Scotsman Guide - July 2009 Commercial Edition

5 Buttons You Should Push
Tell the story behind your clients’ deals for a better chance at funding
By Kevin Kleen, vice president and production manager, HomeStreet Capital

Today, many mortgage brokers are finding loan requests that would have been approved without discussion two years ago are being declined — and often for reasons that would not even have come up in the boom years.

it is therefore more important than ever for brokers to communicate the story behind their clients’ deals to lenders. Unfortunately, getting the story may require having uncomfortable conversations with your borrowers about weaknesses in the transaction. But having these conversations can be the difference between funding success and failure.

There are five primary underwriting hot buttons you must be able to address with your clients and lenders. They are:

1. Upcoming loan maturities. Lenders always have required information on

borrowers’ real estate portfolios, but during the boom years, many didn’t pay much attention to it. in particular, lenders often accepted schedules that did not detail loan-maturity dates. This information was deemed unimportant because values were seen to be increasing anyway. also, many lenders relied on the protection of single-asset borrowing entities to insulate themselves from problems on other deals. Those days are gone, however — values are plummeting, and recent bankruptcy filings have undermined confidence that bankruptcy-remote entities are really bankruptcy-remote. Now lenders are scrutinizing borrowers’ portfolios with a

particular focus on upcoming maturities. Because debt markets have been disrupted, the most common cause of loan defaults by far is maturing loans that can’t be re-

if it experiences negative cash flow. The old rule of thumb was for liquidity to equal six months of payments or 10 percent of the loan amount. Those guidelines, however,

are not helpful when a borrower has numerous projects. This is because a single maturing loan that requires a substantial paydown can exhaust the borrower’s liquidity cushion quickly. Lenders now look more closely at borrowers’ liquidity in relation to their entire portfolio debt. if your

borrowers do not have a strong liquidity position, you must explain how they can raise liquidity (e.g., identify low-leveraged properties to refinance or sell).

3. Exposure to distressed loan types. Borrowers with loans secured by land, residential construction and condominium developments are defaulting more often than borrowers with stabilized retail, office, industrial or multifamily properties. Land loans are generally paid off by construction loans, but it is difficult to

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“It is ... more important than ever for brokers
to communicate the story behind their clients’
deals to lenders. Unfortunately, getting the
story may require having uncomfortable
conversations with your borrowers.”

Kevin Kleen is vice president and production manager at HomeStreet Capital. Kleen joined HomeStreet Capital in October 2007 and is responsible for income-property loan-origination activities. Prior to joining HomeStreet, Kleen was senior vice president for credit and asset management at Capmark Capital and was chief credit officer for ARCS Commercial Mortgage Co. LP. The advice provided should not be construed as the opinion of HomeStreet Capital. Reach Kleen at rpakkleen@gmail.com.

financed. ideally, your clients’ portfolios will comprise conservatively leveraged properties with long-term debt. if there are upcoming maturities, part of your story must be how the borrower will refinance those loans.

2. Liquidity. Until we see employment recovery, market fundamentals will continue to deteriorate, and all projects will be at risk if the recession continues. even with a nonrecourse loan, it is important that the sponsor can fund unanticipated capital costs or carry the project for some period

YOUR DIRECT LIN K TO ALTERNATIVE FUNDING SOURCES

Weofferourclientsaccesstothemostadvancedloanproductsinthe industry. Whetheryou arein needofshort-termfinancing, suchasa bridgeloanorhardmoneyloan,oryourneedsaremorespecificsuch as construction, we will work with you to structure a transaction that will meetorexceedyourexpectations.