How to Broker Commercial Real Estate Loans Table of Contents:
Chapter 1 Commercial Income Property Loan Process
5
Chapter 2 Licensing
9
Chapter 3 Types of Commercial Properties
Retail
12
Industrial Buildings
17
Multifamily Properties
20
Hospitality
23
Office Buildings
24
Health Care
25
Mixed Use
25
Other Commercial Property
26
Property Classes
27
Chapter 4 Types of Commercial Loans
Chapter 5
Chapter 6
12
28
Amortized Loans
28
Balloon Loans
28
Purchase Money Loans
29
Permanent Financing
29
Refinancing Loans
29
Bridge Loans
30
Mezzanine
30
Construction Loans
30
Hard Money Loans
31
Interest Rates
32
Fixed Rate Types
32
Variable Rate
32
Spreads
33
Loan Fees
35
Fees due at the Application Stage
35
Fees due at Closing
36
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Chapter 7 Prepayment Penalties
39
Yield maintenance
39
Defeasance
40
Yield maintenance vs. Defeasance
40
Chapter 8 Loan Packaging
Preparing the Loan Request
Chapter 9 Identifying Potential Lenders—Making the Transaction Happen
41
41
45
Portfolio Lenders
45
Private Money
46
Credit Companies
46
Non-bank lenders
47
Government Sponsored Enterprise (GSE)
47
Identifying the Right Lender
48
Chapter 10 Preliminary Underwriting Analysis
50
Loan-To-Value (LTV)
50
Debt Service Coverage Ratio (DSCR)
51
Other Factors
53
Chapter 11 Timeline
54
Packaging the Loan
54
Letters of Interest
55
Loan Application
55
Processing
55
Underwriting
55
Loan Commitment
56
Reports Preparation
56
Loan Conditions
57
Closing
57
Chapter 12 Structuring and Collecting Fees
58
Fee Agreements
58
Collecting Earned Fees
61
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Chapter 13 Effective Marketing Methods
62
Creating a Marketing Plan
62
Setting Marketing Goals
70
Tracking Results
71
Competing
71
Questions and Answers
72
Appendix A: Glossary
77
How to Broker Commercial Real Estate Loans
Copyright © 2009 -All rights reserved
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Chapter 1
Commercial Income Property Loan Process
Commercial real estate is an important sector of the real estate industry. This guide covers the
major aspects of becoming a successful commercial real estate loan broker, or as it is referred to
in the industry, a correspondent lender.
What is a correspondent lender?
Lenders and brokers both carry out a number of tasks that relate to advancing loans. They each
locate borrowers, talk to them, check their loan applications, credit, employment, financial assets
and review their business proposals. Within the real estate industry commercial loan brokers are
also referred to as correspondent lenders.
A starring role:
Correspondent lenders play an important part in the financing of commercial loans. The first
step correspondent lenders need to take is to find potential commercial loan customers. Chapter
13 provides marketing methods effective in building a successful commercial lending business.
After identifying a potential commercial loan client, brokers put the loan package together,
analyze the information, and then submit the completed package along with any additional
information to lenders for loan approval. Correspondent lenders are the liaison between the
client and the lender. As loan experts brokers will need to analyze the clients’ needs, wants, and
circumstances in order to match the client with the appropriate commercial loan.
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A never ending role:
Correspondent lenders are involved in a lengthy process which begins with providing different
and creative options to clients for financing commercial property. Because brokers are not
affiliated with any particular lending institution, they can establish a working relationship with
dozens of lending sources. This allows the correspondent lender to offer a variety of loans. The
total process ends when the loan closes and can sometimes require 90 days to complete.
Controlling the transaction:
It is important correspondent lenders control the transaction from beginning to end.
A
commission is paid when and if the loan closes. Therefore, careful guidance of the transaction
throughout the process is necessary.
Positive Attitude:
The power of positive thinking can make an enormous difference to the success of closing the
transaction. When correspondent lenders take on a new commercial loan, it is important they
maintain a positive attitude. This positive outlook will help in keeping an open mind, explore
many possibilities and have the greatest chance of completing a successful transaction.
Gathering information about the transaction:
Correspondent lenders should start gathering information about the transaction when they first
meet with the new clients in order to obtain the details required to assess the clients’ needs. The
broker should employ normal conversation and avoid overwhelming the client with too many
questions.
Creating credibility:
As professionals and experts on financing commercial real estate properties, brokers need to be
knowledgeable and fully aware of the various aspects of commercial lending. This will prove
the correspondent lender’s credibility and reassure the client that the correspondent lender
provides a valuable service. The displayed knowledge will also make clients feel confident they
have chosen the right mortgage broker.
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One conversation--no callbacks:
While gathering the information needed to proceed with the transaction, correspondent lenders
should make effective use of their time.
