the trusted advisor's guide to commercial real estate loans

The Trusted Advisor’s Guide

To Commercial

Real Estate Loans By Craig S. Higdon

© 2016 Craig S. Higdon 1 Phone (888)-578-5441 x81

Hello!

Purchasing a commercial property is a major event in any investor’s or small business owner’s life – especially if it is his or her first time through the process. As a trusted advisor to your client it is important that you understand how the commercial property financing process works, what it takes to be prepared, and how to separate the facts from fiction so that you can better advise your clients in your specialty. That’s the purpose of this report … How I Can Help You My name is Craig Higdon and I specialize in helping real estate investors, small business owners, and their advisors identify the most effective and low-risk ways to finance income producing properties. I also happen to get paid in the most professional, risk-free way possible: Upon the successful close of the loan. In other words, the only way I make money on your client’s loan transaction is if, and when, I’ve succeeded in helping them to acquire financing. If I can’t get them a loan and they are unable to finance a property, they will not owe me anything. And this is true whether we spend two hours or twelve months together in the process. That is very unlikely to happen, however. You see, I don’t represent a “typical” bank or savings and loan. I represent a mortgage brokerage – a brokerage that specializes in commercial and construction loans. As a broker, I represent multiple lenders and multiple types of lenders. This means that there is a very good chance that I will help your client find the best loan program to meet his or her investment needs, regardless of their type of employment, credit status, source of funds, or desire for liquidity. How do I do this? I have over 23 years of experience helping hundreds of commercial real estate investors like your clients. Because I don’t represent a single institution, I’m not locked in or committed to offering your clients the interest rates and programs of only one bank.

I’m able to take your client’s financing request and shop three, six, ten, or even dozens of different lenders and investors in order to find them the best possible program for their situation. I have contacts with lenders all over the country and can access hundreds of different loan programs.

© 2016 Craig S. Higdon Phone (888) 578-5441 x81 - 2 -

With this range of available financing, I will be able to provide your clients with a tailor- made loan program designed to help them meet their investment goals. Whether they are involved in development, buy-and-hold investment, value-added rehabilitation and re-tenanting, or small business expansion, we are aware of programs to serve their needs. On the other hand, if you were to go to a local bank, there is a good chance your client would be locked into taking only the few programs that they have to offer. They would probably require a minimum down payment of at least twenty-five percent (25%) or more, a small mountain of paperwork, and two months to close the transaction.

We deal in “less.” Less equity (if that is a need), less paperwork, and less time. I Would Like to Extend an Offer I’d like to “buy” your commercial real estate investor clients a half hour of my time to discuss any specific project that may be of interest to them. I have a couple of short forms concerning their projects that I would need completed prior to the meeting so that I can discuss their situations intelligently. At the end of our half hour, we will have created a plan to help them effectively structure and obtain their financing, whether through me or on their own. You will receive a copy of the Findings to review with your client in depth. You see, I understand I’m dealing with their livelihood, and more importantly, a highly prized possession - their real estate. Thus, I want our relationship to be a long and enduring one, not just a simple half-hour session. If you are interested in taking me up on this special offer, please see the information at the end of the report on how to take the next step. I look forward to working with you on this and future transactions. Sincerely, Craig S. Higdon P.S. I hope you enjoy the “special report” you’re about to read. I think you’ll find it very helpful.


