STRENGTHENING THE POSITION OF A BORROWER

Often when an investor is seeking debt or equity financing for a type of commercial property with which he has little or no experience he finds investors/lenders reluctant to consider new financing because of his lack of experience.  In a recent article (“Strengthening the Property Sponsor�) in the March 2007 issue of National Real Estate Investor W. Joseph Caton writes about how an investor can strengthen his position with a potential lender. 

 

As he states, after the location and potential cash flow from a project the strength of the borrowing entity (particularly its or his creditworthiness and property management experience in the specific type of property and activity) is paramount in the underwriting of the loan or equity investment.  He suggests that an investor who is weak in one or more areas that are important to the project’s success and therefore to the lender’s or investor’s underwriting can significantly strengthen his position with the lender by partnering with a property management firm or a contractor with specific experience in the location and type of property.

 

It is important to lenders – particularly in high ration loans that the borrower be willing to bring the appropriate talent to the project and often the hiring of the right property manager or leasing agent can provide the assurances that the lender is looking for.  If a borrower fails to provide this necessary ingredient he may find funding difficult to obtain at reasonable terms – while there is plenty of mortgage and equity capital in the market lenders do refuse to make deals that they consider too risky.

 

Mr. Caton closes by saying “adding strength to one’s deal sponsorship may also include hiring internal personnel or naming business partners who bring a broader scope of experience to the table. Real estate investing is a business operation, and successful developers, investors and building owners are rarely lone rangers. Instead, they are forward-thinking planners who understand and take advantage of other people’s professional strengths.â€? 

We think this is excellent advice for commercial real estate investors.