10 Things Every Buyer Needs – To Close A Commercial Real Estate Loan

For nearly 30 years, I have represented borrowers and lenders in commercial real estate transactions. During this time it has become apparent that many Buyers do not have a clear understanding of what is required to document a commercial real estate loan. Unless the basics are understood, the likelihood of success in closing a commercial real estate transaction is greatly reduced.

Throughout the process of negotiating the sale contract, all parties must keep their eye on what the Buyer’s lender will reasonably require as a condition to financing the purchase. This may not be what the parties want to focus on, but if this aspect of the transaction is ignored, the deal may not close at all.

Sellers and their agents often express the attitude that the Buyer’s financing is the Buyer’s problem, not theirs. Perhaps, but facilitating Buyer’s financing should certainly be of interest to Sellers. How many sale transactions will close if the Buyer cannot get financing?

This is not to suggest that Sellers should intrude upon the relationship between the Buyer and its lender, or become actively involved in obtaining Buyer’s financing. It does mean, however, that the Seller should understand what information concerning the property the Buyer will need to produce to its lender to obtain financing, and that Seller should be prepared to fully cooperate with the Buyer in all reasonable respects to produce that information.

Basic Lending Criteria

Lenders actively involved in making loans secured by commercial real estate typically have the same or similar documentation requirements. Unless these requirements can be satisfied, the loan will not be funded. If the loan is not funded, the sale transaction will not likely close.

For Lenders, the object, always, is to establish two basic lending criteria:

1. The ability of the borrower to repay the loan; and

2. The ability of the lender to recover the full amount of the loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the event the borrower fails to repay the loan.

In nearly every loan of every type, these two lending criteria form the basis of the lender’s willingness to make the loan. Virtually all documentation in the loan closing process points to satisfying these two criteria. There are other legal requirements and regulations requiring lender compliance, but these two basic lending criteria represent, for the lender, what the loan closing process seeks to establish. They are also a primary focus of bank regulators, such as the FDIC, in verifying that the lender is following safe and sound lending practices.

Few lenders engaged in commercial real estate lending are interested in making loans without collateral sufficient to assure repayment of the entire loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, even where the borrower’s independent ability to repay is substantial. As we have seen time and again, changes in economic conditions, whether occurring from ordinary economic cycles, changes in technology, natural disasters, divorce, death, and even terrorist attack or war, can change the “ability” of a borrower to pay. Prudent lending practices require adequate security for any loan of substance.

Documenting The Loan

There is no magic to documenting a commercial real estate loan. There are issues to resolve and documents to draft, but all can be managed efficiently and effectively if all parties to the transaction recognize the legitimate needs of the lender and plan the transaction and the contract requirements with a view toward satisfying those needs within the framework of the sale transaction.

While the credit decision to issue a loan commitment focuses primarily on the ability of the borrower to repay the loan; the loan closing process focuses primarily on verification and documentation of the second stated criteria: confirmation that the collateral is sufficient to assure repayment of the loan, including all principal, accrued and unpaid interest, late fees, attorneys fees and other costs of collection, in the event the borrower fails to voluntarily repay the loan.

With this in mind, most commercial real estate lenders approach commercial real estate closings by viewing themselves as potential “back-up buyers”. They are always testing their collateral position against the possibility that the Buyer/Borrower will default, with the lender being forced to foreclose and become the owner of the property. Their documentation requirements are designed to place the lender, after foreclosure, in as good a position as they would require at closing if they were a sophisticated direct buyer of the property; with the expectation that the lender may need to sell the property to a future sophisticated buyer to recover repayment of their loan.

Top 10 Lender Deliveries

In documenting a commercial real estate loan, the parties must recognize that virtually all commercial real estate lenders will require, among other things, delivery of the following “property documents”:

1. Operating Statements for the past 3 years reflecting income and expenses of operations, including cost and timing of scheduled capital improvements;

2. Certified copies of all Leases;

3. A Certified Rent Roll as of the date of the Purchase Contract, and again as of a date within 2 or 3 days prior to closing;

4. Estoppel Certificates signed by each tenant (or, typically, tenants representing 90% of the leased GLA in the project) dated within 15 days prior to closing;

