This year I will receive about 180 loan inquiries. Prior to the Great Recession the number of loan inquiries I received approached 300. That’s a lot of loan requests! Of these, less than 20 will eventually get funded using my services as a commercial mortgage broker. Some borrowers will go on to get their loan funded through other lenders or mortgage brokers but the vast majority will never get financed. Why? There are several reasons. Here are just a few:

1. Too much existing debt/ too highly leveraged. It’s not uncommon that I see properties that currently don’t support the debt that was put on the property prior to the Great Recession. The good news is that the owner has been faithfully paying his monthly mortgage payments. The bad news is that in order to refinance his property, the owner will have to pay down the existing mortgage, i.e., pay cash at closing to pay off the existing loan. Unfortunately, many owners are unable or unwilling to do that.

2. Not keeping good records on the property. A commercial property owner should keep separate books on each property they own. It’s not uncommon to see co-mingled funds with other properties or with the owner’s personal accounts. Bookkeeping needs to be clear and accurate so a lender can assess the property’s performance as the lender needs to know if the property can support the proposed mortgage payment. The chances of getting financing are slim without accurate historical operating statements, a current rent roll, and a list of capital improvements over the past few years.

3. Insufficient Global Cash Flow. The Darth Vader of loan underwriting these days is global cash flow. Not only does the property have to cash flow to generate an acceptable debt coverage ratio, the borrower’s overall real estate portfolio must do the same. Gone are the days that lenders look only at the proposed loan on the property. Lenders want to make certain that there is not another property that the borrower owns that could potentially suck all the cash out of his personal financial statement, which leads to the next issue:

4. Lack of liquidity. The saying that, “Cash is King” is as true a statement as you’re going to hear when it comes to financing commercial real estate. Lenders like to see borrowers flush with cash and other liquid assets that can be easily converted to cash. At the very minimum lenders want borrowers to have 6 to 9 months of the proposed mortgage payments showing on their personal financial statements. The more, the better and the easier it is to overlook other financing issues.

5. Unrealistic expectations of the borrower. It’s surprising to me how often I hear borrowers requesting loan terms that are not being offered in the market including:

  • too high of an LTV expectation
  • a longer fixed rate loan term than most properties can qualify for
  • unrealistic low expectations for the costs associated with financing a property
  • unreasonable expectations about a lender’s prepayment penalty for fixed rate loans

6. Violating the Golden Rule of Lending. There is small group of commercial real estate property owners who act as if they are God’s gift to commercial real estate. You know who I’m talking about. The rules of financing don’t apply to them because they’re special. Right… Let me let you in on a little secret: They’re not. The Golden Rule of Lending is – He who has the gold makes the rules. If you want a loan, you must comply with what the lender is asking for in the way of documentation. There are some that say what the lender is requiring is intrusive and unnecessary. I will admit at times this can be true. The question is, “Do you want the loan or not?” Don’t argue with the lender’s requirements. It will get you nowhere.

7. Going to the wrong lender. I will often ask a borrower what lenders they have talked to so far about getting a loan. Once I hear the lenders they’ve contacted, I chuckle to myself because it’s obvious why they are still searching for financing: the borrower doesn’t know the right lenders to contact in order to get the best rate and terms for their property.

In summary, these issues will doom the borrower to failure. Even so, a borrower could still benefit by using the services of a commercial real estate mortgage broker. For example, the mortgage broker knows those lenders that might be less concerned about global cash flow or liquidity requirements. I know I’m biased but most of these issues could be either resolved or possibly mitigated if the borrower placed his trust in a qualified mortgage broker who could guide them through the loan process.

Source: 10 Top Reasons Why Commercial Loans don’t get Funded; Sofia Capital Ventures: