steps to getting a commercial real estate loan

October 22, 2021

John Maher talks with Mike Luster, Executive VP and Commercial Loan Officer, and Andrew Marques, Commercial Loan Officer, at Cape Ann Savings Bank. They discuss the steps involved in applying for a commercial real estate loan, and they talk about what lenders want to see from borrowers.

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Transcription Disclosure: Below is a transcript of the conversation between John Maher, Mike Luster and Andrew Marques. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi. I'm John Maher, and I'm here today with Mike Luster, Executive VP and Commercial Loan Officer, and Andrew Marques, Commercial Loan Officer, at Cape Ann Savings Bank. Today, we're talking about the steps to getting a commercial real estate loan. Mike and Andrew, welcome.

Mike Luster: Thanks John. Looking forward to talking to you.

Andrew Marques: Great to be here.

Qualifications for a Commercial Loan

John Maher: Can you first tell me a little bit what a borrower needs to qualify for a commercial loan?

Mike Luster: Sure. It's a kind of a vague question because there's so much that goes into it. It depends on the situation and the borrower. We like to talk to someone first and get to the bottom of what it is they want to buy. But for the most part I think the basics, John, are that the person needs to have had a good credit history and have managed their finances as well. That's important with anything, with a car loan, with a residential mortgage, or a commercial real estate loan, you had to have had a pretty good credit history throughout your adult life. Cash is always important, or equity, or net worth, a mix of that. At some point a borrower's going to need to inject some of his own or her own capital into a purchase. So credit history, cash or equity, are very important.

Additionally, somewhat of a background, or experience, or some sort of business acumen we always look for, we always try to talk to the customer to see if they have the capacity to handle the loan or the property they're buying. It's always good to have some sort of business acumen, some sort of experience, any type of business experience.

Then finally, like I mentioned before, net worth. In most cases we're not going to provide someone with a multi-million-dollar commercial real estate loan, if it's their first mortgage, and they haven't had any experience, and they have no cash to put down. So it's a mix of everything. And I would say credit history, cash, experience, and backup net worth would be what I would say would be the major items when qualifying a person for a commercial real estate loan.

Steps for Obtaining a Commercial Real Estate Loan

John Maher: Okay. Andrew, can you tell me what the steps are to getting a commercial real estate loan?

Andrew Marques: It depends on where you are in the process, whether you're having an initial conversation, because you have the investment goal, you want to acquire a piece of property, you might call the bank to see what's needed on your side in going through that process and qualifying for a mortgage or business loan, or if you have an immediate need, if you have a property under agreement that you're looking to purchase, then you might come in and submit a full application. Really it starts with a conversation with a lender to see where we're heading, what type of loan product is best for your funding needs.

Then we go through a punch list of items depending on the project or the loan itself of what we would need to collect through the underwriting process at application. It really does depend on each individual person and the project. If an individual comes in, they own multiple businesses or multiple properties, that drives a different application package than someone that earns a salary or wage income and is looking to invest in their first real estate investment.

When Should Borrowers Apply for Financing?

John Maher: Okay. Let's go through a few steps here. The first thing that somebody needs to do obviously is to find a property that they want to purchase and then put that under contract. Does that all happen before they have a conversation with a bank, or should they be having a conversation with the bank first and then identifying the property and putting it under contract?

Mike Luster: That's a great question, and it's a little bit of both. It never hurts to have a conversation with us. There's three of us on the commercial lending team that are qualified to speak to someone who might be interested in getting into commercial real estate. And it never hurts to ask, "What are the steps to qualify?" Just like you asked, John, to open this podcast, it's always good to cover those items up front just to let the person know what they need. Maybe they're not ready now, but maybe they could be ready in a couple years if they start preparing. But that's definitely the case. Talk to us first, or if someone's already in the commercial real estate game and they have a property in mind, come on down and talk to us.

We can help them put the financing package together. But at the same time, one thing I want to just talk about quickly is pre-approvals and pre-qualifications. Many borrowers are looking for pre-quals and pre-approvals on the commercial and investment property side, and banks typically don't offer them. They're not as black and white as a typical residential loan where there's certain ratios involved. There's so much speculative information that goes with a commercial real estate loan, whether it's potential rents on a property, whether it's a speculative construction where they don't know what they're going to get for a sale price at the end when the property is about to be sold.

We don't typically offer pre-quals or pre-approvals. So sometimes a borrower will come to us and say, "Well, the broker's looking for a pre-approval." Well, not many banks provide them to non-owner-occupied investment or commercial properties. In that case, you have to depend on the offer you make to the real estate agent, and then you have to depend on the bank to get you a commitment letter as soon as possible to get to the seller who's trying to sell that property.

Financial Packages in Real Estate Lending

John Maher: Okay. Another step is to prepare a financial package. Can you talk a little bit about what a financial package is in this context, and again, is that something that you guys help with or is something that they should have in order before they come to you?

Andrew Marques: No, we can definitely help with preparing the package. We often work with accountants, CPAs, real estate attorneys, and realtors to bring the whole package together because there's different aspects that come from different professionals, whether it's a purchase and sale agreement, or the contract to purchase, historical tax returns, year-to-date financial information. Some of that information is coming directly from the applicant, and sometimes it will come directly from the professional that they rely on to prepare that information.

Oftentimes we'll encourage people to put us in contact with their accountant, for example, in collecting their historical tax returns because that's definitely something we need in every application package. We have secure portals on our side. We have really good relationships with all local CPAs and accountants, where we have a friendly relationship and can get the information from one person to another through a secure portal so it's not floating around on email which can be inherently insecure.

Presenting the Credit Application to the Board of Directors

John Maher: Then the next step is to submit that financial package for a quote. Is that what they're submitting then to you, the bank, in order to find out what their loan product is going to be?

Mike Luster: Yeah. We'll start with the financing package. If there's any additional information needed, we'll contact them as soon as possible. We don't like to string people along and ask for things two or three times, or make it seem like we're asking for things two or three times. We like to keep it as simple as possible for the borrower. But once we have the financing package, we have a great team, we have a credit analyst, we have a credit assistant that can pull the package together, prepare the financials for a credit presentation.

Once we have the credit presentation together, we present it to our board of directors where it's approved, declined, or deferred until we can get more information. But typically once we submit that financing package, it gets to a credit presentation within a week most times, and then you're usually never a week or two away from a final decision. We meet every week to present these loans, so it's a good position to be in. Many of the larger banks have multiple levels of people they have to present to. We have the luxury of meeting every Wednesday and we can get applicants an approval or any information they need usually within a week or two.

Andrew Marques: Mike, I'd just like to add, through the underwriting process and preparing the presentation to our board, our job is really to be the person who represents the bank when talking to the borrower and to represent the borrower when talking to our board. At that point, when we have the complete financing package, we can put together a full picture. We can provide the terms that we're going to propose, which would help make the decision for that borrower in the end when they're looking to take that commitment, accept the commitment, or potentially look for a different option. Because pricing, rates, loan structure, is very sensitive to the project itself and also the person's risk appetite. Some people might want to pay a higher rate for a longer term fixed product. Some people may be willing to benefit from a lower interest rate and take a shorter term on that fixed-rate period.

Presenting the Borrower With Options

John Maher: So do you present the borrower with those different options and then allow them to choose the loan product that works best for them?

Andrew Marques: Yes, and I think we do a really good job at laying out multiple options on the table that work for both parties. And then we allow borrowers in many cases to make the decision on the product that they like the best out of multiple options. That happens through multiple discussions or simply back and forth exchange in terms of this is what we typically do, this is what the loan payment would look like. Then there's a conversation that can happen from there if they have questions or want to look at different options.

Due Diligence and Closing

John Maher: The final step would be due diligence and the closing. Can you talk a little bit about what those are?

Mike Luster: Once we've done the due diligence and got the approval from the board, we issue a commitment letter to the borrower. They can review the terms and conditions. If they find the terms and conditions acceptable, they execute the commitment letter, send it back to us, and then we use their attorney to close the loan for us.

Their lawyer will work with the bank's counsel to get to a final closing. We do have bank counsel that will review their attorney's work in preparation for the closing, but we do allow our borrowers to use their own attorney. Gives them a certain level of comfort. The luxury we have is, we already have a relationship with most of our borrowers' attorneys so we know them well. So we know our borrowers are usually well-represented and the bank will be well-represented as well.

But we do have that level of comfort because we have our own in-house bank counsel also keeping an eye on the documents and doing that final review before the closing. Usually, it's tough to say right now, John, because we're in a historic time with real estate conveyancing.

A typical purchase of a commercial property or a non-owner-occupied investment property from application to closing, I would have to say is no less than five to six weeks at this point no matter what bank you're dealing with. Sometimes we can squeeze it in sooner if the appraisers can get that appraisal back to us, and if the attorney's title examiners are working fast. But right now things have been really protracted and extended given the state of the industry over the past 18 months. It's really a historic era in the commercial and residential real estate business.

What Do Borrowers Need the First Time They Contact the Bank?

John Maher: Right. When a borrower comes and they speak to you for the first time, maybe in order to kind of make things go a little bit faster in a way, what should they really have prepared before they come and they speak to you for the first time?

Andrew Marques: You should always have three years of tax returns compiled, ready to go, and a recent pay stub if you earn a salary, or year-to-date income statement if you operate your own business, and then the property-specific information such as your goals with the property or if you have some historical information in terms of rental income and expenses there. We're looking to understand your goals and your intentions in either acquiring the property. Whether you want to hold onto it long term or if you're looking to do something more short term, we're really looking for what your goals are, and then your basic financial information that would be expected to be submitted with really any application. That includes your tax returns, year-to-date income, and any other pertinent information that might be applicable to your personal or your business's financial position.

Contact Cape Ann About Commercial Real Estate Loans

John Maher: All right. Well, that's really great information. Mike and Andrew, thanks again for speaking with me today.

Mike Luster: Thank you John.

Andrew Marques: Thanks John.

John Maher: And for more information on commercial lending, visit the website at capeannsavings.bank.

Cape Ann Savings Bank, member FDIC, member DIF, Equal Housing Lender.