Legal Notice The author and publisher of this report and the accompanying materials have used their best efforts in preparing this report. The author and publisher make no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this report. The information contained in this report is strictly for educational purposes. Therefore, if you wish to apply ideas contained in this report, you are taking full responsibility for your actions. Every effort has been made to accurately represent this product and its potential. Even though this industry is one of the few where one can write their own check in terms of earnings, there is no guarantee that you will earn any money using the techniques and ideas in these materials. Examples in these materials are not to be interpreted as a promise or guarantee of earnings. Earning potential is entirely dependent on the person using our product, ideas and techniques. We do not purport this as a "get rich scheme." Any claims made of actual earnings or examples of actual results can be verified upon request. Your level of success in attaining the results claimed in our materials depends on the time you devote to the program, ideas and techniques mentioned, your finances, knowledge and various skills. Since these factors differ according to individuals, we cannot guarantee your success or income level. Nor are we responsible for any of your actions. Materials in our product and our website may contain information that includes or is based upon forward-looking statements within the meaning of the securities litigation reform act of 1995. Forward-looking statements give our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with a description of potential earnings or financial performance. Any and all forward looking statements here or on any of our sales material are intended to express our opinion of earnings potential. Many factors will be important in determining your actual results and no guarantees are made that you will achieve results similar to ours or anybody else's. In fact, no guarantees are made that you will achieve any results from our ideas and techniques in our material. The author and publisher disclaim any warranties (express or implied), merchantability, or fitness for any particular purpose. The author and publisher shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this material, which is provided "as is” and without warranties. As always, the advice of a competent legal, tax, accounting or other professional should be sought.

The author and publisher do not warrant the performance, effectiveness or applicability of any sites listed or linked to in this report. All links are for information purposes only and are not warranted for content, accuracy or any other implied or explicit purpose. This report is © (copyrighted) by Craig S. Higdon. No part of this may be copied, or changed in any format, sold, or used in any way other than what is outlined within this report, under any circumstances.


A Special Report Intended For The Trusted Advisors Of

Commercial Real Estate Owners and Investors:

Business Managers CPAs

Financial Planners Commercial Insurance Brokers

Property Managers Realtors

Real Estate Attorneys Residential Mortgage Brokers

Stock Brokers Trust Attorneys

By

Craig S. Higdon, BSME, MBA

“The Trusted Advisor’s Guide To

Commercial Real Estate Loans”


Introduction

Avoidable Mistakes in Commercial Real Estate Lending Commercial real estate can be an amazing source of passive income and wealth development for a sophisticated investor. It is also one of the more complex investment vehicles available. The investor seeking financing in a commercial real estate transaction relies on a number of additional advisors who each play a role in the success of the transaction. The coordination of these advisors often falls to the mortgage professional providing the loan analysis and acquisition process. Without the help of these advisors, the task of acquiring financing for a commercial property is nearly impossible. This report has been written for the benefit of those who help their clients in areas not directly related to, but in support of, the commercial loan transaction. It is designed to give you a sense of the overall commercial loan transaction and the many decisions faced by the investor in the process. Finally, it helps to make you aware of some common mistakes that can be avoided with some upfront planning. After helping hundreds of real estate investors analyze their properties from a lender’s standpoint, acquire those properties, and reposition their financing for maximum benefit, I have discovered that there are seven areas in commercial lending in which even experienced investors commonly make mistakes that can cost them thousands of dollars. Knowing how to help your client avoid these mistakes will not only make their financing process go much more smoothly, it will probably boost their returns and help them reach their goals faster. In summary, those mistakes are:

1. Not knowing their credit status in advance of the loan application. 2. Not having personal income and asset documentation available or properly prepared. 3. Not having adequate property documentation. 4. Not realizing that lenders differ in their “loan appetites.” 5. Not understanding the impact of “debt coverage” on “loan to value.” 6. Not being aware of their financing options. 7. Not working with an experienced Commercial Mortgage Professional.

Being aware of, evaluating, and preemptively correcting these seven errors will help your clients avoid most of the costly mistakes associated with commercial real estate financing and help them gain significantly more profits in less time.


