CLIENT EDUCATION Commercial Loan Process
Identify Mortgage Brokerage
Shameless plug for our company and client services here – but locking in an experienced and qualified commercial mortgage brokerage is your first step to a successful loan process. While many industries these days have been subsidized by online access and technology, commercial real estate financing remains very much a relationship-driven business. Lender programs and appetites are constantly changing, and tracking these changes is more than a full-time job.
Many lenders and programs are also unavailable to the general public (life insurance companies and select private investors for example), as these lenders do not want to serve as a “call center” for loan inquiries, and only have the capacity to entertain quality loan packages from trusted sources they have experience with. Relationships also play favor to investor clients here, as a commercial mortgage brokerage can frequently negotiate more favorable loan terms based on volume origination to a lender or call in favors for exceptions to policy for a more attractive offer to the investor. Having experience in the commercial loan process is also important, as it is always more complex than a residential loan process and takes expertise to recognize opportunities or solve issues that always arise.
Most of the time, there is no additional cost to the investor for brokerage services, as the net fees are paid by the lender. Just as you would retain a CPA for tax filing or an Attorney for legal services, partnering with the right commercial mortgage brokerage is essential to obtaining the best available financing and having a seamless loan process.
You have options. Many lenders are limited to the programs and terms they can offer investors and clients will often feel that they need to conform to these limited offers. There are a multitude of commercial lenders in the marketplace at any given time, each with their own specialization and flexibility. There truly is a best “fit” for your commercial loan request. Each investor and even each property or transaction is going to have its own unique strategy, hurdles and needs. It is crucial to have a discovery process with you as a client to determine two things: (1) what you desire and what is important to you, and (2) what challenges we might encounter during our process.
First, we want you to get everything you want in this process. While low fees and interest rates are important to all clients, each investor may have different thoughts or needs on loan terms and structure. An example might be ensuring the loan does not have a prepayment penalty if the investor intends to sell the asset in the upcoming years or negotiating with the lender to not require a personal guarantee if it’s important to the client not to risk their personal assets in the event of foreclosure.
Secondly, we need to anticipate challenges, so you have a clean process. Skipping this step can cost you time, money, and legal liability especially if you are in escrow to purchase. We want to identify potential issues upfront and either cure them or review with the selected lender before accepting their offer. Examples of this might be known credit or background issues with the borrower that have not been discovered yet or reviewing potential scenarios should a large tenant be at risk of vacating or giving notice during the escrow process.
Review and Analysis
Our team will do an extensive review of both borrower and property documentation. Since each request has its own profile and challenges, the documents required and discovery questions to the client will be different. We will review your file from every angle that a commercial lender will eventually, to uncover any potential hurdles and determine the eligibility for commercial financing given your request. We will make recommendations to cure potential issues that would affect your loan application (examples: credit repair, liquidity seasoning, increasing occupancy, re-negotiating or renewing tenant leases, etc.) in order to give you a game plan to have the most attractive loan request package possible to potential lenders.
We will also run different financing analyses for you to use as a tool to determine how different leverage points or changes in rate and terms might impact your investment ROI on the property. Lastly, our team will share with you the cash flow calculations that will likely impact your request to see if we need to adjust expectations. Our hope is that whether we work together or not, this step will be informative for you as an investor and in good faith give you market knowledge you can use to improve and grow.
This step is completed internally by HarborWest. Our team will put together an organized and detailed loan request package that will be used to discuss financing with potential lending sources. The loan package will consist of property and borrower documentation provided by you along with insight, analysis and recommendation made by our company. Many of the most competitive lending sources in the market have strict requirements on loan request packages that brokerages must adhere to be considered for financing. However, every lender down to main street lenders such as community banks and credit unions appreciate an organized and detailed package. This allows for a quick and clean review on their side and developing a reputation for quality work as a brokerage is imperative to developing good lender relationships. And it’s those experiences and relationships that over time allow us to negotiate exceptions and more favorable terms for our clients.
Once your loan package is finalized, HarborWest will start discussions with the best-in-class lenders for your request. While our company has partnered with over (275) various lenders nationwide, we typically can immediately assess after package completion which market lenders are going to be the best fit based on the desired client loan terms and the challenges that will need to be overcome. Your loan request package will be sent to a dozen or less commercial financing sources, and we begin our process of advocating for you and negotiating best available offers. This process might bring to light a new strategy or a re-discussion of the request with the borrower depending on results. We will negotiate with our funding sources for the most aggressive rates and fees, most flexible loan terms and conditions, and remain transparent with you along this process.
Our goal is to be your advocate and partner, not the gatekeeper to you securing financing. Our advantage is being able to use our access and relationships during this stage, but also being able to create a “bid environment” between lenders - resulting in lenders fighting to earn your business, instead of the other way around.
Loan Option Selection
Upon receipt of final negotiated offers from our selected lending sources, HarborWest will compile and summarize the offers onto a client-friendly spreadsheet so we can easily compare loan terms, review together to discuss strengths and weaknesses, and make a final selection on the program that is the best fit for your request. Besides determining which lender offers the most competitive financing, we can also make recommendations based on our past experiences with that lender and previous client feedback. While the loan terms are the meat of the eventual selection, having experience with that lender and their commercial loan process is also important – if they cannot perform and honor those loan terms or be flexible on issues that may arise during approval, those offered loan terms mean nothing. Loan servicing and banking relationships might also be an important factor depending on the type of transaction. While most commercial loans are transactional, customer service post-closing, annual reporting requirements, or banking relationship opportunities might also be important considerations to a borrower client.
