Income property lending is an advocacy process, just like a criminal trial. The matter before the tribunal is whether the income property loan should be approved by Loan Committee.
The Prosecuting Attorney, so to speak, is Loan Committee. Loan Committee's job is to point out all of the flaws of the income property loan. The Public Defender, in our drama, is the income property loan officer. His job is to point out all of the good features of the commercial loan and argue why the income property loan should be approved.
I'm blogging on this subject today because one of our loan officers (we'll call him Sam) came to me last week, and he was very frustrated. He had a $1.3 million commercial first mortgage loan request on a very nice, fully-leased strip center in a very desirable city in Texas. The center was even partially occupied by the owner, a physician who had good credit.
Loan Committee cut the loan request to an unworkable number - just 57% LTV - because the loan would otherwise not cash flow. From that number Loan Committee refused to budge. Sam ended up losing the deal - his best deal in months - and his morale was devastated.
But it was Sam's own fault, and I told him so. "Sam, you have to grow a pair and start pushing back with Loan Committee. Loan Committee's job is to point out all of the flaws on the deal and to initially turn down the loan."
"Your job, as the borrower's income property loan officer, is not to roll over like a puppy and say, 'Yes, ma'am.' Your job is to (respectfully and intellectually) fight for the deal."
Here's how the conversation should have gone. Sam is the commercial loan officer. Angelica is our wonderful Executive Vice President and the head of our Loan Committee. She also effectively runs Blackburne & Sons. I try to stay out of her way and focus on developing new products.
Angelica: "Sam, this deal looks pretty good, but I am cutting the loan back from $1.3 million to $1.15 million (57% LTV). The deal doesn't cash flow a penny more."
Sam: "Angelica, this is a gorgeous shopping center in one of the most vibrant and fastest-growing cities in Texas. This is great collateral."
Angelica: "I'm sorry, Sam, but the reason the borrower is coming to us for the loan is because he is behind in his real estate taxes. If we make any loan larger than $1.15 million, he won't be able to make both our payments and his real estate taxes. He'll simply fall behind on his taxes again."
Sam: "This guy is a physican who occupies part of the center with his medical practice. He's not going to move out of this center and let the property go. It would cost him $75,000 to $100,000 to move his office, and he would lose a bunch of his patients."
Angelica: "I'm sorry, Sam, but this guy doesn't make enough money on paper to afford our payments. What are the investors going to say when they look at his financials?"
Sam: "What you can tell the investors is that we would suddenly own a beautiful strip center in a thriving and fast-growing city in Texas, the economically strongest state in the country. We would own the strip center free-and-clear, and we would earn at least a 9.5% cash-on-cash return from the net rental income, even after management fees. Where are you going to beat that investment?!"
Or -
Sam: "The borrower is self-employed. Everyone who is self-employed probably cheats a little bit on their taxes. This guy is probably running $75,000 to $100,000 per year in family expenses through the company. He's got the dough if he really needs it."
Or -
Sam: "The borrower has a $3.5 million net worth. He is not going to lose the strip center that houses his medical practice. It would cost him $75,000 to $100,000 to move. He would just have to sell off his rental house if the real estate taxes simply had to be paid."
Or - And this argument is the Winner-Winner-Chicken-Dinner!
Sam: "Angelica, we're a hard money lender. Few of our deals ever make sense on paper. If this property is valued at an 8% cap rate, I can show you mathematically that if our interest rate is 13.9% - because the loan is large and we need a higher than usual interest rate to raise all of the dough to fund the loan - that no deal on earth will carry a loan larger than 57% loan-to-value. Heck, Angelica, if the highest LTV we can go is a lousy 57%, Blackburne & Sons might as well close up shop. We're not going to be able to close enough deals to keep the doors open."
This is a loan that should have been made at $1.3 million; but the fault wasn't that of Loan Committee. The fault falls entirely on the shoulders of the ineffectual income property loan officer who merely rolled over and said, "Yes, ma'am," when he KNEW that Loan Committee was wrong.
Okay, here are the practice lessons of this article:
1. Loan Committee's job is to point out all of the flaws on your commercial loan and to initially turn it down.
2. As an income property loan broker, don't just roll over and accept the first "No" that Loan Committee issues. Respectfully and intellectually fight for your deal.
3. Choose your income property loan officers carefully. You don't want wimps or salaried, lazy old farts as your commercial loan officers. You want fighters!
Bottom line: No wimps!
