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 on it that you would like to collect, or you are trying to buy a new property and cannot get a lender to loan you 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 know about liquidity and the credit crunch, but what may not be so obvious is that there’s a lot of money out there, for the right business. Change creates new opportunities, and when traditional financial institutions can’t or won’t take on more risk, there are plenty of lenders and investors who will. It’s about taking another look at your existing assets, both real estate and 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 point 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 the IRR (internal rate of return), some on the capitalization rate, some on credit, and some on the overall financial strength of the borrower. Knowing this is often the key to getting to the right lender.
- 2 If your loan was approved but you don’t like the rates and terms, see how much room there is for a friendly negotiation and don’t delay. It’s vital to stay on good terms with anyone willing to lend money these days; don’t burn a bridge if you can help it. I personally know many “sticker shock” developers who expected to return to the approving lender several weeks or even months later (after shopping around and finding nothing better, or getting turned down by everyone else), 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 around, or because conditions have changed.
- 3 You may have to put more cash down if you are making a purchase. Risk-averse lenders want a much more attractive loan-to-value LTV before they step in with the rest of their buy-money funds. If you are refinancing, remember that a risk-averse lender is very cautious about appreciated 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-type 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 build project, 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 working crystal ball, why swim against the current when you can go with the flow?
- 6 If you’ve been through all of 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 normally could, and they can help steer you toward those whose guidelines are a good fit 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 CD. Some larger real estate transactions can be closed with this type of credit enhancement or with funds placed in escrow when other funds will be available at closing. It is also sometimes possible to execute a usable line of credit against a certain type of leased instrument when the financial institutions on both ends agree to the terms. Be very careful to get 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 to be willing to accept 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
