”

Yet, when you make an initial inquiry on a commercial loan, what kind of impression do you make?

What kind of first impression do you make?Does your loan request quickly become one of the many generic inquiries a lender receives in a day, or does it immediately get you the lender’s attention?

The power is in the packaging. And packaging is all about the detail.

As a friend of mine, Linda Chandler, once said,

“It has to sizzle like steak and be steak.”

She was referring to a business plan, but the same principle applies to loan packaging.

Brokers

When you make an inquiry, don’t lead off with your borrower’s story! I don’t want to know what happened to him or her. I also don’t want to know how “great” the deal is, or how much the borrower “deserves” a loan. I also don’t want to hear about location, opportunity, or any other aspect of the deal other than the well-presented facts. Here’s an example:

My borrower owns a fully-occupied 13-unit multifamily property in Athens, Georgia and she’s looking for the highest LTV [or best rate, etc.] on a refinance. The property is worth $5 million and she currently owes $2.3 million.

Boom! Done!

What does this inquiry tell me?

  1. The property is already owned by the borrower – as in not a purchase loan
  2. The size and type of commercial property (13-units, multifamily)
  3. The financial performance of the property (fully occupied)
  4. The location (Athens, Georgia, which is Tier 3)
  5. The “ask” (Highest LTV on a refinance, which implies cash out.)
  6. The value ($5 MM)
  7. The current debt ($2.3 MM)

I got all of that out of two simple sentences. Now I can get to work, scan my Lender Board, ask further clarifying questions, and suggest the best placement I have available.

I can tell immediately from the two sentence inquiry that the deal makes sense. Here’s one that doesn’t.

Borrowers

Know what you’re doing before you approach a lender for a loan.

I own some land in Plano, Texas that I’ve had for a long time. It’s right downtown. I want to build a mixed-use property with retail and office space. I’m looking for $18 million. I also own another property that’s zoned multifamily that’s on the market for $5.7 million. I think the total project will cost $16 million to build, and I need $250,000 for blueprints to get started. Can you finance my project?

Even if I could finance this guy I wouldn’t. You know why? He doesn’t know what he’s doing. His numbers don’t make sense. He want’s to borrower more than the project will cost. He’s telling me things I don’t need to know. He hasn’t even gotten started yet! This project needs help, but it’s not ready for a lender. And the poor borrower doesn’t know it.

Now I don’t mean to belittle borrowers, but there are many people now seeing an opportunity to jump into commercial construction who have never done it before. Especially when you get into construction, you really have to know what the market will bear; you have to be familiar with construction loan terminology; and you have to understand that all construction loans are high risk for commercial lenders. No one is going to give you a break on your first project.

Construction Loan Packaging

Construction loans are a special kind of loan for commercial lenders, and not every lender makes them. The ones that do require the borrower to have made a substantial investment of their own before the lender will even consider the deal. This investment comes in the form of equity, either the developer’s own money, or that of an equity partner or partners. Most construction lenders see their money as what is needed to finish the project, not start it. Therefore the construction loan package needs to show the lender what has already been accomplished, and what the property will be like when the project is completed.

Two essential elements of a construction loan request are the “Sources & Use of Funds”, and the Loan to Cost/Loan to Value.  There’s a lot of confusion around these terms. In addition to having the financial presentation right, the developer also has to capture a potential investor’s imagination and get them excited about the project.

Here is one simple example of a presentation that is part of the overall loan packaging. This fits into the Executive Summary and gives the reader an immediate sense of what the project is and that the developer is ready for construction financing.

To support the proposed project, the developer must have complete design plans, zoning and other approvals, a complete construction budget supported by contractor bids and estimates, and pro forma projections showing the potential operating characteristics of the property. In other words:

“It has to sizzle like steak and be steak.”

 * * *

Sofia Capital Ventures offers a free loan evaluation to any broker or borrower.  We will review your project and give you a written report as to what the strengths and challenges of your project are. We can also work with any borrower on a consulting basis to prepare a complete loan package that is guaranteed to get any lender’s attention. Contact us TODAY for details!

By |May 18th, 2017|Commercial Lending, Lending Process, Private Commercial Lending|Comments Off on The Power of Packaging
Barbara Leuin, Commercial Lending Expert
Barbara Leuin, Ph.D., Commercial Lending Expert, Carlsbad, CA, is a serial entrepreneur and real estate investor, with over 30 years of professional experience, including 13 years of university teaching in business and economics; 16 years of business consulting; and 5 years as a full-time real estate investor. Since 1996, she has helped start-up businesses access millions in private capital. As CEO, Barbara brings visionary leadership, team-building and leadership to Sofia Capital Ventures. She is responsible for lender relationships, broker training and identifying market opportunities.

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