July 23, 2022

JF2881: Commercial Loans & Lenders | Beyond Multifamily ft. Ash Patel

The Beyond Multifamily series is hosted by non-residential commercial real estate investor and Best Ever Show host, Ash Patel. Ash’s goal for this series is to introduce you to the world of non-residential commercial real estate investing and teach you how to look at and underwrite different commercial asset classes.

In this episode, Ash explains the importance of finding a local CRE lender that’s right for you. He shares why going local is a must when it comes to commercial real estate and provides tips on how to establish and cultivate relationships with the top commercial lenders in your market.


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Local Lenders vs. Big Banks

When Ash was just starting out in non-residential commercial real estate, he assumed the bigger the bank, the better his chances would be of getting a loan approved. “In hindsight, the opposite is true,” he says. “You want to find local lenders, especially for value-add commercial deals.” 

Once Ash was able to establish a relationship with a local lender, he set to work proving he could get deals done. Eventually, he reached the point where he could dictate his own loan terms. “I wanted a 25-year amortization, I wanted a 10-year interest rate locked, and I was able to negotiate rates better as the years went on, as my track record was proven, and as I brought more deals to them,” he says.


Tips for Cultivating a Relationship with Your Local Lender

  1. Relationships are more important than saving a little bit of money. While it can be common for multifamily investors to view lenders more as commodities than partners, when it comes to non-residential commercial real estate investing, lender relationships are vital. 
  2. Find a lender that is either local to you or local to the property, if you are purchasing out of state. 
  3. Find the smallest local lender you can. Look for one with anywhere from one to three branches if you're just starting out. 
  4. Ask the commercial loan officer what their legal lending limit is. Try to find a local lender with a legal lending limit of $20M–$30M. 
  5. Also, ask the commercial loan officer what the loan approval process looks like. If the loan has to get approved by a board, for example, you’ll want to know when and how often the board meets.
  6. Open a deposit account at the location once you've found the local lender you want to use. “Just park some money so that when you interact with that lender, you are now an existing customer,” Ash says. This will likely earn you some additional credibility when they bring the loan in front of the board. 
  7. Attend any happy hours or customer appreciation dinners the lender hosts. Get on their marketing list so you can find out when these events are happening. Take the opportunity to get to know the bank president and have them get to know you. 
  8. If you are truly happy with your chosen lender, start making introductions and referring friends and family to the bank. “Whether it’s residential loans or commercial loans, it still keeps you relevant to that lender,” Ash says, “and they see you as more of a partner as well.”
  9. Make any and all deposits in person. Let them see your face often, get to know the people behind the counters, and say a quick hello to the loan officer that you deal with when possible.
  10. Overall, make sure you treat your lenders as strategic partners who will play an instrumental part in the success of your commercial real estate investing business.


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Ash Patel: Hello, Best Ever listeners. Welcome to the Best real estate investing advice ever show. I'm Ash Patel and this is an episode of Beyond Multifamily, where we dive into topics other than multifamily investing. Today we're going to talk about lenders for commercial real estate. And by now you know when I say commercial real estate, I mean non-residential commercial real estate - anything from strip malls office buildings, warehouses, industrial land, medical centers. And we're going to dive in to the importance of local lenders.

I'm going to share with you my very first deal, and how I learned an important lesson about lenders. For over 20 years, I had banked with the same major well-known bank. And when I got my first mixed-use property under contract, I presented it to the lender, they were excited to do the deal. They ran our credit, no problem, had enough cash in the bank... I think it was like $230,000 purchase price, and I didn't think lending was going to be an issue at all. So throughout the entire process the lender told us "Yep, we're good, everything's fine." They had probably 60 days to do this closing, and there should not have been any issues at all, but there were.

Just a few days before the closing I reached out to the lender to make sure everything's set, no issues, and it turns out they responded with "Your loan was not approved." Now, had I not been proactive in reaching out to them, I don't know if they would have even told me that the loan wasn't approved. When I asked why, they said that we don't make enough income to justify this purchase. I was blown away, because again, we had enough cash in the bank to pay for this, and our yearly income should not have been an issue. My wife and I at the time were both W-2 earners.