Commercial Borrower Mistake #1

Failing to Examine and Repair Any Credit Problems Prior to Applying for a Loan

As in any other loan transaction, credit plays a major role in obtaining commercial financing, how much financing for which your client can qualify, and what kind of an interest rate they can obtain. Unfortunately, most people do not pay attention to or monitor their credit files on a regular basis. When investing in commercial real estate, this is an absolute “must.” What is “Good” Credit? Good credit for a commercial investor usually means a person has about twelve to fifteen solid pieces of seasoned credit with several real estate loans either showing as “active” or having been paid off successfully. For example, car loans, current mortgages, and charge cards which are at least three years old and show no late payments. Again, for real estate investors, successful maintenance of real estate loans is a requirement. Now granted, not everyone is perfect (in fact, very few are!) and we all have our ups and downs. So your clients do not have to worry if they have a few older 30-day late payments on their credit report. Today, credit reporting systems use a complex method of evaluating credit patterns which is distilled into and issued as a “credit score.” The higher the number, the less risk there is that a borrower is likely to default on a loan. While this process, called “credit scoring,” is in full use for residential loans, the commercial lenders are only now starting to adopt it. There is a trend to use them by certain non-bank lenders for loans less than $2,000,000 or so. Most underwriters (the unknown people behind the scenes who actually approve a loan) and underwriting systems that review a borrower’s track record are looking for trends. In other words, they’re looking for a history or recent pattern of good or bad credit. Isolated incidents should not affect your client’s ability to get a loan. How Can Credit Be “Repaired?” There are volumes written on the process of credit repair and there are a very few credit-oriented law firms that can effect significant changes in credit scores in a short period of time (call our offices for a referral). However, there are a couple of simple things that your client can do in the short term to clean up a credit file. In most cases, a simple letter or phone call to the creditor or business that originally gave your client the credit can put them on the right track to having that “scar” removed from a report. Most will remove a one-time event with a request or if your client has some proof to explain the error.


Your client can also contact Experian, Equifax, and Transunion directly via the web (just add “.com” to their names), request their reports for free each year, and dispute derogatory credit online. The amazing thing about this process is that 50% or so of the bad marks will drop off from the report automatically from creditor non-response. However, I recommend that you direct your client to www.AnnualCreditReport.com and have them order all three bureaus with credit scores. ALL Federally charted lenders will accept this credit report and it will NOT affect your client’s credit score in any way. Sometimes a creditor will require your client to pay off the balance of a debt or send in proof with an explanation letter before removing derogatory items. Do not let your client pay off any creditor without talking to a qualified professional credit advisor or mortgage consultant first! However, if your client has a history of recent late payments, they will probably have to let time take its course once these other alternatives are exhausted. There are a million scenarios I could review, but I think it’s important you walk away with two key thoughts from this: 1) Your client’s credit can make or break their ability to acquire a loan; and 2) they must know what is on their credit report, what is their credit score, begin to examine and, if necessary, repair any credit problems immediately.

The Importance of Investment History

Your client’s investment property loan history or “track record” plays an important role in whether or not a lender will want to finance their next property. Investment properties, and their respective loans, are often looked upon as a higher credit risk than owner occupied residential properties. The thinking is that if financial problems develop, an individual would be more likely to make extra efforts to keep a primary residence and to sacrifice investment properties to foreclosure. Thus, if an investor loan applicant can show a history of successful acquisition, management, and disposition of commercial properties, a lender will view this favorably in the underwriting process. This is one of the “intangibles” in loan underwriting because it is considered a measure of both the applicant’s character and real estate business acumen. A good investment history is a significant “plus” for any commercial real estate investor.



Not Having Income and Asset Paperwork in the Right Format for the Right Lender

What I see a lot of real estate investors do is to take the supporting loan documentation for granted and this is, frankly, a big mistake. I often have my staff spend hours re-formatting reports or having the client do the same.

Remember: They are often trying to convince an institution with fiduciary responsibilities to its clients to lend them millions of dollars. Your client needs to make a great first impression. Once I get a borrower’s credit squared away, I deal with the income and asset documentation. I often ask for complete Federal tax returns for three years, all schedules and supporting documents … then only get the first page of the State return! And then it becomes a scramble to get the rest of the pages together in a presentable package. I have to be straight with you here and tell you that I no longer deal with investors who aren’t serious about their loan files. It is as if they have the attitude that the lender should lend them the money. To me, these investors are not serious about their investments and I politely ask these paper-misers to get me the complete set or to please find someone else with whom to work.