Being well prepared and gathering complete
information in the initial meeting eliminates the need to continuously ask for further details and
documentation.
When meeting with clients for the first time, it is always more efficient to go to the client’s place
of business where information pertinent to the loan is readily available.
This affords
correspondent lenders the opportunity to immediately review and discuss the information with
the client and request further details if needed.
Establishing the borrower’s intentions:
Brokers need to determine the borrower's intentions in order to help them focus on appropriate
financing options. Some clients may want to buy a commercial building and put the least
amount of money down while others will only be concerned about the monthly payment. By
carefully listening to clients and their questions, correspondent lenders should be able to
precisely identify a client’s intentions.
Ascertaining the borrower’s desires regarding the loan:
Mortgage brokers will need to specifically identify the clients’ needs and wants. It is important
they discuss with the client the various terms and conditions of the loan including amortizations,
pre-payment penalties, fixed or variable rate options, and any other issues that may impact the
commercial loan application. Furthermore, correspondent lenders will need to discuss with their
clients the fees associated with obtaining a commercial mortgage loan.
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Working out the numbers:
Correspondent lenders will need to collect documentation from the client to calculate qualifying
ratios and figures such as the net operating income (for the previous three years and for the
current year-to-date), analyze the tenant data to determine the occupancy of the property and
calculate the Debt Service Coverage Ratio (DSCR)1.
The DSCR is a measure of the borrower’s ability to cover monthly payments and is calculated as
the ratio of net operating income over the periodic payments (principal and interest) made on a
loan. Further details about this ratio and how it is calculated are provided in chapter 10.
By following the above guidelines correspondent lenders will be able to efficiently obtain all of
the information needed to properly assess the transaction and to complete the loan process in the
shortest possible time frame.
1
Defined as the ratio of the Net Operating Income (NOI) to the anticipated Debt Service (see chapter 10)
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Chapter 2
Licensing
Most states have licensing exams which must be passed in order to become a correspondent
lender. Licensed brokers act as mediators between the consumer and the lender. Each state has
its own mortgage licensing laws, but not all states require correspondent lenders to have a
mortgage license.
The law also determines whether a correspondent lender can deal with first and second position
mortgages or only with first mortgages. It also dictates whether the mortgage broker must have a
physical office location or is allowed to work from a virtual or home office. Some states also
require continuing education, with the continuing education requirement varying from one state
to another. See Table 1 below for specific state licensing requirements.
License Renewal:
Correspondent lender licenses have to be renewed regularly but time frames vary from state to
state. Specific information can be obtained by contacting the state regulatory agency. Mortgage
broker schools, classes, real estate local state departments and the National Association of
Mortgage Brokers (NAMB)2 offer help on how to apply for and how to renew a license.
2
www.namb.org
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State
Additional Licensing
Required
Alabama
No
Alaska
No
Arizona
Yes
Arkansas
No
California
Yes
Colorado
No
Connecticut
No
Delaware
No
District of Columbia
No
Florida
Yes
Georgia
No
Hawaii
No
Idaho
No
Illinois
No
Indiana
No
Iowa
No
Kansas
No
Kentucky
No
Louisiana
No
Maine
No
Maryland
Yes
Massachusetts
No
Michigan
No
Minnesota
No
Mississippi
No
Missouri
No
Montana
No
Nebraska
No
Nevada
No
New Hampshire
No
New Jersey
Yes
Name of License
Notes
Mortgage Brokers and
All Commercial Loans
Mortgage Bankers Act Section
6-901
Either a license under the Real All Commercial Loans
Estate Law or a Finance
Lender License
Mortgage Broker or Lender
License under Chapter 494
For commercial loans to
individuals (natural persons)
only
Maryland Mortgage Lenders
Law section 11-501
For commercial loans less than
$75,000 secured by residential
real property
NJ Real Estate Broker Act
Commercial loans including
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all loans secured by 1-6
residential or mixed use real
property
New Mexico
No
New York
No
North Carolina
No
North Dakota
Yes
Ohio
No
Oklahoma
No
Oregon
No
Pennsylvania
No
Rhode Island
Yes
South Carolina
No
South Dakota
Yes
Tennessee
No
Texas
No
Utah
No
Vermont
No
Virginia
No
Washington
No
West Virginia
No
Wisconsin
Yes
Wyoming
No
Money Brokers Act
All Commercial Loans
Rhode Island Lender and Loan For Commercial Loans to
Broker Act
individuals under the amount
of $25,000 only
Mortgage Lenders Business
Act Sections 54-14-1 et. seq.
All Commercial Loans
Mortgage Bankers, Loan
All Commercial Loans
Originators and Mortgage
Brokers Act Section 224.71 et.
seq.
Table 1
The above state requirements were valid in 2008. Therefore, commercial lenders should
check their state’s real estate department for any current updates.
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