A+ Financial Equities Corp. UNDERSTANDING COMMERCIAL MORTGAGES Written for a loan officer, but may be of interest to you.

Welcome to the world of commercial mortgages. This booklet is written to the residential loan officer who is venturing out into the world of commercial mortgages. It is written to introduce you to some of the differences between residential loans and commercial loans and hopefully help you to be more profitable in your quest for diversifying your income through commercial loans. I will endeavor to teach you the who, what, when, where, how and why of commercial loans. There are companies that are trying to sell you software or sell you on their commercial division to get loans in the door and they make it sound like commercial is no problem. I will not do that. What follows is the straight scoop on commercial mortgages. Don’t believe me? Try it yourself. Then 6 months from now when you have still not closed that loan that they told you was a piece of cake you will see that I am shooting you straight. Knowledge is power; my goal is to give you that knowledge-accurate knowledge. And so, let’s begin.

WHO?

ho lends the money in the commercial realm? This is the first and possibly most important difference between commercial and residential. Yes, you sell your loans to a large lender or bank or some financial institution whenever you do a residential loan. But the money is not really lent by that institution. It is for a few days. But ultimately they sell the loan to FNMA or FHLMC and get reimbursed the money. They just keep the servicing rights. Fannie or Freddie then bundle all those loans and pass them through to investors as mortgage backed securities. In other words, the bank is not really lending their own money. It is not that way in commercial. In the commercial realm, most loans are done by banks and it is their own money. They take the money on deposit with them and loan it out to different companies. There is no giant like FNMA waiting to reimburse them. If that loan goes into default the bank is stuck unless they can sell the property for a profit. Because of this, they are much more picky than they would be on residential loans.

But that is not all. 80% of all businesses fail within 2 years and if someone does fall into financial difficulty they will let their commercial investment go before the house that their wife and kids live in. Commercial loans are investment loans and you know full well the rules are stricter on investment loans. Because each piece of property is completely different, commercial deals are not hard and fast. No 28/36 ratios here. The property is more important then the borrower. You can have an excellent borrower but have a bad property and no one will buy the loan. I had a loan officer call me mad as anything that his loan was denied. In fact, we did not even send it to a lender-it was dead on arrival. His message was something like this, “ I have a guy with perfect credit, great income, a property worth $450,000 and all he wants is a little cash out loan of $300,000. You must be an idiot if you can not get this loan done.”

So I pulled the loan, and much of what he said was true. The borrower’s credit was perfect and his income was good-except on the property. The property itself was losing money. His borrower told him the property was worth $450,000 but based on the cash flow, it would not appraise for more than $150,000(more on appraisals later). No one is going to loan $300,000 on a place only worth $150,000!

In talking to him, it turns out he has been trying to get it approved for over a year! Commercial loans are deal-specific. Understand that the bank is loaning their own money and they will be very picky on what they will lend on. The good news is that if the deal is good, there is more than enough commercial money available-banks WANT to lend. They are just more careful when it is their own money.

WHAT?

hat takes commercial deals so much longer than residential loans to close? Rare is the commercial loan that closes in less than 1 month and the rate for those type deals are ridiculous. Small commercial loans will usually take 2 months and large commercial loans can take as much as 4-6 months or more! Many factors go into this-the appraisal, the broker themselves, the title, and especially the borrower. Let’s start with an appraisal. It will rarely be ordered before the loan is approved and the borrower has committed. This could be weeks into the deal. Once ordered, an appraisal on a commercial property will often take a month and it could be longer if the property is large and has mixed use. That is because the land under the commercial property is just one part of the equation. The properties value ultimately will be determined by its’ cash flow. The appraiser of a commercial property has to get the financials on the property and compare it to similar properties in the area. If my apartment complex is 70% rented and the average complex in the area is 75% rented it will effect my appraisal. How the property has been managed is important. How quickly the appraiser can get that information is important. The appraiser often must contact an owner and get information direct from them. It is rarely as easy as pulling up an MLS listing. Some companies may tell you different-again, try it and you will see.

The broker often can drag the file because they do not get the information needed up front. If my apartment complex is running 30% vacant compared to most places running 25% vacant then I need to explain that and have a business plan ready that explains how I am going to change that. Most brokers will send a deal in with a residential loan application filled in, a credit report and two years tax returns and think the loan can get approved. Then when asked for the stuff that is really needed-3 years operating statements, business plan for the property, etc. they balk at getting it. The loan will never get approved just based on 2 years tax returns and a credit report. Why? Because the property is the most important factor. If you get the right documents in a timely fashion, however, then your loan will move through much quicker and actually have a chance of getting approved. Because title on commercial property often involves such things as environmental and zoning issues, it can take 30 days as well. One 10 Million dollar deal got hung up on environmental issues for 3 months! But the big deals can make an entire year!

