By Jonathan Tomhave
Hard-Money Lenders Act More Like Banks
Wellington Funding Group LLC
Changing times mean changing structures for deals with cash-poor borrowers
with Economic changEs, words and
phrases often take on different mean-
ings to fit the new circumstances. One
term that appears to be shifting in
meaning is “hard-money lender.”
A few years ago, hard-money lenders
were willing to lend based solely on the
collateralized asset’s value. This is be-
coming rarer, and hard-money lenders’
approach often is now more akin to tra-
This shift is instructive to commercial mortgage brokers seeking hard-money deals for borrowers who are
asset-rich but cash-poor. Brokers must
know why the change has occurred, as
well as how it affects their hard-money
The fundamental change in the
equation is that with asset values no
longer increasing or staying even in
the market, many hard-money lend-
ers are now concerned that they may
acquire assets they don’t want to
end up owning. This is because in a
foreclosure, asset values decline fur-
ther. By the time the mortgage is per-
fected, the lender often has three
You must be upfront as to why borrowers are seeking a hard-money loan.
Many hard-money lenders previously
did not care about this. Now, they’re
concerned because they may be subject to the same forces that brought a
borrower to their door.
One such example is when notes
have been called by the bank and option contracts are expiring. In these
instances, the borrower’s timeframe
becomes the lender’s timeframe. Conversely, a credit issue that may be important to a bank may not be important
to a hard-money lender if it does not
directly affect the lending transaction;
unpaid medical bills are an example.
Brokers should address any potential
issues in the executive summary.
Also verify borrowers’ leases or letters of intent to lease or buy. These
are now important to determining the
asset’s value. Cash flow is important,
as well. Try to get a recent personal financial statement from your borrower
to see if there are enough liquid assets
to cover payments over any part of the
loan period. A statement older than 90
days is ancient history.
Finally, consider the exit strategy.
Brokers must help make the take-out scenario feasible for both parties.
A $3 million loan with a $150 million
takeout is a tall mountain to climb. It
would be better to scale back the project to make it work in the short run.
This is particularly true for cash-poor
borrowers. If they are planning to roll
the interest payments into the loan,
make sure that the loan is not based on
unreasonably optimistic expectations.
Cross-collateralize, find partners, pre-sell, pre-lease — in a nutshell, make
the exit door wide enough so that the
borrower and lender can get through
In a market that has faced a long-term decline, hard-money lenders, as
well as borrowers, have a lot to lose.
For once, they are in the same boat.
Brokers who understand this and who
structure their clients’ hard-money loan
requests appropriately can adapt to
hard money’s new role. •
NEED HELP BUYING
Jonathan Tomhave is managing partner of
Wellington Funding Group LLC. He is on the
board of directors of the Mortgage Bankers
Association of Southwest Florida. He is a
Phi Beta Kappa graduate of the University of
Minnesota and the University of Michigan,
Ann Arbor. E-mail him at john@ wellington
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condo at a low price per square foot if
the new owner winds up paying three
or four times the expected owners-as-sociation dues because co-owners are
not meeting their obligations.
Leasing quirks also warrant a look,
especially with clients who also are
landlords and who may be seeking ten-ant-improvement loans. Many landlords
in today’s market have vacant space to
fill. They need fiscally sound tenants
who are willing to sign at today’s market terms.
Be aware of zombie buildings — i.e.,
high-vacancy properties owned by
people who don’t have the financial
reserves to complete promised tenant
improvements. These can lead to a litigation nightmare for every transaction
intermediary if the landlord can’t deliver the space as promised.
« CAPSTONE continued from page 30
Value is key
A final important component to clos-
ing transactions successfully is to
add value to the deal. If you don’t
see a solid way you are really bring-
ing something to the table — whether
through your knowledge, experience,
the ability to structure and package
the transaction, or simply keeping a
deal alive — then hand it off to some-
one who can add real value. Not only
will the client be better off in the long
run, but you also will be. Getting a com-
mission check is not the same thing as