What alternatives do you have when your bank or other lender denies your commercial real estate loan? Your property has an appraised value, and you have equity in it that you’d like to collect, or you’re trying to buy a new property and can’t get a lender to loan you the money for the purchase. Maybe you’re a real estate developer who’s used to getting your loans approved because of a successful track record and can’t even get a meeting right now. Or maybe you’ve been approved for a loan, but can’t stomach the rates or terms.
We’ve all heard more than we care to about liquidity and the credit crunch, but what may not be so obvious is that there’s plenty of money out there, for the right business. Change creates new opportunities, and when traditional financial institutions are unable or unwilling to take on more risk, there are plenty of lenders and investors who will. It’s about taking another look at your existing assets, whether real estate, liquid or paper assets, and choosing the best option available. The following is a simple list of ways to create alternative financing possibilities:
- 1 Which institutions have rejected it and why? Knowing what hasn’t worked can steer you in the right direction, so be sure to ask as many questions as possible when you’re turned down, including asking if they can direct you to a lender who might make your loan. While most of the following criteria generally play some role in qualifying for a loan, some lenders focus more on CLTV or LTV (Combined Loan-to-Value or Loan-to-Value), some on DSCR (Debt Service Coverage Ratio ), some on IRR (internal rate of return), some on capitalization rate, some on credit, and some on the overall financial strength of the borrower. Knowing this is often the key to finding the right lender.
- 2 If your loan was approved but you didn’t like the rates and terms, see how much room there is for an amicable negotiation and don’t delay. Staying on good terms with anyone willing to lend money these days is vital; don’t burn a bridge if you can help it. I personally know many developers with “sticker shock” who expected to return to the approving lender several weeks or even months later (after shopping around and finding nothing better, or everyone else turned them down), only to be turned down this time because The lender begins to wonder if there is something wrong with the project that he didn’t see the first time, or because the terms have changed.
- 3 You may have to put down more cash if you are making a purchase. Risk-averse lenders want a much more attractive LTV loan-to-value ratio before stepping in with the rest of their buyout money funds. If you’re refinancing, remember that a risk-averse lender is very cautious about appraised value and would prefer to see more of their own cash in the property.
- 4 If you don’t have the extra cash, take stock of your other assets. There are lenders that will lend against many different types of assets, such as business accounts, future cash flow, marketable securities, other financial instruments, cross-collateralized real estate, insurance settlements, and factoring receivables. For certain types of projects, such as energy and green projects, as well as movies, there are tax credits, carbon credits, and various types of bonds and partner participation sponsored by municipalities and states.
- 5 When considering a purchase, or perhaps designing a new project to build on, you may want to see what types of properties lenders are looking to finance before making an offer. Even if you have talent, a niche, tons of experience, or a crystal ball that works, why swim against the current when you can go with the current?
- 6 If you’ve been through all your usual banking relationships, you may want to consider working with a licensed broker. Even if you pay for the broker’s services, remember that a broker keeps up with many more lenders and investors than you usually could, and they can help direct you to those whose guidelines are right for you.
- 7 One resource that can work well (if done with the right institution) is a leased financial instrument, such as an SBLC or a CD. Some larger real estate transactions can be closed with this type of credit enhancement or with escrowed funds when other funds will be available at closing. It is also sometimes possible to run a usable line of credit against a certain type of leased instrument when the financial institutions at both ends agree to the terms. Take great care to obtain approval from the bank providing the line of credit before making any payments.
It’s important to be creative and realistic when trying to get a commercial real estate loan, and be willing to accept the changing financial terrain while being open to new suggestions. Seek sound professional advice to enhance your own personal and professional goals. Sometimes when you look at things differently, the solutions to the problem become much clearer and perhaps better than the plan you had in the beginning.
Colleen Zaruba copyright 2009