reports, application fees and other
Fortunately, in this example, doing
due diligence paid off and saved a
huge amount of time and effort. It is
vital to do a market study to complement the initial financial analysis,
ensuring that the local market is stable and the property will sustain its
Seasoned commercial mortgage brokers who religiously do market studies
and run the financial numbers sometimes get tripped up by a final, critical
step: examining the players involved in
the company that is seeking the loan.
Swept up in the excitement of talking with borrowers about the project
itself, impressive potential rates of
return and the great location, a commercial mortgage broker often skips
the basic step of looking at whether
the deal’s sponsors are financially
strong enough to be candidates for
the loan. Typically, the borrower will
be a limited liability company with as
many as 10 or more members with an
ownership stake in the property.
When analyzing the individuals, brokers must ask the following questions:
• Who are the sponsors, by name, and
what is the ownership breakdown?
• What are their net worths and liquidity figures?
• Are there any negative personal
credit issues, past or present?
Even more often than when conducting financial and market studies, mortgage brokers sometimes fail to ask
these basic questions. For example,
consider the scenario of a borrower
who comes to a commercial mortgage
broker seeking an A-paper rate with
conventional financing. The financials
look solid and the local market appears
to be great. The broker believes the
loan will go through smoothly. A few
weeks later, however, the broker discovers that three of the four sponsors
have an extremely low net worth compared with the loan amount, as well as
numerous foreclosures and short sales
over the past few years.
Three weeks of everyone’s time were
wasted before the loan officer determined that 75 percent of the owners
were financially untenable. The broker
then may scramble to get around the
problem, but if lenders aren’t comfortable with the credit issue, they’ll decline the loan. Had the broker dug into
the background of the company’s sponsors right away, it could have saved
this valuable time.
• • •
By asking basic questions early in
the process about the numbers, the
market and the sponsorship in any
commercial deal, you can quickly and
efficiently get the information you
need to walk away from deals that will
never close, and instead spend more
time pursuing ones that are work-
able. By paying attention to these of-
ten-forgotten basics, you help ensure
yourself a much more brilliant and lu-
crative future. •
Although this deal seems like a
home run on paper, it may turn out
to be a strikeout when you do a more
thorough research. You may discover
that the U.S. Department of Defense
has decided to close the military base
permanently in six months. Further-
more, the base represents the heart-
beat of the local economy. Many of
the people producing goods and ser-
vices in the community service this
military post. Although the property
has performed well historically, its
future looks extremely bleak.
So, in this example, by researching the local market, you killed the
deal before an underwriter later realized the market was about to crash.
Had you proceeded with the attitude
of “let the underwriters take care of
the research,” you could have wasted
four weeks or more of your time, and
cost the borrower money in third-party
Research the market
If everything seems to be in order after an initial check of the financial
numbers, commercial mortgage brokers should study the local market.
It’s essential to learn the specifics
about the place where a deal is located to determine if a loan has a realistic shot at making it to the closing
table. The local market can shift rapidly because of changes in government services, population and the
local economy, turning workable deals
into bad ones.
Consider this hypothetical example of a local neighborhood center,
located in a midsized town with a
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