In my last lesson I pointed out that a commercial loan broker has to be very, very careful when he requests the documents that will go into his loan package. If he asks for too many documents, the borrower will want to shop around.
If he asks for the wrong documents, like an updated financial statement, the commercial loan broker will probably lose the deal to a competitor who will pop up during six long weeks it takes for the borrower’s accountant to prepare the updated financial statement.
And if the commercial mortgage broker makes the horrible mistake of describing all of the documents that will eventually go into the commercial loan package, the deal is most sincerely dead. Remember, never-ever send or verbally give to your commercial mortgage borrower a list of all of the documents that eventually will go into a complete commercial loan package. This list is so huge and so scary that your borrower will run for the hills.
Instead, you should just ask for a few loan documents initially. You will collect the rest of the documents slowly over time, as the borrower slowly becomes wedded to the idea that you are the broker that he has chosen to fund his deal. (If you and I were chatting over a beer, I would put this differently. You will wait to collect the bulk of your loan documents until the hook is firmly set in your borrower’s mouth. Don’t jerk the hook out of his mouth by asking for too many documents too soon. You’ll just scare the fish away.)
So what documents should you gather first and when should you ask for them? Here are some general rules:
- You should collect your commercial loan documents in a series of small batches. Make each step easy!
- After receiving and reviewing each batch of loan documents, call your borrower and tell him that his commercial loan application looks good. In other words, give him some positive feedback, so he knows that he is not wasting his time. I’ll cover this important step in another lesson called the Pooh-Pooh Soup Story.
- Ask for initially just the income and expenses on the property and some color pictures. I’ll cover this important first step in far more detail below.
- Be very careful when ask for color pictures of the property. We want the first step to be very easy in order to get inertia on our side. (Inertia: A body at rest tends to stay at rest. A body in motion tends to stay in motion). For most middle-aged folks, it’s pretty easy for them to snap some pictures using a smart phone and to email them to you. Many commercial properties, however, are owned by elderly investors who don’t know how to use email to forward pictures. You might ask your borrower if he knows how to take pictures and to send them by email. If he doesn’t, you might ask him if he has a property manager or a younger relative who could do this for him.
- The second batch of documents you will request is an old (!!) financial statement or an old (!!) loan application, plus his last two years’ personal tax returns. If you ask for an updated loan application or an updated financial statement, you will probably lose the deal.
- Most borrowers do not own a copier with an auto-feeder, so copying the tax returns is often an agonizingly slow, one-by-one, process. The borrower will therefore only want to do this once. This is why I often say, “The first commercial mortgage broker to get the borrower’s tax returns usually wins the deal.”
- After receiving these documents, call your borrower and give him some positive feedback. (The Pooh-Pooh Soup Story.)
- Next – but do NOT combine steps – ask for copies of all of the commercial leases.
- At a later date you will ask for other documents, including a financial statement on the LLC that owns the property, two years’ tax returns on the LLC, the Statement of Organization on the LLC, and the Operating Agreement on the LLC. However, I recommend that you do NOT ask for these file-filler documents until your lender has issued a term sheet and the borrower has signed it.
So what documents make up the income and expenses on the property (see step 3 above)? It depends on the type of property:
Multifamily and self-storage properties:
- Current rent roll.
- Last year’s actual operating expenses.
Office, Retail, and Industrial Properties:
- Schedule of Leases (one page summary of the tenants, the square footage of each unit, the rents, and lease expiration dates)
- Last year’s actual operating expenses.
Hospitality (Hotels and Motels) and Health Care Properties:
- Last TWO years’ actual Profit & Loss Statement (P&L)
- Any year-to-date P&L Statement that is ALREADY available. If it’s late in the year, perhaps a P&L Statement on the first quarter or on the first two quarters might have already been prepared by the accountant. Do NOT ask for an updated P&L. No-no-no! You’ll lose the deal while you’re waiting for the accountant to prepare it.
“But George, if you bleed the loan documents out of the borrower this slowly, it will take four months to close a commercial loan.”
Yup. That’s right. The situation reminds me of that age-old joke about the old bull and the young bull who trot up to the top of a hill and see a whole herd of beautiful, available heifers grazing in the valley below. The young bull turns to the old bull and says, “Hey pops, let’s run down and kiss one of those cows.” To which the old bull replies, “Son, let’s walk down and kiss them all.”
Folks, if you try to rush the document collection process, you’ll scare away 49 out of every 50 commercial mortgage borrowers. Why not reel in the necessary commercial loan documents slowly and close them all?