Erik Johnson, Vice President at Venture Mortgage, lays out 5 common mistakes commercial real estate investors may make while debt-seeking.
1. Assuming your bank’s loan officer has the best rates and terms: If you have a banking relationship at a particular branch, you may assume that the commercial loan officers at said bank will offer you the best available rates and structures in the market, or even at that bank. Perhaps you’ve become complacent and approach the same bank when it comes time to refinance. For these and other reasons, you neglect to utilize the power of a commercial mortgage banker to shop your deal among different lenders. This can be a costly mistake: it’s in your best interest to ensure that a mortgage banker assesses the financial marketplace on your behalf and presents you with all of the available loan products for your particular situation. A Venture Mortgage banker presenting a deal to an array of lenders can offer you a customized range of rates, terms, structures, and concessions that best fits your needs and personal situation.
2. Not matching your debt structure to your future plans: Do you exclusively consider the interest rate when considering debt? Be advised that the interest rate is often secondary to other aspects of the loan structure in relation to your goal for the subject property. For example, a five year loan at 3.27% might be a good fit for if you will be looking to sell in the foreseeable future, or you are willing to bet that rates won’t rise significantly by year five (when it’s time to refinance). However, a volatile market or a long-term hold strategy can make a 15 year loan at 3.89% a much more attractive proposition, despite the slightly higher rate. Also pay attention to other components of the loan, such as prepayment penalty clauses or the level of recourse (personal guarantee of the loan against the borrower’s assets) required by the lender; don’t forget to add up the multiple closings associated with repeated short-term financing.
3. Focusing on alarmist news headlines: Financial news media outlets have the same objective as any other news source: they want to get attention. Finance journalists often report about the dire state of the market, often just days or weeks after breathlessly discussing historically low cost of capital. It’s wise to take with a grain (or teaspoon) of salt the advice and analysis of financial pundits regarding interest rates and market status for two reasons: one, as discussed above, the interest rate is not the sole consideration in a loan structure. Relatively small interest rate fluctuations might make the news, but don’t let them make decisions for you. Secondly, you as a knowledgeable investor know the state of the market relative to your objectives for your portfolio better than the reporter on your television. For guidance as to how to view capital markets as it relates to your situation, contact your Venture Mortgage banker by phone or email.
4. Assuming your deal is too small for a life insurance company: You may have heard about the low fixed rates with terms and amortizations up to 30 years that are available when using a life insurance company as a lender on a commercial real estate deal. However, news of life companies funding loans in the hundreds of millions of dollars can leave borrowers seeking smaller loans to feel that they have no place with these lenders. However, don’t count yourself out of this space: our life company lending partners seek and fund loans starting at just $600,000, putting them well within reach of the vast majority of our borrowers. The key to accessing these favorable terms with a life company is working with an experienced mortgage banking firm that has relationships with these lenders, as life insurance companies typically do not offer loans directly to commercial real estate borrowers.
5. Avoiding the use of a mortgage banker: Commercial real estate financing is serious business, and you must work to protect your interests and ensure that you are receiving the most competitive rates and terms available in the market today. We’re able to offer access to lenders with all types of financing, some of whom do not lend directly to borrowers; in addition to leveraging our relationships with an array of lenders for your benefit, we’re able to push a variety of levers to secure the loan package that is right for you. We can often negotiate a lower interest rate, lower or even eliminate lender origination fees, discuss required 3rd party reports with the lender and secure said reports with no effort on your part, save you time and energy by taking care of all the administrative tasks to go along with a closing process, negotiate for the reduction or elimination of recourse requirements and prepayment penalties, secure capital for investments in secondary or tertiary markets, and so much more. Our many satisfied and repeat clients speak to the value of our independent and objective service, where our only goal is to earn your business and work hard with your best interests in mind.
Steer clear of these mistakes as you seek debt for your next commercial real estate project. We invite you to contact us here at Venture Mortgage to receive a professional consultation and personalized analysis of your commercial real estate financing needs. We look forward to earning your business!