The Little Secret about Tight Credit

I want to let you all in on a little secret.  It’s something you and I intuitively know, something I know because I am trained as a bank-credit union commercial real estate loan officer.  It’s something I know because I survived the meltdown of 2008 and the death of the CMBS market and the crash of the REITS and the day of reckoning for loans that should not, in retrospect, have been made or securitized.

Here is what I need to tell you, and it just hit home last Friday when one of my “perfectly good” loans,  with a reasonable LTV of 70%, DCR of 1.5 to 1, on an OK piece of real estate, got DECLINED.

I want to tell you  from personal experience what tight credit really means.

It means that your guarantors have to have a strong individual global cash flow.  At my shop 1.4 to 1.  For every dollar in debt service they PERSONALLY have, they should have $1.40 in TAX RETURN VERIFIED income.  Skimp on what you tell the IRS, mister borrower?  Don’t expect to get a good bank or credit union commercial real estate loan. Maybe a life company loan, maybe a conduit loan, if you like torture but not a bank loan and not a credit union loan.

If you have a big mortgage on the big house and our outgo is $10,000 a month, your AGI plus proven NON cash losses plus depreciation, divided by 12, had better be $14,000 a month.

Then there’s GLOBAL GLOBAL cash flow.  Total personal debt service plus  total borrowing entity debt service,  including the proposed loan, let’s call that D for Debt.  Total entity NOI, plus total DOCUMENTED (from those understated tax returns) cash available from outside sources for personal debt service equals AC for available Cash.  AC better be 1.4 times D.

Now, I know these things.  I’m an SBA 504 guy, I know how important outside income and cash is to absorb a downturn in the real estate market and I know what examiners are looking for.  But sometimes I think that a little extra debt service on the PROJECT, or a little lower LOAN TO VALUE, or a little higher LIQUIDITY can make up for a shortfall in personal global and global global.

Or maybe if global global (the big picture, total INFLOW divided by total OUTFLOW as documented by leases and operating statements AND THOSE TAX RETURNS, is high enough, then individual global shortfalls (as in, the guarantor has negative cash flow because of a huge mortgage on his huge mansion with a view and there’s nothing really showing on his AGI with all the add backs), won’t count as much.

Don’t believe it.  These days, lending is like a track meet.  Knock over one barrier in the hurdles and hang up your running shoes, you are done. There is no such thing as a compensating factor. Collateral, capacity, character, conditions of the market, cash available (aka global liquiduity) — and GLOBAL coverage, there are six C’s of credit not 5, that is the moral of my story.

So before you drive down the road and order reports, or spend ages rewriting an appraisal with all fresh comps, look at the bank statements and the tax returns.  Do that FIRST and avoid the self destruct button.

It is our job as professional commercial mortgage lenders and bankers to know these things, spot them RIGHT AWAY and take the steps that are necessary, such as:

(1) Decline the loan right away

(2) Bring in another guarantor or three

(3) Tell the borrower to go away and come back after filing his 2011 returns, maybe his 2012 returns.  And when he does so,  report every single dime and pay the tax. Because NOT BEING ABLE TO BORROW MONEY AT A GOOD RATE IS ALSO A TAX.

There, said my peace, lesson learned.  Onward!

PS, if you have a decent global we have great rates.  Click here to get rates. Commercial Mortgages March 2012- Centennial Lending

And, if you would like to discuss your deal with a banker, a life company and CMBS rep, and a credit union all at once, and enjoy a free lunch March 15, click here for an invite.  The Fine Art of Getting the Deal Financed

You can always email me at Ph 303-746-9169

About Timothy E Thomas

Senior business development officer, CENNTENNIAL LENDING, metro Denver. Responsible for SBA 504 production and conventional small balance commercial lending. Centennial is a credit union service organization owned by 13 credit unions in Colorado and Wyoming. Former SBA-USDA desk manager and Registered Representative for Isaak Bond Investments, Inc., a municipal broker dealer and market maker in SBA and USDA guaranteed loans and pools; taxable and tax exempt municipal bonds and agency securities serving institutional investors for over 33 years, member SIPC, FINRA.
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