The Commercial Mortgage Loan Process
Sep 13, 2016
A commercial real estate borrower should understand that both the subject commercial property and the borrower’s financial history will be subject to extensive investigation. This, in turn, extends the period of time a commercial mortgage lender required to process a loan by weeks and sometimes months.
Below is an outline of the commercial loan process. Each commercial lender may have their own variation to this process. However, in general the commercial loan process can be broken down into these 4 phases.
The 4 steps of receiving a commercial real estate loan
Phase 1 – Preliminary AnalysisA Commercial real estate lender will typically request the following pieces of information from a borrower to perform their preliminary analysis on a commercial property:
- 2-3 year operating history with year-to-date information
- Current Income Roll (Rent Roll and/or Lease Roll)
Depending on the type of commercial property, the information on the income roll can be a bit different. For instance, with multi-family properties, a borrower should provide a rent roll with: unit mix (bedrooms and bathrooms), tenant names, the number of total units, square footage, utilities paid, any discounts/concessions, and any additional income sources (such as parking, laundry, billboards, cell towers and signage).
For a retail property, a borrower would provide a lease roll with: tenant names, their occupied square footage, utilities paid, common area maintenance (CAM’s) agreements, copies of the lease agreements. Additional information may be requested depending on the property type and tenant mix.
- Exterior and interior photos of the subject property
- Last mortgage statement (*if applicable)
- List of Recent Capital Improvements
- Ownership Structure
- Some commercial properties are owned by entities such as corporations, LLC’s, trusts or partnerships. Allowing the lender know who is involved with the financing will help the lender request the proper information for Phase 2 of getting a commercial real estate loan.
- Purchase Contact and Escrow instructions (*if applicable)
- Borrower(s) Financial Statement
When the commercial lender performs their preliminary analysis, they are looking to determine the commercial property’s ability to service the requested loan. In simple terms, the lender wants to know that the subject property generates a consistent flow of income to pay the mortgage, taxes, insurance, operating expenses, and reserves.
At this phase, most lenders will generally assume a borrower has the financial capacity and credit strength to support their lending guidelines. In would be good to note that no matter how solid the property financials appear, conventional commercial lenders still want to have a borrower(s) with a strong financial background and good credit history.
Upon completion of the pre-analysis, a commercial real estate lender would issue a Letter of Interest (LOI) that indicates potential loan terms or inform the borrower that they will not be able to move forward with the loan request.
Phase 2 – Loan ProcessingIf the terms outlined in the commercial Letter of Interest are acceptable, the borrower(s) will provide the lender with a signed LOI along with their good-faith deposit. The monies provided by the borrower are typically used to pay for third party costs.
When the loan has been booked with the lender, the loan file is assigned to a loan processor. The loan processor will order: the appraisal report, environmental report (if applicable), a preliminary title report, pull a credit report for each borrower, and open escrow. Depending on the lender, the borrower may have the choice of which title and escrow company they want to use for their loan.
During this phase, the lender will work with the borrower(s) to complete their commercial loan application package. Usually, every borrower with more than 20-25% vested interest in the property will need to complete an application package. A complete loan file can involve packaging multiple borrowers and entities.
- The following is a list of commercial loan application package items/forms typically required from each borrower:
- 2 years personal tax returns
- 2 years business/entity tax returns
- Last 2 months bank statements for personal and entity
- 4506 an 8201 tax certification forms
- Lender specific loan disclosures and borrower rights disclosures
- Entity supporting documentation
- Operating agreement
- Corporate filings
- Resolution to borrow
- Trust agreement (if applicable)
- Schedule of Real Estate
- Credit Report – explanation letter (if needed)
- Statement addressing reason for borrowing
- Copy of Valid Identification
- Vesting Instructions
- CIP Form for individuals
- Borrower and/or Guarantors Resume of experience
Phase 3 – Underwriting / Loan ReviewOnce the Loan Application package is complete and all third party reports are received by the lender, an underwriter is given the complete loan file for review.
If the loan file meets all of the lenders guidelines, which includes a review of the loan-to-value of the loan request, the underwriter may issue a final loan commitment letter.
However, the underwriter does have the option of issuing conditions with their loan approval. These conditions that need to be met can be pre-funding conditions or post-funding conditions. Moreover, underwriting may make adjustments to the loan terms and/or loan amount, as they deem necessary to keep the loan request in line with the lender’s guidelines.
On the other hand, if the underwriter concludes that the property and/or borrower(s) does not satisfy the lender’s guidelines, they can deny the borrower’s loan application.
Phase 4 – Loan Closing
When the borrower(s) accept the terms outlined in their loan commitment letter, the process of closing a commercial real estate loan is similar to the process of closing a residential loan.
The loan file is transferred over to the loan closing department, where a closer would work with Escrow to deliver loan instructions and loan documents. In turn, Escrow would work the Borrower to insure that any items and signatures required by the lender as part of their loan documents are received.
Escrow would also work with the Title Company to confirm clean title and finalize the assignment of the loan to the borrowers and on the subject property.
Escrow would send all documents back to the lender. After the closing department verifies accuracy and completeness, funds are scheduled for disbursement and the loan process is completed.