5. Subordination, Non-Disturbance and Attornment (“SNDA”) Agreements signed by each tenant;

6. An ALTA lender’s title insurance policy with required endorsements, including, among others, an ALTA 3.1 Zoning Endorsement (modified to include parking), ALTA Endorsement No. 4 (Contiguity Endorsement insuring the mortgaged property constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged property has access to public streets and ways for vehicular and pedestrian traffic);

7. Copies of all documents of record which are to remain as encumbrances following closing, including all easements, restrictions, party wall agreements and other similar items;

8. A current Plat of Survey prepared in accordance with 2011 Minimum Standard Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer;

9. A satisfactory Environmental Site Assessment Report (Phase I Audit) and, if appropriate under the circumstances, a Phase 2 Audit, to demonstrate the property is not burdened with any recognized environmental defect; and

10. A Site Improvements Inspection Report to evaluate the structural integrity of improvements.

To be sure, there will be other requirements and deliveries the Buyer will be expected to satisfy as a condition to obtaining funding of the purchase money loan, but the items listed above are virtually universal. If the parties do not draft the purchase contract to accommodate timely delivery of these items to lender, the chances of closing the transaction are greatly reduced.

Planning for Closing Costs

The closing process for commercial real estate transactions can be expensive. In addition to drafting the Purchase Contract to accommodate the documentary requirements of the Buyer’s lender, the Buyer and his advisors need to consider and adequately plan for the high cost of bringing a commercial real estate transaction from contract to closing.

If competent Buyer’s counsel and competent lender’s counsel work together, each understanding what is required to be done to get the transaction closed, the cost of closing can be kept to a minimum, though it will undoubtedly remain substantial. It is not unusual for closing costs for a commercial real estate transaction with even typical closing issues to run thousands of dollars. Buyers must understand this and be prepared to accept it as a cost of doing business.

Sophisticated Buyers understand the costs involved in documenting and closing a commercial real estate transaction and factor them into the overall cost of the transaction, just as they do costs such as the agreed upon purchase price, real estate brokerage commissions, loan brokerage fees, loan commitment fees and the like.

Closing costs can constitute significant transaction expenses and must be factored into the Buyer’s business decision-making process in determining whether to proceed with a commercial real estate transaction. They are inescapable expenditures that add to Buyer’s cost of acquiring commercial real estate. They must be taken into account to determine the “true purchase price” to be paid by the Buyer to acquire any given project and to accurately calculate the anticipated yield on investment.

Some closing costs may be shifted to the Seller through custom or effective contract negotiation, but many will unavoidably fall on the Buyer. These can easily total tens of thousands of dollars in an even moderately sized commercial real estate transaction in the $1,000,000 to $5,000,000 price range.

Costs often overlooked, but ever present, include title insurance with required lender endorsements, an ALTA Survey, environmental audit(s), a Site Improvements Inspection Report and, somewhat surprisingly, Buyers attorney’s fees.

For reasons that escape me, inexperienced Buyers of commercial real estate, and even some experienced Buyers, nearly always underestimate attorneys fees required in any given transaction. This is not because they are unpredictable, since the combined fees a Buyer must pay to its own attorney and to the Lender’s attorney typically aggregate around 1% of the Purchase Price. Perhaps it stems from wishful thinking associated with the customarily low attorneys fees charged by attorneys handling residential real estate closings. In reality, the level of sophistication and the amount of specialized work required to fully investigate and document a transaction for a Buyer of commercial real estate makes comparisons with residential real estate transactions inappropriate. Sophisticated commercial real estate investors understand this. Less sophisticated commercial real estate buyers must learn how to properly budget this cost.

Conclusion

Concluding negotiations for the sale/purchase of a substantial commercial real estate project is a thrilling experience but, until the transaction closes, it is only ink on paper. To get to closing, the contract must anticipate the documentation the Buyer will be required to deliver to its lender to obtain purchase money financing. The Buyer must also be aware of the substantial costs to be incurred in preparing for closing so that Buyer may reasonably plan its cash requirements for closing. With a clear understanding of what is required, and advanced planning to satisfy those requirements, the likelihood of successfully closing will be greatly enhanced.

Modern Marketing Tips for Real Estate Agents

The real estate industry sure has become competitive in recent years. I don’t say that to scare you, but only to voice what you probably already know. The number of real estate agents in the United States is staggering — and well into the millions. If that weren’t enough, there’s also an explosion in the number of real estate “self help” websites such as HouseValues and Zillow.