So here is what you have to know about loan file documentation: There are two sets of documents that the client controls with which we have to concern ourselves in a commercial real estate finance transaction. The first set concerns your client’s documents and the second concerns the property they are financing. In this section we’ll focus on the client’s paperwork.

Personal Documentation

Here is a basic list of borrower documents … and keep in mind that they need to be neat, legible, and complete to have a better chance of success in getting a commercial loan approved (underwriters hate to have to squint or call brokers for clarification).

“Reduced Document” Transactions

Advantages - less paperwork, fewer questions to answer; Disadvantages - more expensive, less money for the borrower, and lower loan amounts.

1. A three-credit bureau Credit Report, with credit scores, for all persons who will be signing for the loan or who will own 20% or more of the property.

a. Direct your client to www.AnnualCreditReport.com and have them order all three bureaus with credit scores. ALL Federally charted lenders will accept this credit report and it will NOT affect your client’s credit score in any way.


2. Two (2) months of bank, brokerage, or retirement account statements – to show the availability of funds to close and for reserves.

3. For those who are self-employed, proof of employment such as a CPA history letter, copies of the Articles of Incorporation or Organization for their company, or a current professional license.

4. Two forms of I.D. such as a Driver's license and Social Security card (this is for the Patriot Act). 5. A resumé or history of real estate activities (real people underwrite a file, so they want to know

something about the investor). Show them past projects and how long they have been a successful investor or business person (if the client is just starting out as an investor).

Full Document Transactions

The great majority of commercial real estate transactions require full borrower income, tax, and liquidity documentation. Reduced documentation loans are relatively new to commercial loan underwriting.

Advantages - less expensive, more money for the borrower. Disadvantages - lots more documentation, more questions to answer.

1. Everything mentioned in the Reduced Document list, plus: 2. Three (3) years of the Borrower's personal Federal tax returns, all schedules, forms, and

supporting statements such as W-2s and K-1s, all signed by the Borrower. 3. A current Personal Financial Statement, dated within 90 days and signed by the Borrower. 4. Three years of any business or trust entity Federal Tax returns, of which the Borrower owns

20% or more, all schedules, signed by the Borrower. 5. Current interim financial statements on those entities in #4, both Balance Sheets and Income

and Expense Statements, dated within 90 days and signed by the Borrower. 6. A complete Schedule of Real Estate Owned (call our offices for one if you need it), signed by

the borrower. 7. If it is a business owner buying a property for his business, then a company history or a website

address that shows company products/services and history,

We are getting closer to creating that perfect loan file. Now let’s look into the property’s documentation.



Not Having the Proper Property Documentation

The third thing that borrowers tend to have problems with is their property documentation. Once your client’s credit is checked and their income and liquid asset documentation are all tied up neatly, this is the next area that requires focus. This is probably the most important part of the documentation process: Establishing the Net Operating Income of the property. Property Related Documentation

Remember, this is “income property lending” we're discussing. Unlike residential lending, our focus is on the property and its ability to service the debt in question, i.e., your client’s loan. With that in mind, we want to pay special attention to how we present the information concerning the property's income and expenses. As usual, we have to divide things up a bit depending upon whether we're discussing a purchase or a refinance. So here is a "list" of Property documents, broken into three parts: For ALL Transactions

1. Ownership Entity Formation Documents. If a corporation, you’ll need the Articles of Incorporation (Corp.) or Articles of Organization (LLC), the By Laws (Corp.) or the Operating Agreement (LLC), and the Secretary of State’s current Statement of Information (either).

2. Sometimes you will need a Zoning Letter from the County in which the property is located indicating that the property is properly zoned for its use.

3. The most recent prior Appraisal done on the property, if any. 4. The most recent Environmental Phase 1 on the property, if any. 5. A property Survey, if any.

