George Novak The Provident Bank (732) 726-5524 This e-mail address is being protected from spambots. You need JavaScript enabled to view it More Info

If you are in the market for a commercial mortgage, here are some examples of things you should not say to your lender:

1. “I found some land and am thinking of building some condos. There are no approvals yet.”

2. “Can you finance a purchase if I put 10% down? That’s all I can afford.”

3. “I own a property. I would like to do a cash-out refinance for unspecified future endeavors.

Banks are conservatively risk-averse in these uncertain economic times. They are especially leery of any proposed deal that contains any element of speculation or where a borrower isn’t injecting at least 25% of the project cost.

Let’s take a look at the quotes above one at a time and examine each for the risks. The perceived risk is important because it’s how banks price (determine rates and fees) commercial loans. We will then reshape the statements above to increase the borrower’s chances of securing a loan.

The first quote has three big risks. First, the prospective borrower found some land but doesn’t own it. The bank will prefer that the borrower own the land when looking for a construction loan. Second, the condo market is long gone. We are in a renter’s market, not a seller’s market. Finally, the bank will expect that you have approvals to build whatever is planned. So, the chances of getting the loan are much higher if the comment is changed to:

“I own a parcel of land free and clear. It has approvals from the township for a 6 unit multifamily property. I already have 4 of the units pre-leased.”

The second quote represents one of the big hindrances to obtaining a commercial mortgage for an investment property or project. The borrower is unwilling or unable to supply a sufficient down payment. In this market, most banks will require at least 25% down and some may push for 30%. Banks want to ensure that the borrower has sufficient “skin in the game” so that if the cash flow on the property weakens the borrower is motivated to stay involved and continue to operate the investment property until new tenants are found. Also, if the 25% to 30% capital injection depletes the borrower’s reserves, then the borrower will be unable to provide any cash flow “cushion” for any “speed bumps” along the way. This is of great concern to bankers today as liquidity is as important as ever.

A better statement would be:

“There is a nice building in the next town over. I can easily put 25% toward the purchase or even 30% if that is required.”

Finally, let’s take a look at the third quote above. Banks are cautious of cash-out refinances where there is not a very clear specification as to the use of the funds. Banks are very careful whenever an aspect of speculation is involved. They generally don’t want to write commercial mortgages that only finance other forms of debt. A better statement would be:

“I own a property in a nice location. It is encumbered by a very small mortgage. I would like to refinance it and use the cash out to purchase another investment property. The new property is fully leased and has a positive cash flow.”

It’s true that the reworked quotes generally represent best-case scenarios. However, the difficult economic climate coupled with increased pressure from regulators has forced banks to be very selective about the loans that are booked. Having an understanding of what the banks are looking for will aid you in your search for a commercial mortgage.

Finally, it’s crucial to find a solid bank as your lending partner. Many banks have ceased or scaled back their lending activities in this economy. The Provident Bank has a 170 year history and a healthy balance sheet. In fact, we are one of the few regional banks that did not take any government TARP funds. We are still very active in the lending arena.

We welcome the opportunity to work with you.