I was determined to get to the bottom of this, why was this loan not approved. And again, it's not a major purchase, $230,000 for a mixed-use property that had four apartments and a grocery store on the first floor. It had income already coming in enough to justify the mortgage. So as the closing approached just a couple of days away, we scrambled to try to salvage this deal and salvage the loan. And in talking with a bank, I realized, like most big banks, they had multiple locations, multiple people working on this loan. So out of Cincinnati was my loan officer, out of another state was their underwriting department... And it turns out, I was told that my wife and I combined only make like $60,000 a year, which was not the case, and I showed them tax returns that they already had possession of... And they finally came back and said, "Okay, the underwriter didn't know how to read a K-1." And that absolutely blew me away, because a K-1 is a one-page document. And my wife at the time was getting paid through a K-1, and the underwriter for whatever reason couldn't figure out that that was her income, and they did not approve the loan based on that. When they went back and figured out how much we actually make a year, they said, "Oh, sorry about that", but they could not get the loan done by the contractual closing date. So we ended up having to pay cash for that deal, and just a few days later they ended up funding the loan and gave me maybe a point off on the interest rate to make up for it, and try to recapture our future business. For me, that was not an option; I couldn't risk losing a future deal because a big bank couldn't get their act together.

In my mind at the time, I assumed the bigger the bank, the better your chances of getting a loan approved. I had been recommended to several local lenders, but I dismissed them. I assumed they're little mom and pop banks, and they probably wouldn't want to deal with me. And in hindsight, it's the opposite that's true. You want to find local lenders, especially for value-add commercial deals.

My first experience with a small local lender was when my wife and I were buying our house, which is actually a church. We bought a church and renovated it into our home. And again, we reached out to all the big banks, including the bank I had done business with for 20 years, and nobody wanted to touch the loan, because it wasn't a house. We're not buying it as a church, we're buying it to convert it. It just didn't fit anybody's criteria for a proper loan. So we reached out to a local lender, who was recommended to us, and they immediately jumped on it and said, "Yeah, no problem. This is not the norm, but we'll figure out a way to get it done." And this bank charged us a point higher than the current residential rates, because again, it didn't conform to anything, they couldn't trade or sell this loan on the secondary market... But nonetheless, we were grateful that they were able to get this loan done.

My wife and I have lived in that house, church house, or chouse, for almost 15 years now. So that same lender, I brought them my next commercial deal, which was a 15,000 square foot vacant single-tenant retail building. It had been vacant for about five years. We brought the loan to them, they approved it, knowing that there was a good chance I was going to fail, not be able to turn this property around. But we had enough income, enough reserves to where we wouldn't default on the loan. So they felt good about us, they didn't feel good about the deal.

I believe it took me about four months to sign a tenant on a five-year lease for that building, and the lender was blown away that I was able to get that deal done. And this was probably around 2013 or 12, where it wasn't easy to find tenants; we were coming out of the last recession... So they were impressed with me, and I was able to bring future deals to them. And over the years, it got to the point where I could dictate my loan terms. I wanted a 25-year amortization, I wanted a 10-year interest rate locked, and I was able to negotiate rates better and better, as the years went on, as my track record was proven, and as I brought more deals to them. The most important part about this relationship is that anytime I bring a deal to this lender, I never have to worry about them approving the loan. It's literally two or three emails. The first email is "Hey, here's a contract for the next property I'm purchasing." The next email back is "Okay, we're ready to close" and the next email after that is "Here's our closing date." So there's very little back and forth. Because of the track record and the relationship, I'm confident that when I signed a contract for property, it's going to get financed.

I'm going to share with you how I cultivated this relationship over the years, and tips for you to find a local lender. The first thing is when you're doing value-add commercial deals, no big bank is going to touch the deal. After 10 years of doing this, I've brought value-add deals to big banks, and they don't want them. If there's any vacancy, no matter how much income the property is generating - it can be a total cash cow, it can be a unicorn deal that's phenomenal; if there's any instability, meaning leases that are month to month, or any vacancy, they just don't want them.