What’s the result? Well, for one thing, real estate marketing has gotten a lot harder to succeed with. Real estate agents have to work smarter, use more marketing channels than before, and truly “out-think” their competition in order to succeed.

To help you achieve those marketing goals, I’ve compiled some real estate marketing tips. I hope these tips make your marketing a little less intimidating and a lot more effective.

1. Grow Your Web Presence

A website is one entity. A web presence is a combination of online entities, each one reinforcing and supporting the next. When you combine online marketing tools (such as your website, a real estate blog, online press releases and articles), you can steadily increase the number of ways people find you. Also, by being “ever present” on the Web, you will reinforce your brand and be better able to position yourself as an authority. I feel so strongly about this particular real estate marketing tip that I’ve written a training manual about the real estate web presence.

2. Start a Real Estate Blog

A real estate blog can help you grow your marketing program in several ways. Once they are set up, blogs are easy to use. Because of this simplicity, you’ll be more likely to publish online content through your real estate blog. The more publish, the stronger your web presence. The stronger your web presence, the more likely will be to (A) find you online and (B) respond to what they find. Thus, starting a blog makes the list of top marketing tips for real estate professionals.

3. Add Some PR to Your Marketing

Public relations (PR) seems to be the forgotten tool of real estate marketing. This is a real shame, too, because PR is a highly effective marketing technique when properly used. In fact, it’s a real estate marketing tip I refer back to time and time again. Public relations can involve many things — a real estate article in your local newspaper, a well-timed press release, a free seminar on the home buying process — there’s no end to the possibilities. Best of all, many real estate PR techniques are free (aside from your time and effort).

4. Tune Up Your Direct Marketing

A lot of real estate agents are beginning to develop tunnel vision with regard to the Internet. What I mean is, they are focusing on their Internet presence to such a degree that they have forgotten about other forms of marketing. The Internet is a powerful marketing channel, but it’s not the only one. Various types of direct marketing and public relations (next item) can be used to broaden and strengthen your real estate marketing program as a whole.

Here’s a marketing tip for real estate agents using direct marketing tactics, such as real estate postcards. Tune up your direct marketing. Do some testing to find out what’s working and what’s not. Then do more of the good and less of the bad. Experiment with new forms of direct marketing. Add value to your message. Strengthen your offer. Give people an incentive to respond. Use the proven techniques of direct mail marketing to boost your success.

5. Strive for Talkability

You won’t be able to find “talkability” in the dictionary. But it’s extremely relevant to your real estate marketing program, so it makes my list of top marketing tips for real estate agents. I define talkability as the ease with which a product or service can be talked about. In other words, when you have talkability, people are more inclined to talk about your services. This leads to referrals, recommendations and word-of-mouth marketing. So how do you increase your talkability? Read this article to find out.

Conclusion

I hope you have enjoyed my list of real estate marketing tips, and I hope you can apply at least one of them to your own marketing in some positive way. Good luck in all your marketing ventures!

* You may republish this article online if you retain the author’s byline and the active hyperlinks below. Copyright 2007, Brandon Cornett.

Real Estate Lead Generation – An Agent’s Guide to Success

Lead generation is one of the hottest topics in the real estate industry, and with good reason. Leads are the first step in the business relationship. So without them, you have no business.

But real estate lead generation is also one of the most confusing topics for new real estate agents (and even some of the veterans). In fact, ever since I’ve been involved with real estate marketing, one of the most frequent questions I get is: “How do I generate real estate leads?”

Rethinking Lead Generation

My goal with this article is to change the way you think about lead generation. Back in the “old days,” purchasing real estate leads was a popular strategy. And while a lot of agents still use this approach to real estate lead generation, it is by far NOT the most effective way to go about it.

Think about it for a moment. When you purchase real estate leads, you are basically buying the names and phone numbers of people who (A) don’t know you, (B) haven’t asked to be contacted by you, and (C) could very well have an agent by the time you contact them.

In other words, you will be cold-calling strangers, in an age when cold calls are dying out. This is not the best way to approach real estate lead generation. When I listed a home on the MLS a few years back, I was annoyed at the number of real estate folks who contacted me each day. “Do you have an agent? Need help selling your home? Can I come over and give you a CMA?” It struck me as both desperate and annoying. There is a better approach to real estate lead generation!

