9 Questions to Ask your Commercial Lender
This article will go through nine vital questions that you need to ask your commercial lender before choosing your major financial partner. The commercial lender is one of the most important pieces of purchasing commercial real estate, e.g. industrial, multi-family.
Your lender is coming as a financial partner into a deal, where they have 55, 75, maybe even 80% of the total purchase price, and therefore, anybody who's coming in with that amount of capital has a large impact on the profitability of your deal.
This article will review nine questions about commercial lending for industrial properties.
Commercial Lender Market Expertise
The first question you want to ask is, are you an expert in my market?
How many industrial deals did they do last year? What types of property types? if they primarily do distribution or warehouse buildings, they may not be able to understand industrial outdoor storage deals. Nothing would be a deal breaker alone, but factor this level of expertise in when evaluating the complete picture.
For example, a big problem that I've seen is if a single tenant building is applying with a regular lender, sometimes they apply a vacancy to their own DSCR (Debt Service Coverage Ratio), and they apply a vacancy factor for a single tenant building, which is just wildly inappropriate. If you have a single tenant, it's either going to remain occupied at a hundred percent or it's gonna go dark, there's not really a chance of losing 10%,losing 25% or having turnover, like on a multi-family property or large multi-tenant office.
Some expert lenders in industrial:
- Texas Capital Bank
- Veritex Bank
- Independent Bank
Second, what is your average loan size?
This is, related to one of my consistent pieces of advice that I always give my clients:
"work with the smallest lender that can do your size of deal" --Ron Rohde
So for example, if you're buying a $20 million property, you're looking at a $15-18 million loan, you probably can't go with a credit union, that's gonna be above their single borrower limits, they may not have the deployment, and they're probably just not gonna be as experienced, but you can go with a small regional bank, and so that's the lesson here, but don't jump to Wells Fargo or Chase if you don't have to. It's just not gonna be a good fit, they're not gonna have procedures in place and expectations to manage a smaller loan size.
- Texas Republic Bank
- Bancorp South now Cadence Bank
- Golden Bank
- Texas Capital Bank
- Plains Capital
- Frost Bank
A smaller loan may have a shorter time period for the closing etc. and that leads me to my third point.
Commercial Lender Time to Close
How long does it typically take to close?
And there are certain steps that you should ask them about, are they going to produce a letter of interest? Will they produce a term sheet?
Typically that term sheet will be a one to two page document similar to an LOI, but it's an LOI from a lender with major deal terms listed, but when you ask for this document it slows down the approval process. Which is okay if you have enough time, maybe a 90 day to close, but only you need that term sheet to enhance your offer or to feel comfortable that you can close.
The alternative, and what is more common is probably no term sheet, no written description, other than an email form, and the lender will say, "We like this deal. We want to move forward." "Let's just move towards closing. Do you select us?"
And then you may sign a loan application with them, you may pay some fees, rate lock, etc. but there is no formal term sheet.
Therefore its an important distinction among lenders--s how long does it take to typically close from various stages? Approvals, getting all your applications in and final clear to close.
Let's also talk about the credit committee. This is a really insightful, experienced question that will reflect how experienced you are,
How often does your credit committee meet? Or what's your loan approval process?
Some smaller banks will have a credit committee of one to five people, and they meet every week, once a week, other banks will have a smaller or larger committee that meets twice a week, and so you're able to get your documents in a lot faster, if you have a credit committee that meets twice a week, say, Tuesdays and Fridays.
Loan Product Options for Industrial Commercial Real Estate Loans
Number four, what other loan options are available?
I think that that's really important when you are working with a bank, maybe you're working with a mortgage broker and different agency options, but for an industrial investments, they really don't have too many options, you're not gonna be looking at SBA, you're not going to be looking at adjustable rate mortgages, but you might as well ask, because sometimes when they only have a few tools, or you come to them saying,
"I want this type of loan product."
You don't really know what the bank also has out there so its important to ask either a mortgage broker or the lender itself. Although keep in mind that if a certain product isn't offered by the lender, they won't recommend it to you, even if its in your best interest. Only a mortgage broker can recommend the best product, but they will want to be compensated for their role if you hire one!
Application Fees when applying for commercial real estate loans
Number five, what are the application fees?
This is probably a broader question, but it really relates to some things like the appraisal, you may have to pay$5,000 for an appraisal, $3,000 for the phase I environmental report, $2,000 for an ALTA survey, you may have a nominal application fee: it all depends on your loan size,
For commercial investments in industrial in 2022, they're very hot and heavy, so I don't think borrowers have to spend much for upfront fees.
Do I get a copy of my lender reports?
Number six, can I have a copy of my appraisal?
That's really, really common question and the short answer is if you pay for it, you're entitled to it , while you may not be able to use it in the same capacity, in general, if you pay for it, it's your report.
Number Seven Is there a good faith deposit or a rate lock fee?
That's important to know as it can be anywhere from 1 to 2% of the loan amount, and you have to pay that fee early on in the process, maybe after your due diligence has expired, but well before closing, if you want to lock in that rate, and if you don't close for whatever reason, or if you terminate, those funds are out of pocket from you as a buyer, you may have some contractual recourse against the seller, but contact your attorney, and we can put that clause in your next PSA.
Commercial Real Estate Insurance Amount
Finally, number nine, how much insurance do I need?
And I think this one's important because a lot of different investors are buying industrial land where the value is really in the land, and you may not want as much insurance, because there's a highest and best use for the land, so if there was a catastrophic destruction, you don't want to insure for the full replacement cost of that type of building, because you're planning on redeveloping anyway. So I think that's really important, because it's all pre-negotiated, there are no requirements, and even if they tell you that they want 2 million or 5 million of coverage, you can negotiate that down based on the circumstances.
So that wraps up this handy list. I hope it was useful!!
Please, contact us if you have any questions about working with your lender,
Building your team is the next critical step, you'll need a CPA, lawyer, lender, broker, property inspector, property manager, and possibly a general contractor.