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William Pape
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deal BEFORE YOU TELEPHONE  ABOUT THAT COMMERCIAL DEAL

Everyone wants to do a quick commercial deal. Just pick up the phone and make that one telephone call to your commercial broker friend and you're into the "Big Bucks". It would be wonderful if life and the placing of a commercial loan were that easy. The reality of life and the commercial loan deal is that you get out of it what you put into it. If you are unprepared to deal with the multitude of questions that you will be asked concerning any commercial loan, you will just be "spinning your wheels. What if I called a residential mortgage broker and wanted to finance a new home. I may be asked questions about the source of the down payment, my income, my longevity in the community and job, credit history, tax returns, etc. If I cannot answer those questions to your satisfaction, I probably will not get my home loan. And yet, I receive calls about commercial deals from residential mortgage brokers who are unable to answer my questions. I'm told "this is a great property, the borrowers are great, etc., and they only want umpteen million dollars". What types of questions am I going to ask my residential colleague who calls me about a commercial loan?
Let's consider some possible questions.

What can you tell me about the borrowers?

    ~ What is their experience with the property type we are discussing?
    * What is their net worth and how much actual cash or cash equivalents do they have?


Assuming we are going to do a recourse loan, we are very very interested in the borrowers and if we are doing a nonrecourse loan we are still very interested in the borrower. Do the borrowers have several years of experience in doing projects of the type we are discussing or is this their first project?

As one loan officer said to me, "all the borrowers say they are millionaires". What he was really saying is that all their financial statements say they are millionaires. We need to be aware that the borrower's financial statement may be a bit optimistic. There is an old saying that some borrowers have three different financial statements - one for the IRS, one for the bank and one that he keeps for himself. Unfortunately, that possibility is still the case in a few instances. Cash is still "king". It is very important that there be a substantial amount of actual cash in the statement. If someone says they are worth ten million and have ten thousand in cash, you should look twice.
What can you tell me about the property location?
"' Where is the property located?
* Tell me about the community.
* Tell me about the demographics of the community.
* What makes the community prosper?
I would like to know what makes the community prosper. Is the community dominated by one large industry, by a military base, etc.? Is the stability of the community important to me? You bet it is. I want to know about the average income, competing communities, etc. I want to know about the location of our project within the community. Are we in the best location or area within the community? Stop by the Chamber of Commerce office. They will be happy to provide you with all the necessary facts and figures. By the way, the first question in this category that I may ask you is "have you seen the property?" I hope you can say yes.

What can you tell me about the actual property?
* What is the actual N.O.I.?
* What percent is the N.O.I. of gross income?
* What are the expenses taken?
* Who are the tenants?

      Credit tenants?
      Regional credit?
      Leases? Including length, rates, turnover, anticipated T & I costs etc.


What is the "Net Operating Income"? It is adjusted gross income less expenses prior to debt coverage. It could be a figure that is projected or an actual historical figure. You cannot assume that one figure is better than the other is. It may be that the historical figure is inaccurate because of tenant fill-up, etc. You should do your calculations based upon the norms of the community and property type. If an apartment complex is showing expenses that amount to 25% of gross income and every other apartment complex in your community is showing 30% to 35%, you may have a problem. Please don't overlook the fact that some of our borrowers may not include a vacancy factor because the property is 100% occupied. The borrower may show a 2% management fee, when the norm for the community is 5%. You must be aware of these possibilities.

What is an anchor? What is a credit? What about the leases? Is there a "go dark" clause in the lease of the major tenant? If so, how does that affect the other tenants and the center? What are the Moody's or S & P rating of the tenant? Are there any concessions in the leases? You may not know the answers to these questions, but you should be prepared to get the answers.
What can you tell me about management?

Is the owner the manager? Does he have experience? How many properties of this type has he operated? If he dies, is there a backup management team?

What about actual costs, if the property is new or recently purchased?

If the property is new, please be prepared to discuss the actual cost of the project and the amount of actual cash our borrower has in the project. Let's eliminate the "fluff' and get down to real money. You know, the green stuff. Please don't talk to me about lost opportunity dollars, developers overhead and profit, etc. I need to know the actual amount of "green stuff' that the developer has invested in the project. I may be able to obtain a loan of 70 to 75% Loan-To Value, but I also have a maximum of Loan-To-Cost, which may be 80 to 85%, depending upon the property type. In some property types these figures may decrease by 10 to 15%.

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