So you've made the decision to acquire or refinance an apartment complex or to convert an office building. Once you find yourself in the thick of the financing process, inevitably you will be faced with many tactical choices. You will need to prioritize your wish list - to put out the biggest fires first. This need to prioritize will come up again and again during the loan process. Once you've gotten past the primary choices of lender, the loan amount, the rate structure and the basic terms, there are still many secondary points that will need to be dealt with correctly. Remember that you are going to live with your new loan and your new lender (and your prepayment penalty) for years to come. The fact is; there are only so many winnable points in any negotiation, so it's important to choose your battles, and just as important to time your battles, carefully.
Time Leverage:
At Winter & Company, we are enthusiastic supporters of the "The Earlier the Better", rule: Just like the concept of leverage applies to financing real estate, it equally applies to the proper and most effective use of time. As a borrower, you can either leverage time to your advantage, or you can squander a golden opportunity to optimally structure a transaction to your advantage. Proper guidance with regard to timing is one way to distinguish levels of competence in commercial mortgage brokers. A good broker must be able to offer effective advice to help the borrower achieve his goals. Sometimes all it takes is asking for something at the right point in the loan application/closing cycle, when it's still easy for the lender to alter course and accommodate a borrower's deal point. There are many negotiating points that are easily "winnable" when you're still at the "dating" stage with your new lender, yet those same points can become a nightmare to achieve if left until a day or two before you close your new loan.
Get what you want by asking for it at the right time:
For example: Tax Escrows - In the beginning of the loan process, you're still shopping and pondering different loan programs, and the lenders are competing for your loan. Variables like whether or not the lender will escrow for taxes, or whether an actual/360 or a 30/360 calculation will be used when computing your monthly/annual mortgage payment, are still, in many cases, malleable. While a sculptor's clay is easy to work with and mold at the beginning of a project, it's a whole other story once the clay is dry. Changes become much more difficult to make as time wears on. The loan process has similar time-critical elements: The borrower needs to ask for things at the right time in order to shape the deal to his or her liking, and therefore to win as many battles as possible. A good broker with years of experience will prompt the borrower early on for important feedback to ensure a smooth and successful loan closing.
The mortgage broker plays a very important role during the "dating" stage. Aside from more obvious things like bringing you up to speed on the differences in process, reliability, timing of rate lock, and the likelihood of a particular lender imposing onerous conditions or making unwanted changes later on in the process, a well-chosen mortgage broker knows the terrain. He has been through this lender's process many times before, and therefore knows what crucial information, if any, might be omitted from a particular lender's offer letter, only to surface later in the commitment letter or the loan documents. Stated differently, the right mortgage broker is your Early Warning System helping you to focus on asking the right questions early enough in the process to get what you want from a lender, and if satisfaction is not to be forthcoming from lender #1, then to keep on searching for your best match.
Clearly, it is valuable to work with a mortgage advisor who has gone all the way from conversation, to offer letter, to commitment, to loan documents, to closing - many times with many lenders. Avoid brokers whose lender pool is small. Some get comfortable with 2 or 3 lenders to whom they bring most of their business, and will try to get your loan to fit in with one of their favorites. Efficient for them, however, not necessarily in the borrower's best interest.
Once you've accepted an offer letter and paid a good-faith deposit, if you haven't yet brought up points that are of key importance at the earliest stages, these points will be much more difficult (although not necessarily impossible) to change later on in the process.
Most savvy borrowers have a team of trusted professionals including their mortgage broker and their real estate attorney to help them achieve the best results. It is critically important for the borrower to set the tone, and to let those professionals know, as early in the process as possible, which key points are the absolute priorities - to identify which battles simply must be won.
About the Author
Gregg Winter is President of Winter & Company Commercial Real Estate Finance and is Managing Principal of W Financial Mortgage Fund I, LLC, a direct private hard money lender.