magine the following scenario: A banker is sitting at his desk, looking at spreadsheets of
closed loans and funded projects, when the phone rings. It’s John from Indiana, who tells
the banker he knows Peter in Texas — who had worked with the banker previously to
secure a construction loan for an assisted-living facility.
John begins the conversation by telling the banker about his own vision — building
a 120-key hotel on land that has been family-owned since the early 1900s. The project
would sit next to rolling hills and the perfect, idyllic stream. John projects the hotel will
operate at 100 percent occupancy during the county fair, 75 percent occupancy during
corn-harvesting season and at least 60 percent occupancy for the rest of the year.
John then suggests he only needs to borrow funds to complete construction. Building permits will be easy
to obtain, he says, because his cousin is on the town committee that issues them.
Confirm the value
The banker, of course, asks John some hard questions, beginning with how much money he wants to borrow.
John tells the banker he needs $7 million — enough to cover his $6.5 million construction budget, an interest
reserve and contingencies. The bank doesn’t need to worry, John adds, because the land alone is worth more
than $12 million, according to another of John’s relatives, a certified appraiser who has lived in the town for a
long time and is familiar with every local real estate deal.
The banker then asks John how much money he has invested in the deal. John says the value of his family-owned
land should be more than enough to serve as collateral and that the institution should be more than safe doing
the loan. After the banker asks him if it’s OK to have an independent appraisal done by a company the bank is
more familiar with, John barks at the banker and tells him his projections are spot on.
Experienced commercial mortgage brokers and borrowers know how this story concludes, yet it happens to
Know the competition
lenders often. If you indeed want to close loans, one of the best approaches is the simple, honest recognition that
a principal lender will always want to confirm the value of collateral by having their own appraisals prepared
by nationally recognized experts in the field. When preparing a presentation to a lending institution, recognize
the principle of “he who has the gold makes the rules.”
If a lender is disbursing funds for your project, they will have a set list of third-party reports to order. Prepare
your loan request with the recognition that the lender will need to have such reports, including — but not lim-
ited to — the appraisal, environmental reports and possibly a third-party review of operating-business plans
and projections. Although it is always a good idea for a mortgage broker and borrower to know the value of
the assets in question, it may be more efficient and less costly to have a lender obtain the actual appraisal, as
opposed to providing it and asking the lender to accept it. Why pay for an appraisal twice? Be realistic.
Assessing any loan application is dependent on several factors that generally remain the same, although they
may be slightly different for each asset in question. Lenders will often want a market assessment of competition.
This should include both existing and projected new entries in the market involving the asset class under consideration. Why would a lender contribute to a hotel project if the local market cannot support existing hotels
through acceptable occupancy numbers, which are required for good profit margins and higher debt-service
This simple analysis holds true for many asset classes, from retail construction and golf courses to general
office space. If the market has reached a point where the current asset class is serving the needs of the community,
then even the best piece of raw land will have limited success.
When considering the factors of competition in any market, one needs to understand the simple demographics
of the market and compare them to the number of hotel rooms, golf courses or assisted-living facilities. This is
simple math all lenders will do, and the data is readily available. With construction of a new assisted-living
facility, for example, a mortgage broker should research the senior population in the relevant geographic market
and compare it to the current number of assisted-living beds there.
If the data supports the construction of a new facility, this can form the basis of your loan presentation.
Indeed, it also can provide a foundation for the eventual lender-ordered appraisal. Doing your homework
before the loan presentation, however, will always provide a strong foundation from which a lender can proceed
before committing to your loan.
Jerry Sager is senior managing director of First National, a leading principal lender to hospitality-business, mixed-use commercial property, golf-course and special-asset owners. With more than 25 years
of experience in lending to owners and management companies, his team has provided financing for the
acquisition, construction, expansion and refinancing of specialized assets throughout the United States.
Reach Sager at (212) 244-7400 or firstname.lastname@example.org.
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86 Scotsman Guide Commercial Edition | ScotsmanGuide.com October 2018
“It may be
and less costly
to have a lender
obtain the actual