For Refinances

1. A current Rent Roll (multifamily) or Lease Summary. These statements should be thoroughly completed. The information usually requested includes: Tenant name, unit, square footage, start date, end date, escalations and options. Also note any free rent, CAM charges, etc. Do not make it hard for the lender to evaluate your client’s property. Call our offices for examples of these forms.

2. Income and Expense Statements for the past two years. Schedule E forms from your client’s tax returns may be used as a substitute, but including actual statements shows a lender that the client is more involved in the property’s management.

3. A Year to Date Income and Expense Statement if we are more than three months into a new year.


4. A Trailing 12 Months Income and Expense Statement. This is sometimes difficult to do, but a lender is likely to extrapolate this. The best approach is to make the process easy for the lender. These statements are especially critical in loan transactions in excess of $3,000,000.

5. A 12 month Pro Forma Income and Expense Statement. This is your client’s estimate of the income and expenses for the coming year.

6. A Schedule of Major Repairs done during the period covered by the income and expense statements. Include notes indicating how the repairs impacted the Income & Expense statements. You want to show as little Operating Expense as possible to maximize your client’s loan. Capital Improvements are treated differently and do not affect calculated net operating income. I see this mistake often.

7. The Closing Statement from the original purchase of the property. Lenders like to know what your client paid for a property and how much equity has been invested to date.

8. A Preliminary Title Report. 9. A current Tax Bill. 10. Evidence of Insurance: Liability, Hazard, and possibly Environmental and Terrorism.

For Purchases

1. Add the Purchase and Sale Contract, and 2. The Escrow Instructions (often the same document, referred to as the Purchase and Sale

Agreement). 3. The income and expense documentation will come from the Seller, over whom there is little

control when it comes to the form of the property documentation. This is often where our office gets involved in “translating” the information into a more presentable form.

While not directly related to income documentation, there is another set of documents needed in the case of a construction or rehabilitation project. To be complete, I have included that list here for reference. For Construction

1. A signed construction contract (usually “single price”). 2. The contractor’s resumé. 3. The contractor’s license. 4. A complete Cost Breakdown. 5. Working plans, stamped by the Building & Safety office. 6. Specifications. 7. A site plan. 8. A soils report. 9. A survey. 10. A pre-paid expense schedule.

We are one step closer to a perfect loan file; however, to borrow a phrase from late night television, “but wait ... there's more!”



Not Understanding Different Types of Loans Require Different Types of Lenders

Why Many Commercial Loans Are Rejected I hear this question often: “Why did the bank turn down my loan request?” One of the things that real estate investors get confused about is that different types of lenders like different kinds of loans. And even lenders in the same class have different “tastes” for financing. Here are the major classes of lender:

1. Bank 2. Traditional Mortgage Bank 3. Thrift 4. Life Company 5. Wall Street Conduit 6. Private Money Lender 7. Small Balance Commercial Mortgage Bank

Banks are usually interested in a deposit relationship, like to “keep their money moving” so they make shorter term loans (think construction), and are essentially front ends for the Conduits on larger permanent loan transactions. Banks also go into and out of the loan market depending upon their deposit demands and loan portfolio mix. Traditional Mortgage Banks have more flexibility, often originating loans for banks, life companies, Fannie Mae, Freddie Mac, The Department of Housing and Urban Development (HUD), and Wall Street. However, economies of scale usually dictate that they do loans larger than $2,000,000. Thrifts charge higher interest and therefore take on riskier projects such as leasing turnarounds and vacant buildings for rehab. Your clients generally have to be experienced to work with these lenders. Life Companies only want the best real estate around. They offer great rates and reasonable terms, but there can’t be any “hair” (unusual circumstances) in the transaction. It has to be a very clean building in a good area with great long term tenants. Wall Street Conduits replaced the Savings and Loans in the early 1990s. They provided desperately needed liquidity to the real estate capital markets and became the de facto choice for large permanent loans. They “securitize” their loans and thus make it hard to pay them off except at then end of the loan term. Again, they prefer larger loans, starting around $3,000,000