Make People Want to Contact You

One of the best things you can do to generate real estate leads is to make people actually want to contact you. Think about the difference in mindset here. In the previous scenario of cold calling, you are contacting strangers who don’t know anything about you. And because we live in an age of skepticism, they will have a level of distrust right from the start.

But instead of contacting strangers to introduce yourself, what if they contacted you and introduced themselves? For one thing, they would be much more inclined to listen to what you have to say. They would be more trusting and receptive as well. In other words, you would have a much easier time building a business relationship with them. Now that’s the way to go about real estate lead generation!

How to Generate a Response

Sure, having people call or email you is the ideal scenario for lead generation. But how do you go about it? How do you motivate people to initiate that critical first contact? Well, there are several things you need to do. Here’s a summary:

1. Be Visible

Obviously, people cannot contact you if they don’t know you exist. This is where your business visibility comes into play. Online visibility is a big part of this, which is why search engine optimization is such a hot topic among real estate agents. The more visible you are online, the more likely people will be to find you.

You can also increase your business visibility by publishing articles in your local newspaper, publishing articles and press releases online, being active in your community, conducting free seminars, and other aspects of PR. Visibility and awareness are the first steps to generating real estate leads.

2. Be Valuable

The agents who are most successful with real estate lead generation are those who understand the concept of “perceived value.” When a person perceives something as being valuable, they naturally want that thing. In real estate terms, this perceived value comes from many elements:

A real estate agent with unique knowledge of a certain niche … or one who offers access to the best listings … or one who has a proven (and illustrated) track record of client success … or one who streamlines the process by networking with mortgage folks …

These are all ways a real estate agent can increase his or her perceived value, which is the value your audience perceives you to have.

You can also create an item with a high perceived value, and you can in turn use this perception of value to generate leads. Let’s examine the concept of “free reports” as an example. Many agents use this approach to real estate lead generation, but they botch the strategy because the report in question does not have a high enough perceived value — not by a long shot.

A report entitled “Top Ten Home-Buying Tips” does not have a strong perceived value and therefore will not generate many leads. Why? Because (A) it is generic, (B) it does not identify closely enough with the target audience, and (C) it’s information that you can find anywhere. It is not exclusive “must read” information. It will not motivate the average reader.

So how do you increase the value of such a report? Easy. You make it a “must read” document. Instead of basic home buying tips, why not boost the value and put people under pressure to read the piece? Why not promote something like this: “Which Happytown Schools Are the Best? Exclusive Report Tells All.”

This kind of document would have a much better chance of motivating people and generating leads. It would be easy to tie into real estate, too, so most of your leads would be qualified ones. But this is just something I came up with off the top of my head. You could create an even better “hot button” report with a little imagination and knowledge about your community.

To take this approach even further, you can add a visual element. Have a graphic designer create an eye-catching cover for your report, along with some thumbnail-sized versions to put on your website.

3. Be Trustworthy

People don’t trust strangers. We talked about that already. So if you cold call people as a stranger, you already face an uphill climb in terms of real estate lead generation. The key, then, is to inspire trust among your target audience. This will help you overcome the natural skepticism people have and make them more likely to contact you.

How do you generate trust? Testimonials help, especially when you use the former client’s full name, photo, and neighborhood. A long track record helps too, as do professional certifications and sales awards (just be sure to tie these back to the success and satisfaction of your former clients).

You can also generate trust by sharing your expertise with people. A real estate blog is a great example of this. If you publish a real estate blog over a long period of time, and people find that blog online (through search engines or otherwise), they will feel as if they already know you a little. If you publish quality content, people will realize that (A) you know your market, (B) you are active in that market, and (C) you obviously like to help people. Suddenly, you’re not such a stranger … you’re a perfect candidate to be their real estate agent.

Lead Generation Success

Being visible, valuable and trustworthy will make your real estate lead generation efforts pay off in the long run. Is all this effort worthwhile? Well, let me ask you this. What would it be worth if you never had to call or email a stranger again? That’s a goal worth striving for, isn’t it? That’s the kind of thing that can happen when you change the way you think about lead generation.

* You may republish this article online if you retain the author’s byline and the active hyperlinks below. Copyright 2007, Brandon Cornett.