Smoke and mirrors

How to tell whether a lender is real

by RUSHI SHAH

Commercial real estate finance and capital markets are parts of a lucrative ecosystem. As a transaction moves forward step by step, each link in the food chain adds value. These producers may include investment sales and leasing brokers, buyers, sellers, borrowers, lenders, equity and mezzanine investors, mortgage bankers and brokers, and more. Ultimately, everyone is working toward the common goal of a successful acquisition or refinance closing.

There is a lot of money to be made along the way, however, there is always the risk of running into profit-chasing posers who can delay and disrupt the path to closing. Fortunately, there are simple steps borrowers can take to avoid a derailed deal.

ASK THE RIGHT QUESTIONS
While there are many upstanding lenders in the commercial real estate industry, the lure of healthy profit margins also attracts players who misrepresent their abilities to get you to the closing table. As capital has become more plentiful, the number of players calling themselves “direct” lenders has also grown. In reality, most of these shops don’t have money to lend but are just brokering the deal to someone else. This can be a problem for two main reasons. First, because they aren’t the final lender, they frequently fail to complete the proper level of upfront due diligence needed to ensure the transaction’s viability. As a result, surprises can crop up further into the process, causing the transaction to go sideways and the borrower to lose precious time and money. Second, these alleged lenders do not have control of the deal. They may try to convince borrowers they’re in charge, but chances are someone else is actually calling the shots. In a commercial real estate transaction, control equals certainty of execution, and certainty of execution ensures closing. The best way for borrowers to avoid being trapped is to ask the right questions upfront. Let’s explore three ways to effectively peel back the onion to determine if a capital source is bona fide or not.

1. TRUST THE RIGHT RESOURCES
To begin the process, borrowers should engage a professional mortgage banker to guide them. Prudent borrowers choose an expert who has long-standing relationships in the market, a proven track record of closed deals, including recent transactions, and references to vouch for past performance. These qualified intermediaries rely on an established platform and methodical due diligence process to evaluate if a lender should be included in their repertoire.

2. UNDERSTAND WHO IS BEHIND THE CAPITAL
Even if the lender has its own balance sheet, it may not be a direct lender in the truest sense. A qualified mortgage banker knows to probe further to determine if the lender is using a warehouse line of credit to fund deals. This blanket line of credit is provided by a bank or a financial institution to the lender to make loans. Under this model, a lender is often at the mercy of the warehouse lender for transaction approvals. The warehouse lender also may leverage the loan at closing to make more return on its invested capital. Although an acceptable practice, warehouse lending can prolong the closing process for borrowers and increase the loan-approval risk.

3. RECOGNIZE RED FLAGS
If a lender requests a deposit before producing a fully approved term sheet, borrower beware. Asking for an underwriting fee before doing any work on the deal is a practice employed by sham lenders and unqualified mortgage brokers. A bona fide mortgage banker would never request this type of upfront deposit. The industry standard for engaging with a mortgage professional is that they get paid only upon a successful closing. The only time an expense deposit is legitimately required is when an actual, approved, execution-ready term sheet for a particular deal has been issued.

By enlisting a professional to do the heavy lifting for you, asking the right questions, and heeding red flags, borrowers can ensure certainty of execution and avoid unnecessary headache and heartache. Financing a large transaction is an arduous process. Having an expert by your side whose sole job is to work with real leaders with real balances sheets and real decision-making capabilities and who will ensure you get to closing every time (barring any extraordinary circumstances such as fraud) can prove a key catalyst for success.