Private Money Lenders, also known as “hard money” lenders, do the tougher deals. Usually based upon the value of the project they charge high interest and high points, but will finance things a banker would not be seen driving by in the same zip code! Contrary to popular belief, their loans tend to be full recourse. Small Balance Commercial Mortgage Banks are a new phenomenon and offer real estate investors a real wealth of loan choices. They will do Reduced Documentation loans, high loans to value (up to 90%), second trust deeds, and they will finance all kinds of properties. Their rates are higher than those of banks or traditional mortgage banks and they usually limit their loans to $2,000,000. They are having a significant impact on commercial real estate. As you might expect, however, there are exceptions to all of the above. While you can use this list as a guide, it’s not exhaustive. Many factors can go into whether a particular lender would have an interest in your client’s particular loan. There are also minor lender categories that I have ignored for the sake of brevity and because they have such a limited impact on the overall loan market. Thus a loan may be turned down simply because the wrong lender was chosen, not because the loan or borrower was “bad.” So which is the right lender for your client? You’ll have to wait until Commercial Investor Mistake #7 to find out.



Not Understanding How “Debt Service Coverage” Can Affect “Loan to Value”

Why Loan Amounts Are “Cut” Borrowers come to me after having their loan requests reduced, or “cut,” and ask me why. To answer that, I have to describe the concept of “Debt Service Coverage.” One of the key concepts that separate commercial lending from residential is the idea of “who” is really qualifying for the loan. In residential lending, loan approval is all based upon how much debt the borrower can afford. In commercial lending it is (almost) all based on the property’s ability to service the debt. In residential lending you may be familiar with a couple of key ratios: The Housing Ratio (sometimes called the “Front End”), and the Debt Ratio (sometimes called the “Back End”). These both calculate a certain amount of monthly “debt service” (obligations) as a percentage of the borrower’s income. In commercial lending the lenders use something called the Debt Coverage Ratio or “DCR.” You’ll also hear it called the “DSCR” or Debt Service Coverage Ratio. Lenders express this as a minimum number, ranging from 1.15 to 1.35, depending upon a number of factors such as the type of property, its age, and the quality of the tenants. DCR is the lender’s cushion in the event things don’t work out as planned at the property. An Example Let’s say you have a $1,000,000 retail center that has a Net Operating Income (NOI) of $5,000 per month and the lender your client calls tells him that they can go as high as 75% LTV or $750,000. They can offer him a rate of 7% on a 25 year amortizing loan, due in 10 years. Since your client owes $500,000, he is thinking, “Great! I can free up $250,000 in stuck equity and go buy another property!” Unfortunately, the lender has not told him the whole story. The lender then tells him that the maximum loan will be “subject to a DCR of 1.25.” So he takes your client’s $5,000/mo NOI and divides that figure by 1.25, thus giving the lender a cushion in the event a tenant moves out or doesn’t pay his rent. In effect, DCRs reduce the maximum loan amount possible. (In practice, the lender may make adjustments for vacancy, management, and reserves, but I’m keeping the example simple.) It looks like this:

5,000 ÷ 1.25 = 4,000 available for debt coverage


So now we plug the $4,000 monthly payment into our financial calculator, using a 7% rate and a 25 year amortization. This gives us a maximum loan of only $546,000! So in this example, it appears that your client will not be buying a new property any time soon. The bottom line is that you have to know what a lender’s minimum DCR is for the type of property being financed, in that market and in its current condition. From there, you’ll be able to find out what your client’s real loan amount will be once, regardless of the stated maximum loan to value. Alternative Underwriting There are other options available to commercial real estate investors now. As I have mentioned in the previous section, there is a new kind of lender that is changing the way smaller commercial loans are underwritten. These lenders blend residential and commercial underwriting procedures to allow much lower DCRs and even do commercial loans without the full document paperwork that traditional lenders require. So there is hope! See below …



