Make Your Borrower's Projects and Submissions More Robust

Make Your Borrower's Projects and Submissions More Robust

In the current climate, it’s getting harder than ever to impress potential lenders with your client’s loan scenarios. It may be that times have changed permanently and that it will be years before lenders return to their pre 2007 comfort level. Until then I thought I would make some suggestions to help you to re-think your borrower’s loan scenarios and try to make them more robust.

By robust, I mean strengthen your loan scenarios for your clients so that they can withstand potential negative factors that might otherwise harm your ability to perform as promised. Things seldom go as planned and when they go wrong, it’s good to have the ability to weather bad tidings. What if it takes your client longer to sell the project than expected? What if the value of the finished project has dropped since it was started? What if a government approval is held up for reasons your borrower can’t control? All of these things could severely impact your borrower’s ability to perform.

Lenders are critically aware of these items (especially in light of the recent unpleasantness in the marketplace) and now look to see if a potential borrower is also aware of these items and has a plan to deal with them (and back-up plans after that). To that end, I would make some suggestions to help you make your client’s scenarios more robust.

Lower LTV’s

A low LTV can forgive a lot of sins. In the past a 75% LTV was considered the maximum LTV we would consider. While that is not impossible now, it’s more of a low probability event that you’ll find a scenario that can present well at 75%. You should be thinking below 65% or even 60%. Lenders now want a larger cushion to protect against property devaluation. Not only that, having a borrower with more equity means you’ll have some room to work with if you need a loan modification or workout. There may also be enough equity to borrow against to do some debt service. Also, lenders love it when there’s room for another hard money loan after theirs. Low LTV is critical right now.

The days of heavy leveraging are over for the time being and we’re ready to work with you to bring your client’s LTV down. You can consider additional cash, seller carries, subordinations and cross collateral as techniques to lower the LTV. This is where hard money has always shined. We can get creative to help you in this area.

Multiple Contingencies

Nothing ever goes as planned. The borrower should plan for that. Having back-up plans shows that they’re aware of this and prepared to make adjustments if necessary and respond to changes in the marketplace (all of our best developers have back-up plans to their back-up plans). If they can’t sell the house, maybe they should be ready to have it rented. They should build in extra time for delays if they’re waiting for government approvals. If the market changes mid-way into their project, how will they adjust their project to fit what the market wants? These considerations are what are on lenders mind’s as they’re reading your proposal. If your borrower has well considered answers and plans to deal with multiple contingencies, they’ll demonstrate to their potential lender that they’re a careful planner and prepared for what may happen down the line.

Finally, the most important of these contingencies is being able to do the long hold. It’s so important it deserves its own section.

Do the Long Hold

The common enemy to most real estate development is time. Market trends come and go. Projects can be delayed. Things inevitably take longer than expected. All along the clock is ticking. You should consider that your borrower might end up not being able to exit as soon as they expected. When this happens, have they prepared for the long hold?

Debt service would be critical going forward. Do they have enough cash flow to sustain payments? Is there enough equity to borrow again if needed? These are the questions that the lenders will ask about your borrower. Having a plan to do the long hold goes a long way to inspire confidence for lenders.

These three suggestions will go a long way to making your borrower’s projects and loan requests more robust. Following them (and working with your borrowers on their development plans, before asking for funding) will give you and your borrowers a greater chance of getting funded.