It stands to reason that any transaction you undertake without prior experience is likely to go against you in some way. Commercial property transactions, as complex as they can be, are no exception. Lenders, counter parties, managers, brokers, even counsel, all represent their interests to the maximum. When they’re on the other side of the table, you can bet that those interests will be represented at your expense if you lack the ability to see the deal in the terms they do. You obtain that ability in depth in only one way: through direct experience. Experience in commercial property ownership and management is critical to success.
Everybody Prefers Experience, Starting With The Lender
A borrower’s understanding of how to operate the property is high on the list of what a lender is looking for. Creditworthiness is king, then market conditions have their say, but no matter what, the lender is always looking for clues that the borrower has an understanding of what owning this property entails. If the borrower’s answer boils down to a simple “I’ll be hiring a property manager,” a lender has every right to wonder about the management capability of the borrower. This is not to say that hiring a property manager is a mistake, it’s to say that the borrower’s management acumen should be on display, not downplayed. Take the intent to hire a manager as an example: the borrower’s management of that relationship between herself and her property manager is still seen by the lender as the lender’s best defense against the borrower running into trouble down the line with the property. And trouble means endangered loan service.
A borrower needs to demonstrate to the lender an acumen at commercial property ownership and management. One way to do this is through the development of a document of that acumen. Sometimes called an REO Schedule (Real Estate Owned), this list of real property, which can include single-family, is to make it clear to the borrower that the lender has experience commercial real estate purchase, ownership and operation.
This document has such an effect on lenders that if a borrower happens to be out of the market at the time of the deal, the Schedule should include a list of properties once-owned with dates of sale, descriptions including unit numbers, square footage and other vitals.
Bottom line: Commercial property is income property – show your lender that you’ve got the experience and can handle the ins and outs of an income stream, and you’re more likely to get the capital you need to make the deal.