Not Understanding the Available Financing Options

When it comes to financing commercial real estate property, there are more options available to investors than in years past. Here are the basics: All Cash

With the recent run up in prices and the attractiveness of 1031 Exchanges, investors do buy properties “all cash.” This is the most conservative approach and offers the investor sheltered income that grows year by year. Returns are lower, but are predictable and offer protection against inflation. The funds can all be from a single investor or they can be raised in a syndication involving multiple partners. Part Cash, Part Debt

This is “traditional” real estate financing. Your client provides a portion of the purchase price and the lender provides the balance. What is not so clear is exactly how much the lender will give your client. As I mentioned above, we are all familiar with “loan-to-value” and how that figure can get significantly “adjusted” by debt service coverage. I also mentioned that we have some maverick lenders coming into the market who, unlike traditional lenders that pretend the borrower’s other income from other sources does not exist, will count that income in the coverage calculation. Although their loans are more expensive, they offer real estate investors the ability to conserve capital and acquire more property for the dollars they have available. As more of them come into the marketplace, I expect to see overall rates decline for these kinds of loans. Types of Loans Most commercial loans do not “fully amortize.” This means that they are due before they are completely paid off and often have a significant balance. This is because most commercial lenders want to keep reinvesting their money as market conditions change. This applies to fixed rate loans as well as adjustable rate loans. Most commercial loans have a shorter amortization period, such as 20 or 25 years. Newer properties and apartment buildings will often get 30 year amortizations. Apartments also tend to get access to full amortization loans, too. As I mentioned in #4, the source of the loan has a large impact on the type of loan your clients get. Here are some more examples:

Banks: Adjustable rate loans, shorter pre-payment penalties, higher rates, recourse to the borrower; Construction, Land, Acquisition and Development (A&D) Loans.


Mortgage Banks: Low rate fixed loans sold to Wall Street “Conduits” with tough pre-payment provisions; Bridge Loans; Mezzanine Loans, non-recourse.

Insurance Companies: Low rate fixed loans, flexible pre-payment provisions, can lock at application, slow, like large high-quality properties.

Private Lenders: High rate fixed loans, Construction, Bridge, Land, A&D loans, focus on the equity, low LTV, full recourse.

Small Balance Commercial Mortgage Banks: Medium rate loans, a full range of adjustable and fixed rate loans, multiple amortizations, permanent only, pre-payment penalties.

Which loan is right for your client will be determined by a number of factors including: Your client’s credit, the quality of the property, the purpose of the loan, the property’s location, the lender’s appetite for that kind of loan … and others. A qualified mortgage professional can be the difference between a successful transaction and one that goes nowhere.



Not Working with a Reputable and Experienced Commercial Mortgage Broker

To Help Finance an Investment Property Last but not least, whom you choose to help your client finance their property can make or break a transaction. Good advisors research, interview, and associate themselves with a quality, reputable, service-orientated mortgage broker. This is probably the most important factor in acquiring commercial real estate financing if you have understood this report to this point. This is an important decision. It is not something you want to treat lightly. Being associated with the right broker can not only mean the difference between having your client’s loan application approved or rejected, but it can also save your client hours of frustration and thousands of dollars in long-term costs. Finding the Ideal Mortgage Broker There are plenty of very reputable, knowledgeable commercial mortgage professionals out there to help you. You just need to know what questions to ask to make sure you get into the right relationship. Here are some questions I recommend that you ask: 1) Can you furnish me with the name and phone number of three past customers? This is important. If the broker or agent is hesitant there is a good chance they may be hiding something. Do not get involved with them. Always ask for references. 2) If my loan gets rejected, will you return the cost of my application fee? Most bankers and brokers will do an initial consultation free-of-charge. Once your client applies for the loan, the lender may charge an application fee. The lender who actually approves the loan will request a deposit for third party reports such as an appraisal and credit report. These are generally not refundable once the report has been ordered. Laws vary from state-to-state, but check the application documents carefully to see what the broker’s policy is. Some states require brokers to return the application fee if the loan gets rejected. However, the law may only require them to return the money if the customer asks. Check with your state banking commission on the details. Most brokers in California do not charge application fees. Most reputable bankers and brokers will tell you about their return policy at the time of application. If they do not, your may want to reconsider with whom you have your client do business. 3) How long have you been in business? And have you ever had your license suspended or

revoked by the state banking commission or any government authority?