Finally, the other big drag on commercial closing times is the borrower-and I don’t just mean them dragging on getting documentation. Please understand that most investors that buy commercial properties want to disclose as little as possible and they do shop you. You may be just one of 5 brokers they have working on the deal and they may only be using the brokers because their local bank already shot them down. But they will beat you up if you let them. You are not dealing with a scared single mother who does not think they can even qualify for their dream home. You are dealing with a generally sharp, aggressive individual who could usually care less about you. They want the best deal and don’t care what they have to do to get it. They will take your approval and go back to the other people involved and try to get them to beat you out by 1/8^th and then blow you off. You need to either be firm and clear on what you need, when you need it by and how it will affect their loan or utilize someone who can speak their language without ruffling their feathers.

OUR COMPANY IS VERY EXPERIENCED AND TRAINED ON PROPERLY HANDLING THESE INDIVIDUALS TO GET THE BEST RESULTS.

These commercial loan customers are not dumb, if you explain why they need to get something, the benefit to them in providing it and a proper time frame to get the information then you will be able to not just close loans-but close them on time.

WHEN?

hen do I get paid? Most commercial loan fees are due and payable at time of commitment. In other words, the customer signs that they want this rate and costs and structure and you get a commitment from a bank or entity for it. However, it is usually not collected until the closing. But here is another danger with commercial loans. It is not like residential. On residential, the loan package comes from the lender and your fees are there and everything is fine. On commercial, the customer has much more clout. Often it is no problem, but sometimes if you are not careful, they can cut you out of the deal. The customer is also looking out for themselves. They will beat you up on fees and threaten not to close. They may tell the bank they do not want to close with the brokers fees on the closing statement and that they will pay you outside of closing and the bank will run with it. They may try to find out whom you are using and go direct to them. Anything to avoid paying you a fee. Sounds like I am being overly negative but I am not-I am just shooting you straight.

At A+ Financial Equities Corp., we have the legal forms and expertise to protect the fees. We have established relationships with the banks where we are usually a more valuable source to them then this one client. And if we need to, we have in-house attorneys that can sue for the money. Done right, you rarely need to resort to that kind of drastic action. But it is good to be aligned with someone who protects your interests! You will get paid! The good news is that the fees on commercial deals can be quite good and most people will ultimately pay you.

WHERE?

here can I do commercial loans? Depending on the lender you choose, you can do loans anywhere in the country. You must align yourself though with a lender who can work the deals in all the states. We are one of those companies. Where can you get commercial deals? They are everywhere! At Chamber events just mention that you do commercial deals and people start talking. It is a great niche to go to Realtors with. Drive any area and look at the properties. With rates this low, most properties can be refinanced! Call the landlord and get the owners info and market them. Get a letter out to your past customers letting them know you do commercial loans. There is no end to the lead flow. The commercial mortgage market is 4 times bigger then the residential market in terms of loan amount! It is a huge market!

HOW?

ow do I get started? Two ways. One quick, the other longer but both have merits. The longer way is to take all the classes and instruction you can find on commercial loans and try to place them yourself. Although you will keep more of your money that way, it will take years for you to get really good at commercial loans. The quicker way is to pick a company that you will work with. They should have contacts in the different states but also access to Wall Street money and nationwide commercial lenders. They should have experience doing commercial loans and not be tied to one lending source. Refer the deals to them and let them do the work while you watch and learn. You will pick up the stuff as you go along and will end up more knowledgeable in a shorter time frame. You will have to make less up front but you will close more loans, have less headaches, and ultimately be able to branch out on your own. This is like mentoring and it is a rock solid Biblical principle. At Commercial Capital, we operate this way. We will take your referral and work with you and the customer and get the loan done. We have access to local and national lenders in most marketplaces as well as Wall Street money and our commercial guys are experienced commercial veterans. We feel it is the best of both worlds. And finally,

WHY?

hy do commercial loans? I mean, if they are so deal-specific, longer to close, with tougher customers who are trying to get out of paying me anyway, why do them? Because commercial loans, done right, can be profitable. Because it gives you an edge over other brokers. Because you will come across them even if you do not try. Because it is smart business to diversify your sources of income. And most importantly, IT GIVES YOU A NATURAL HEDGE AGAINST RISING RATES! What do I mean? Commercial activity increases as business and the economy improves. As business and the economy improve, stocks do better and our rates go up slowing down refinance business. As that happens, the commercial marketplace heats up. A great offset to lost refinance business. Commercial loans are picking up right now which means that low rates are close to being over. Begin now to diversify your income and tap into this HUGE growing market!

For more information or to run a deal past one of our mortgage experts please call our Commercial Division at 305-931-2272.

Wishing you a prosperous year,

Paul Gall,

Loan Origination Dept