In the banking industry, there is the concept of commercial mortgage lending. What this means is that someone uses commercial buildings and/or property as collateral for getting a loan. Usually commercial mortgage lending is sought out by a business or corporation and not by an individual, but it is not unheard of for an individual to take out this type of loan – especially if they are a wealthy individual who owns several businesses. The way in which this type of loan works is slightly different from personal *********. While the entity who took out the loan would have up to 30 years to pay it back, there is usually a time before then in which the remaining balance would be due, which is called a balloon payment.

To make the concept of commercial mortgage lending a little easier to understand, let’s look at it this way: Say you have a loan with a 20 year repayment schedule, but there is a balloon payment due at year 10. You will pay your scheduled payments every month up until year 10. Then, the remaining balance and interest will be due in full, even though you were on a 20 year repayment schedule. You have three options at this point. You can either pay the remaining balance in full, re******* the loan, or you can sell the property and repay the loan. Either way, you have to do something. This is just the way that commercial mortgage lending works.

Residential construction ***** are another aspect of the banking industry. These are pretty self explanatory: they are the type of loan you get so you can build a house to live in. You can also get residential construction ***** to renovate an existing home. Either way, some sort of building has to go on in order for you to qualify for this type of loan. If you are building a house from the ground up, then before you go in to apply for the loan, you need to have a detailed and itemized statement of all costs associated with the building. You need to have the cost for the contractor, laborers, materials, fixtures and everything else before you can even begin to know how much you need to borrow.

Something that you have to keep in mind when applying for residential construction ***** is that you need to have a good credit score and history in order to get the best interest rate – or even a loan at all. Usually building a home from the ground up is a costly endeavor, so if you have bad credit you will be less likely to qualify for residential construction *****. If this case applies to you, then you will need to either wait until you can get your credit score back up or seek out an existing home loan.

In today’s challenging market, getting a private money commercial real estate loan can be a smart way to ******* a commercial property. While previously private money ***** were mainly for borrowers with credit issues, in today’s market private money commercial ***** can be utilized for many different types of borrowers.

For properties that a more traditional lender would not normally lend on, a private money lender may help. For example, in a situation where a commercial building was purchased from a company that went bankrupt, & the building was completely vacant, a bank wouldn’t normally choose to ******* a loan. However, a private money lender who can see the potential of a building which could be renovated to handle many tenants and bring in income which would be more than sufficient to pay back borrowers with return, will be more likely to provide quick financing.

A hard money lender for commercial loan financing in this and many other cases, is much easier to deal with than a traditional bank loan. Investors mainly want to ensure that they are paid back, and so they will simply require that the borrower of sufficient equity. Finding a private money lender who is more lenient than a bank or traditional mortgage source may not be an easy task on its own, but it will most likely be your best bet.

Keep in mind, when looking for a private money loan, the loan to value ratio will always be lower than with a traditional commercial mortgage lender. Depending on the credit, the property’s cash flow, and the borrower’s capacity to repay the loan, the maximum loan to value is normally 70%. In a traditional commercial mortgage, the maximum is 90%. Though a general rule of thumb to consider is, the riskier the loan, the higher the interest rate. So while getting a private money loan may not be cheap (the rate can be 9-15%) it really depends on the risk involved. A lucrative investment may be worth going through a private money lender.

Summary Highlights:

Why is a thorough lender search critical early in the process? 

The fees associated with getting a commercial mortgage loan can be steep.   An appraisal, an environmental review, a survey and other due diligence charges can approach upwards of 10% of the requested loan amount for a small balance commercial loan.   It is the borrower who bears the lender’s cost for the 3rd party due diligence reports.  Subsequently, it becomes all too clear that an underwriting denial during the latter stages of the loan process is extremely costly and painful for the borrower.  Not only has the borrower lost his or her funding opportunity, but the sting of tallying up and paying the expenses associated with the failed loan can derail the transaction permanently.

Where does one begin?

With an estimated number of more the 6000 banks, 7400 credit unions and upwards of 20,000 private lenders, including institutional, private, small, large, local and national lenders, where does one begin?  Ask Uncle Joe for a referral?  Conduct a commercial lender search online?  Neither. Not yet.

Begin with a critical and realistic assessment in the following three areas:

Can you make the monthly payments on a regular and consistent basis?  More importantly, can you prove it?    Having the financial information at hand is important, not only to assess the feasibility of your loan, but as a good negotiation tactic when choosing a lender, broker and/or adviser.  Good advisers are busy, filtering many more loan requests than usual to find the types of ***** their investors want.  The more successful mortgage professional is typically focused on ***** capable of closing, in part because commissions are paid on closing. It’s the nature of the beast so why not make it work for you.  Proof that you can manage the repayment schedule is great bait to attract the best lender’s or adviser’s attention.   Face it. The supply demand dynamics for loan procurement has long since changed away from being a “borrower’s market.”  It’s just harder to get a loan today.  

Collateral typically includes the value of subject property and consideration of the equity or down payment you have invested in the property.   Today, a typical down-payment is running in the area of 20-35% of the purchase price for commercial *****. 

No matter if your lender is conventional, a hard money lender or a private money lender, all are astutely aware that not all ***** work out all the time.  In the event of failure and probable foreclosure, the key to recovering investor principal is based on the LTV ratio or Loan-to-Value ratio.   From the lender’s perspective, they want to know if the property is sold, at today’s prices, would we recoup our funds.  Ask yourself the same question with a healthy dose of realism before you order up an appraisal.  

Note:   Additional collateral is often requested by the lender to lessen their risk.  Such collateral may take the form of personal guarantees, certificates of deposit, equipment, stock or equity in other property.  The decision to provide additional collateral as security for your loan is an important one and a key element of negotiation with your lender.  Say no if you can.  If not, seek counsel independent of the lender in order to fully understand the implication and risks of pledging additional assets.

It seems simple enough.The two drivers behind a loan are relatively straightforward.  Prove you can pay, but should you not pay, can the lender’s principal be recouped by the value & sale of the collateral?  Boom – in theory we have a loan.

Why then, doesn’t the loan make it to closing? Conditions!   Once you begin a productive discussion with a lender or broker about assessing # 1 and #2, you would be wise to ask about typical lender conditions and the documentation required for the loan scenario you just described.  Not all lenders have the same requirements.   Requests for 3 years of balance sheets, profit loss, cash flow projections, AR & AP aging, rent rolls, personal statements, articles of incorporation leases and certified documents are just some of the docs requested. Loans get turned down and denied all the time for missing documentation.

To some degree we are likely experiencing a reaction to the lackadaisical loan documentation experienced during the boom years, except it’s a moot point if you’re trying to get a loan done.If certification of the rent roll is a non-negotiable condition of the loan and you, as the borrower, cannot deliver this documentation, then there is no reason to step up and write expensive 4 and 5 figure checks for appraisals and other 3rd party reports if the loan is unlikely to close.

The eventual receipt of an LOI or preliminary term sheet from a lender is an extremely positive event for a borrower and can make for a good day. While the LOI indicates strong interest and intent fromthe lender, it unfortunately does not guarantee the loan will close.  Avoid the high actual and opportunity cost of a loan failing to close by assessing realistically