These questions accomplish two things: 1) They demonstrate that you have educated yourself about the commercial loan process and will likely not be taken advantage of and 2) they help you to decide if the broker has sufficient experience to help your client finance one of their significant assets.

I hope that you have found this report educational and useful in working with your clients who might be engaged in commercial real estate. Whether your role involves financial, tax, insurance, legal, property management, or real estate transaction advice, your expertise has an impact on a commercial real estate financing transaction. We look forward to working with you in the service of our mutual clients. Sincerely,

Craig S. Higdon Director C. S. Higdon, Inc. www.CSHigdonInc.com


What to do Next It has been my experience that the complexity of the commercial loan process requires a different approach to helping my clients evaluate their financing options. When I started out doing commercial and construction loans, the extent of my service was limited to calling a few local lenders to see what the best rate of the day was. As I got better at what I do, I grew with my clients. I also adapted to their changing needs. Now, I fully analyze a client’s portfolio, investment goals, and risk/reward profile before making financing structure recommendations. This growth process has taught me that I have to coordinate a number of professionals in other disciplines to move a loan transaction to a favorable conclusion. I have to help you to help them! Only in this manner can I truly benefit our clients, earn their trust, earn your trust, and provide valuable advice for transaction after transaction. But first, I would like to meet with you. Coffee, lunch, ice cream, whatever. Let’s spend a few minutes getting to know each other and the scope of our practices. Once we’ve done that, then we can move towards helping people with their commercial real estate loan needs. Please call me at 888-578-5441 x81and let’s get together. I have also developed a “15 Minute Commercial Loan Review” which I conduct over the telephone with your clients interested in commercial and construction loans. Here is what I accomplish in this fast-paced, no-nonsense session:

Investigate The Transaction - The key to a successful commercial real estate finance transaction is to understand all of the issues that affect the property and the guarantors. Missing a key item can set the process back weeks as we try to convince the current lender to move forward or start over with a new one. This will help your client uncover hidden road blocks to their loan closing.

Evaluate Financing Alternatives - There is more than one way to get to the top of the mountain, but not all of them are easy or short! There are nearly as many ways to finance a commercial property and without someone showing your client the way, getting your loan funded can be an arduous experience.

Recommend Financing Structures - At the end of the interview, I will have narrowed the choices down to one or two ways that will get your client the financing he or she needs for the project. With my recommendations you will be able to quickly and effectively package your loan request for almost any appropriate lender.

This consultation can take place at your client’s convenience. To secure a time for the consultation, please call me at 888-578-5441 x81or send an email to [email protected]. Thanks! Craig Higdon


About the Author Craig Higdon Director C. S. Higdon, Inc.

Craig S. Higdon graduated with a Bachelor's degree in Mechanical Engineering from the University of Southern California. He subsequently earned a Masters in Business Administration from Heriot-Watt University in Edinburgh, Scotland. After leaving school, he decided that he did not look good in a pocket-protector and consequently took a job on Wall Street as a retail stock broker. This began 30+ years of work in the financial services sector where he held jobs as an investment banker, business owner, and eventually as a mortgage broker.

Mr. Higdon has been in the mortgage business since 1993 and is a licensed Real Estate Broker in the state of California. Mr. Higdon has extensive background in both residential and commercial mortgage loan transactions, including significant construction loan experience. His personal mission is to help small business owners and real estate investors create wealth through the acquisition of commercial income producing property. As a second degree black belt in Shaolin Kenpo, he considers it his personal duty to protect real estate investors from commercial loan misinformation.