Another quick story is I had a big bank recently reach out to me, and they said, "We know a little bit about you. We would love to capture all of your business." I asked them about the rates that they would offer, the terms... And they seemed pretty favorable. And I felt like if I could do a massive portfolio cash out refi, lower my interest rate, get better terms, it might be worth doing. Maybe it's time I left the local lender and moved everything to a big bank. Well, this big bank reviewed my portfolio, and they cherry-picked the properties that they wanted to refinance. They picked the properties that were stabilized for three years or longer, meaning no vacancies for three years or longer, and everything was on a long-term lease, no month-to-month.

So I thought to myself, it's not cool for the big bank to take all of the good properties, and leave the local lender, who really was my partner for the last 10 years and helped me get to where I am today, take all of that away from them, leave the local lender with all the crap. So I turned down the offer, even though I would have saved money, could have cash-out refied. Relationships are more important than saving a little bit of money. And for a lot of my multifamily Best Ever listeners, you guys are using brokers to find a quarter point off on your interest rate. And each deal, you get a broker that finds the latest lender that has a special, and they're hungry for a deal, or maybe the broker gets some kind of a kickback. But in that world, Best Ever listeners, you're using lenders as commodities instead of partners. And my world, in the commercial world, our lenders are truly our partners; they're one of the most important partners we'll ever have. So establishing those relationships is very, very important.

How do you find the best lender for you? You find somebody that's either local to you, or local to the property. If you're purchasing a property out of state, and you don't already have a local lending relationship, you want to find somebody that is very close to the property to get the deal done, because you don't have the track record. If you're starting out and your goal is to purchase properties close to where you live, my recommendation is find the smallest local lender; if they have 1, 2, 3 branches, that's ideal; if they have 8 to 10 branches, but they still have that local knowledge, they're not a giant regional player, they still want to do loans in their own neighborhood, find those banks.

Break: [00:12:53.13] to [00:14:40.15]

Ash Patel: Call the lender up and ask to speak with a commercial loan officer, and ask a few questions. One, what is your legal lending limit? So each bank has a legal lending limit set by the Feds, and whatever that is is important, because if it's 2, 3, 4, 5 million, you just know at some point that they're going to be capped at how much they can lend to you. This is a question that I did not ask until I was told "We have reached the local lending limit with you; we can no longer do loans unless we bring in a partnering bank." And now, if I use that same bank, they have to pitch the deal to another bank that is okay with partnering on the deal with them. But this other bank now has to underwrite me, and they have to underwrite the loan, not knowing we've got this great relationship.

So again, if you plan on scaling your commercial real estate portfolio, try to find a local lender that has a legal lending limit of $20, $30 million, just in case you outgrow them quicker than you thought.

You also want to ask what the loan approval process is. Each local lender typically varies a little bit. Some local lenders, the loan officer is able to approve smaller loans themselves. In other cases, it has to get approval from the bank president. And once that's approved, it has to go to the board. And you want to find out how often the board meets, try to figure out that timing, and that's going to be important for your contractual close date. You don't want to lose a deal because the board isn't going to meet for another two weeks.

We had one local lender that was out of state, but they required the loan officer to visit each property. So the bank was in Georgia, and if we're buying a property in Illinois, we have to pay for the lender to get on a plane, fly out to wherever we're purchasing the property, stay in a hotel, pay all expenses... They want some eyes on the property. We are willing to go through all of those hoops, because this particular lender is offering us 15% down on commercial property.

Now, initially, when you start out, banks may want 30%, 35% down. As you get more established, or if you have a partner on your deal that's established, you can get down to 25%. Ideally, you want to be at 20%. 15% is just unheard of, it's a bit of an anomaly, and it takes a great track record and a lot of years to get down to that level.

Once you establish that this is the lender I want to bring on as a partner for future deals, go there and open a deposit account; whether you use it as your primary account or not doesn't matter. Just park some money, so that when you interact with that lender, you are now an existing customer. When they bring the loan in front of the board, you're being sold as this is our customer, not just somebody that wants a loan from us.