In addition, besides a comparison of commercial loan options, HarborWest can also provide further analysis to aid in your decision-making process including: APR Analysis, Leveraged Cash-on-Cash Analysis, Amortization Forecasting, and Lease vs. Own Comparison.
Lender Due Diligence
Once you have selected your lender with our recommendations, we move into the lender’s due diligence and approval process. An upfront deposit is usually required for most transactions for both good faith and also to cover the costs of property reports. Due diligence is the lengthiest portion of the loan process. Depending on the type of deal, this can range anywhere from 3 days for a bridge or private loan to over 60 days for permanent loans with institutional lenders. You will want to consult with HarborWest on estimated time frames if you have specific deadlines to meet from escrow or otherwise.
The lender will complete a thorough review of borrower and property qualification (as described in another section of this guide), including property reports and inspections, evaluation of borrower strength, and cash flow underwriting to determine if it meets lender requirements. This process likely will require additional paperwork and questions or discussions above what was compiled by HarborWest earlier in the process as underwriting proceeds. HarborWest will complete as much as possible on your behalf, and advocate for you on issues and hurdles that arise that might impact your original offer. Depending on the complexity of the property and loan, this step can be quite simple or very lengthy.
The value of working with HarborWest is two-fold -- leveraging our relationships to secure the best loan quotes and leveraging our experience to make sure this step goes smoothly. HarborWest makes sure all potential issues or hurdles are handled upfront before due diligence even starts and is proactive in providing solutions for things that will arise.
After the lender has completed their due diligence, their management or committee will approve the final loan terms. Depending on the results of their due diligence, a lender may modify their original offer to conform with their cash flow ratio requirements or mitigate any new risk factors that were discovered during their due diligence. This can be very startling to a client and impact their ability or willingness to complete the transaction if the terms are no longer acceptable. This is rarely the case when working with HarborWest, as our team will identify and address any potential issues before lender selection, and if needed use our relationships and negotiation power with the lender to help ensure your initial loan terms are honored as expected.
Most of the time, a final approval term sheet will be issued and can be compared to the lender’s initial offer from when the process first began (Letter of Interest, or LOI as its commonly known). However, sometimes either by lender policies or borrower requests, the approval can be divided into two stages. The first being a “credit approval” whereas the lender approves the loan based on personal or business qualification and is contingent on property qualification and “property to final approval”. This is usually done to the benefit of the borrower since property reports are not ordered until credit approval is received, which protects the borrower from losing the cost of the reports if credit would not be approved. A tight escrow time frame might prohibit this option, and force the property reports to be ordered upfront and processed simultaneously with credit underwriting.
Loan approvals always come with condition to funding. All lenders will require the basic requirements to a transaction including verifying and updating property insurance, proper title insurance, executed loan documents from the borrower(s) and coordination with the escrow provider to coordinate the closing and recording of the lien(s) and other standardized requirements. Beyond this however, a lender may impose new requirements on the client not addressed in the due diligence phase. This might be as simple as a copy of recent bank statements to update now outdated documents, or as laborious as curing a tenant or property inspection issue prior to funding, which can be troublesome should a buyer be under strict escrow deadlines.
The ability to request some items to be completed post-closing or be waived can be extremely valuable to protect a client’s transaction. HarborWest is able to minimize loan conditions with the lender during the approval process and request certain conditions to be “post-closing” if any particular condition would hold up a deal and prevent the client from closing escrow.
Post-Closing & Servicing
Upon loan closing, you will be provided with copies of all important documents related to your transaction (we also retain a copy), including executed loan documents, escrow documents, hazard and title insurance policies, property reports such as appraisals and physical or environmental inspections, and all submission items included in your loan submission package. You will be given instructions on your first payment, loan servicing contact information, and a calendar of important dates related to your new mortgage including any dates of interest rate adjustment or deadlines to complete repair items post-closing if required. The lender will provide instructions for loan servicing either with them internally or with a third-party servicer and be in contact with you for annual reporting if that is part of their policy and requirements.
Our services to our clients are life-long and not strictly transactional – as such, the HarborWest team remains at service to you should you have any questions post-closing or need advice and further assistance during the life of the loan with your new lender, as a thank you for your business and new partnership with HarborWest.
Each commercial loan request is unique and will require different documentation in order to process your loan application. Below is a list of documentation you will want to start preparing although some items might not be applicable. Some documentation is required upfront in order to apply for commercial loan options, while others won’t be required until lender underwriting HarborWest will provide a more defined needs list to you after an introductory discussion with you and can also provide template forms if needed.
Current Property Rent Roll
Historical Income/Expense Statements
List of Recent Capital Improvements
Copy of the Purchase Contract or Closing Statement
Copies of Tenant Leases and/or Lease Abstracts
Any Past Property Reports (if Available)
Current Mortgage Statement (if Refinance)
Property Tax Statement/Bill
Property Manager’s Contract & Resume
Property Insurance Policy & Premium
Vesting Map (Breakdown of Ownership)
Entity Documentation (if LLC, Corporation, etc.)
Personal Financial Statement
Schedule of Real Estate Owned
Federal Tax Returns, Personal & Business (2-3 Years)
Business Interim Financials (if Owner-User)
General Resume and/or Real Estate Investor Resume
Recent Credit Report (if Available)
Letter of Explanation for Any Credit or Character Issues
Bank Statements (2-3 Months)