<< Deals continued from Page 46
For guarantees, flexibility is important and some lenders will work with
a sponsor on a limited, partial and
burn-off basis — meaning guarantees
can be relaxed to as little as 20 percent
if, for example, the sponsor improves
occupancy from 50 percent to 80 percent. For collateral, lenders look closely
at cash flow. As for market conditions,
they work primarily with hard data,
then with opinions of value. Lenders are
not risk averse, yet they focus astutely on
The two most important elements
in lending are the narrative and the
business plan. The lending industry
wants to know what the story associated with a loan application is, as well as
the sponsors’ business plan to achieve
financial success with their projects.
Lenders also want to know what the
borrowers’ exit plans are.
In our tale of two deals — both loosely
based on real loan-application scenarios — it was the sponsor seeking the
$17 million bridge loan to buy the mall
located in the East Coast suburb that
secured the financing, while the spon-
sor seeking financing for the stabilized
skilled-nursing facility located in the
midsize West Coast city was declined.
The West Coast nursing-facility property is in a good location, its demographics
are solid and the sponsor’s business plan
for the asset was sound. Putting the tax
liens to rest would enhance cash flow,
and the capital-improvement plans
would have clearly generated more
revenue in the form of higher occupancy
and increased rents.
The problem was with the cash flow.
The sponsor wanted to take the $2.5
million annual cash flow for himself,
with no capital-expense reserves, tax
and insurance reserves or amortization.
That was the deal breaker for the loan.
Conversely, the East Coast mall
acquisition was financed because of
the sponsor’s narrative for the property
and business plans to improve the asset.
The 800,000-square-foot mall, built in
the mid-1980s and considered a Class B
property, is anchored by three big-name
department stores. It also has leases in
place with 120 other stores, including a
number of major national retail chains
and numerous restaurants and cafes.
The mall has two levels, with a large
multi-screen theater on the ground floor.
In addition, the mall serves a county
with a population of approximately 70,000
and is a popular regional shopping
attraction. Plus, there is no competition
nearby and the mall investor has demonstrated experience and success in the
retail space — and operates malls in
three other states. In other words, this
particular East Coast mall is one of the
900 or so malls on Green Street Advisors’
list that is likely to remain viable.
n n n
As anyone in the lending business can
attest, no two deals are alike. In processing loan applications and considering
funding for commercial real estate
projects, lenders sometimes have to
look beyond the quality and merits
of a project and, among other things,
consider the motives of the applicants.
That’s part of the narrative, too. n
“The two most important
elements in lending are
the narrative and the