Another mistake I made was I assumed that smaller lenders would not have as robust of an online banking system as the big banks have giant IT departments have money to spend; the consumer experience will be much better. Not the case. When I signed up for this local account over 10 years ago, they had all the online banking very easy to use, great reporting features. And what's even better is the big bank I was with at the time had a daily deposit limit through mobile deposits; their daily limit was $1,000. And that doesn't work when you're depositing rent checks, some of which are well in excess of $1,000. So I called the local lender and I said "Any chance I can get a higher daily limit on mobile deposits?" They said "Sure. How about $10,000?" Perfect. Many years later, that $10,000 daily limit was a hindrance, because some checks that were over $10,000, I would have to drive to the bank, deposit through the drive-thru.

And shame on me for not asking, but I was at a local event hosted by this lender, and I was talking to the head of retail banking there. And I said "Any chance we can increase our daily mobile deposit limit?" And she said, "What are you at now?" I said $10,000. She said "Sure. What do you want, $100,000?" I'm like, "Oh my God, yeah. Let's do it." So again, for all of these years, I would have to drive checks to the bank if they were over $10,000, and now I can mobile-deposit anything. And I know for a fact a lot of big banks still have pretty strict limits on mobile deposits.

So speaking of events, a lot of these smaller lenders will host happy hours or customer appreciation dinners. Whatever they do, try to find out, get on their schedule, get on their marketing list, and attend those events, and you can meet the players in a more casual setting. The goal is to get to know the bank president, but more importantly, have them get to know you, so that when they present your deal, it's "Oh, this is Sally-so-and-so. She's a customer of ours, great track record. This is the loan that she's after." You want to stay relevant to the people that you interact with at that bank, and the people that are responsible for the loan approval process.

Another way to stand out is, if you've determined that this is a great lender, a great bank, start making introductions with friends of yours, family, and people at the bank. So they know that you've referred all of these new accounts to them, they know you've brought other people in, that have gotten loans from them. And whether it's residential loans or commercial loans, it still keeps you relevant to that lender, and they see you more as a partner as well.

And speaking of deposits, if you are just starting out this relationship with the lender, it may not be a bad idea to actually go into the bank to do your deposits. Let them see your face often, get to know the people behind the counters, and while you're there, ask if the loan officer that you deal with is available; just stop by, a quick hello will leave an impression with that person.

Best Ever listeners, you also need to understand that a lot of these loans will remain on the bank's books. They're called portfolio loans that often don't get sold. With multifamily there's Fannie and Freddie that can buy loans, they can sell a lot of these loans on secondary markets; you probably have experienced this with your primary home, if you've purchased one - you start out with Bank A, and within a few months, your loan is sold to another bank, and then that can get sold several more times. These are commodities, and there's a secondary market for residential multifamily loans. For commercial loans, there often is not a secondary market; the lender is keeping these on their books, which is important to know, because they are sharing the risk with you for as long as you have this loan. With a normal Fannie Freddie loan, as long as your loan meets all the criteria, it can be sold; the bank that originated your loan just made a lot of money on fees, they made money on the sale of the loan... But with commercial loans, it's on the bank's books, typically forever.

Once you have the loan and you have the property under contract, it's important to give your lender positive updates. They don't need to know when a tenant left or a lease was broken, but if you buy a half vacant property, let them know every time you sign a lease, just a quick email, and let them know you're making forward progress. Because at the end of the day, this loan is still the responsibility of your loan officers. And if you default on that loan, it's a ding on them. So I would imagine it helps them sleep better, knowing that they've made good choices in lending you for a particular property, and they know that you're managing it well.

So Best Ever listeners, let's recap a little bit. A lot of our commercial loans that we do, big banks just won't touch. You want to establish that lending relationship with local lenders. Again, somebody close to your house, if possible. And if your properties or your market is somewhere different, somewhere close to your investment properties. Cultivate that relationship with the local lenders, get to know all of the people that are there, understand how their loan approval process works. Find out if there's a particular niche that they really like... But most importantly, Best Ever listeners, make sure you treat your lenders as strategic partners. They are instrumental to the success of your commercial real estate investing.

Best Ever listeners, I hope I was able to add some value and teach you some of the inner workings of how commercial loans get done, and especially value-add deals or smaller deals. Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five star review, share the podcast with someone who you think can benefit from it. Also, follow, subscribe and have a best ever day!

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