A commercial real estate loan submission is similar to a prospectus, although it is typically more complex. Lenders analyzing a potential commercial real estate loan must examine many critical details in the submission.

In some instances, lenders will require that documents be presented in a particular order, but many items are interrelated and therefore will be examined together. No matter what, there are specific items that brokers should include in all loan submissions.

Loan Application

Although some investors do not require an actual loan-application document, others use it as the basis for the entire loan submission. It carries within it the terms and conditions of the loan scenario. These terms include, but are not limited to the:

– Loan amount
– Loan term
– Interest rate
– Escrow requirements
– Prepayment terms
– Types of security documents
– Commitment term
– Property-insurance coverage and
– Fees and closing costs

Brokers and borrowers should prepare the application with great attention to detail. Because no two borrowers or properties are alike, any special requirements should reflect the borrower’s and the lender’s attitudes properly.

Real Estate Loan Appraisal – Establishing Fair Market Value

The appraisal helps to establish the security’s fair market value – an essential factor to determining the appropriate loan amount. In general, the following should be included in an appraisal:

– Property description
– Neighborhood analysis
– Property utilities and restrictions
– The specific approach to value
– Final value estimate

It cannot be emphasized enough that the mortgage banker is a risk analyst. Bankers, therefore, must relate value to key points such as debt-repayment coverage, occupancy, expense ratios, vacancy ratios, projected income and other risk considerations such as restrictions, easements and conditions of arriving at the value estimates.

Financial Statements Required for Commercial Loans

Any analysis of the borrower without financial statements would be incomplete. If the borrower is an individual, the statements might not be audited. They must, however, be current (prepared within the past six months) and must reflect all assets and liabilities, including any contingent liabilities.

With a corporate borrower, it is best to request and obtain audited statements. Mortgage brokers and bankers must analyze and be familiar with the income statements and balance sheets in the submission.

When dealing with a loan for an existing income-producing property or a property that the owner intends to occupy, include operating statements for at least the past three years. If the company is listed with Standard & Poor’s or Moody’s Investors Service, then a report should be included.

Full Disclosure of Leases and Their Terms

If a property eventually will be leased, include a copy of the leases in the loan submission. Be sure to prepare and include an analysis of the lease. The lease and its terms can be an important factor in deciding whether to make a loan. Be sure to consider the lease’s relationship to the mortgage.

If, for example, the building is constructed for a specific tenant to occupy it, the mortgagee may request that the lease be recorded prior to the mortgage. This ensures that the lease will not be disturbed should a foreclosure occur.

If, however, the investor plans to take possession of the property in the event of foreclosure, the lease must be recorded after the mortgage. This procedure allows the foreclosure action to wipe out the leases, allowing the investor to control occupancy.

Many leases contain information that neither the tenant nor the landlord will want public. In such instances, a short form of the lease may be recorded, thereby providing public notice but revealing no particulars of the lease other than its existence.

The Letter of Transmittal – Your Recommendation

The letter of transmittal is where you make a recommendation to accept the loan. It also can be used to delineate those items that are included in the submission, if for no other reason than to give a record of what information has been provided.

In a sense, this listing acts as a table of contents for the entire loan submission. This also is the best place to discuss items such as fees, servicing, commitment terms and the probable closing procedure.

Loan Summary – The Application in a Nutshell

A good loan summary will usually include a reference sheet of important points so the reviewers can grasp the concept of the project and its acceptability as security for a loan. It can include details such as the:

– Loan amount, term and amortization period
– Interest rate
– Land value (per square foot)
– Building value (per square foot)
– Gross income
– Net income
– Expenses
– Debt service
– Cash flow
– Debt coverage and
– Borrowers’ net worth

Although many institutional investors have their own procedure or format for reviewing a loan and presenting it to their finance committee, the loan summary nevertheless offers a helpful outline of specific information. It helps the underwriter select which specifics to highlight.

Plans and Specifications for the Property

Original plans and specifications give lenders insight into the building’s concept and its physical characteristics. These outlines should give the underwriter a general idea of the building, its total area and the quality of the materials and workmanship that will go into the project.

Outlined plans and specifications normally include information about the:

– Plot
– Floor plan
– Elevations
– Footings and foundations
– Exterior walls, interior walls and ceilings
– Roof structure and finish
– Floors and floor finish
– Mechanical, electrical and plumbing; and
– On-site improvements

Because plans and specifications can be complicated and bulky, it is helpful to provide a written brief accompanying them to the institutional lender. If a more detailed analysis is required, the lender will probably request a review by a qualified engineer or architect.

Final Application Review

Other exhibits that may be pertinent include vacancy surveys, feasibility studies and environmental-impact studies.

Most real estate lenders require the same information to arrive at a sound investment decision, but they will inevitably have different questions based on their specific investment requirements or attitudes. Some investors will request more detail than others.

The mortgage banker, in the role of correspondent, should research the project sufficiently to avoid future questions. There is no substitute for being completely familiar with the lender’s underwriting procedures. If additional information is requested, however, gather it and make it available quickly to allow for continued and uninterrupted processing.

You should consider the length of the completed submission, as well. Lenders are primarily concerned with the facts essential to the decision that conforms to investment policy. A dressed-up loan submission is no substitute for a quality investment or a keen understanding of the elements of lending.

A loan submission that is clean and concise is, without a doubt, much easier for lenders to analyze. It also gives them the impression that you understand the elements of safety and risk for their portfolio.

Most loan submissions arrive on the underwriter’s desk without the benefit of your personal appearance. Every exhibit in the package, therefore, must speak for itself. This underlines the importance of presenting a loan submission with clear, well-written and succinct language that leaves no important questions unanswered.

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