THE REALITIES OF FUNDING A COMMERCIAL REAL ESTATE PROJECT..... FIVE TIPS YOU NEED TO KNOW

Whether seeking funding to acquire a commercial building or for a new construction project, sponsors should understand the realities of funding their project early in their planning.

Too many sponsors discover the true financing costs late in the life of their project. They may have already invested quite a bit in soft and hard costs and are only now facing the reality of how their project is viewed by lenders and the resulting borrowing costs.

Tips to help you succeed in financing your commercial real estate project

To help make a positive impression and secure a loan, it is important to avoid common mistakes. Here are some tips:

1) Estimate Financing Costs Early In The Project

Once a potential project has been identified, a good place to start is understanding how the project will realistically be viewed by underwriters and lending committees at financial institutions. This also includes factoring in whether you are willing to provide a personal guarantee, or if you are seeking a non-recourse loan which may be more expensive. If the project is unable to support realistic financing costs, the time to find out is before additional project costs are sunk.

A common mistake we see among clients is under estimating their total cost of capital, and failing to include lender points and broker fees. Don’t assume you will receive debt at 5% total cost if your project doesn’t meet the lower risk requirements to secure it. Properly estimating total financing costs will save a lot of time and heartaches.

2) Emphasize the Financials

A high quality business plan which includes realistic pro-forma projections of costs, revenues, time frames, “as completed” appraised values and time to stabilization sends the message you are professional and that you understand what it will take to complete the project, service the debt and how this will be achieved. Lenders do not like disjointed, unclear business plans. They are also not going to be very interested in promotional material you may have put together for equity investors or to market the completed real estate offerings. So focus more on clarity of the business venture, accurate financials, past and future financial performance. Ultimately, the numbers are what matter as long as they are well supported by evidence.

3) Transparency and Sponsor Professionalism

The disclosure of inherent project pros and cons, and the feasibility and risk factors of project components all need to be carefully and transparently addressed in both the business plan and in your dealings with lenders. Failure to do so can result in a rejection of your financing request after a due diligence review finds flaws that should have been identified at the start.

Equally important is the ability to be cooperative, professional and show how you and the entire sponsorship team have a track record of success in the industry. You may be asked to reveal your personal net worth, even if the loan is non-recourse.

4) Emphasize Your Local Real Estate Knowledge

Lenders will feel more comfortable if they know the project sponsors are experts in the specific real estate market for their project. As sponsors, if you live in the region of the project or have successfully completed similar real estate transactions this should be outlined in the business plan, including local information on values, local developments, market trends and competitors, along with supporting market analysis from expert third parties.

5) Understand All Your Financing Options

Talk to financing intermediaries who understand how your project will likely be viewed by lenders. There may be less variance between lender interest rates than expected, and other elements of the loan terms can be more important such as the loan to cost ratio, the loan term and repayment flexibility. For example, a longer term loan may result in overall higher borrowing costs but can be worth it to avoid cash flow problems from higher debt servicing requirements. Understanding the flexibility the lender will allow in your scheduled loan repayments also enables you to better manage cash flow if you run into unexpected shortages.