REQUIRED READING: The Fine Art Of Loan Negotiation

nancing of income property is most certainly not an exact science, and some assumptions can be misleading and costly. These basic assumptions and steps, however, are necessary in order to proceed with a loan negotiation: identify the parties to the transaction; evaluate the property in question and decide that it qualifies as security for the recommended loan; on at least a strong preliminary basis, evaluate the borrower's financial condition and credit standing, and believe it to qualify in relation to the loan being recommended; and determine that there are no obvious legal obstructions, such as usury or zoning violations, to the making of the loan in question. The art or function of negotiating and taking a loan application is most definitely a complicated undertaking, no matter how simple it may sound or how willing all parties may appear to be. With the above assumptions established, let us proceed to examine the preliminary steps that must be taken before formally negotiating with the borrower. First, determine the borrower's real objectives. This is the most important aspect of negotiating the application – and usually the most difficult. There are many factors that combine to create a loan, including the amount, rate, term, maturity, prepayment option and personal liability (or lack thereof). Obviously, in a world of negotiation and compromise, it is a rare borrower indeed who actually ends up with a loan that incorporates literally every factor desired on an optimum basis. It is, therefore, necessary to determine which factor or factors are most important in order to know where the borrower is most likely to be vulnerable in negotiations. For instance, a nonprofit corporate borrower does not deduct interest and, therefore, probably wants the lowest rate possible. An individual borrower with excess depreciation, on the other hand, may want to maximize cashflow. A borrower who plans to expand and refinance a property within five years will not wish to accept a prepayment clause that prohibits any prepayment of the loan during the first 10 years. We must also remember that even though they may be corporate entities from a legal standpoint, borrowers are individuals and, as such, are subject to all human frailties, such as ego, prejudice, love, hate and varying moral standards. These factors contribute to a borrower's real objective. A mortgage banker once almost failed to sign up an applicant on terms that were definitely market until he learned that the borrower had bragged at his country club and to his associates that he would obtain a lower rate. His pride would not let him accept the loan rate offered. The problem was resolved by offering the loan at the requested lower rate, but with a substantial discount that resulted in the lender's receiving the same yield as was anticipated in the original offering. Whenever possible, it is wise to spend sufficient time with the borrower and the borrower's associates to get to know and understand them. Keep abreast of market and political conditions that directly or indirectly affect the borrower and, most of all, stay alert to the borrower's attitudes, comments and responses. Doing so will enable you to identify their real objectives and will go a long way toward clarifying and solving the issues involved with taking the application. [b][i]Lender policy[/i][/b] Additionally, determine the lender's goals. This step is of almost identical importance to the borrower's objective and rates second only because it is somewhat easier to determine. Because the lender is usually an institution, many of its requirements are rather inflexibly set by law, practical competition or company policy. Barring market changes, a minimum acceptable yield is usually just that. Similarly, a percentage of assets that may be invested in certain types of securities cannot be exceeded. A set loan-to-value ratio may not be exceeded, although this is not entirely inflexible, because the valuation or appraisal of a security is not a science and is subject to human interpretation. It is important to stay in constant touch with the investor by mail, phone and personal contact, and to stay abreast of all conditions affecting the lender's industry to understand as completely as possible the set goals at the time of application. Maintaining contact is only half the job, however, and it is the easy half. A lending institution is run by individuals with their own likes and dislikes, their own feelings of security or insecurity, and their own interpretations of company policy, as well as reflections of company personality. Obviously, a knowledge of their attitudes is extremely important, if not essential, to successful negotiation of the application. It should be emphasized that institutional lenders vary greatly in the manner in which they wish to be approached, and ignorance of or deviation from their wishes and practices may cause your proposal to be effectively eliminated from serious consideration. Some lenders deal with relatively few representatives or correspondents. Others deal with a wider number of brokers, some handle their mortgage and real estate activities directly themselves, and many use a combination of these approaches. Some lenders prefer to be contacted by phone before a proposal is received, while others wish to see it in writing. Similarly, some welcome you to the home office, and others say, ‘Stay away.’ During any loan negotiation, once you have defined your borrower's objectives and determined your lender's goals, you are more than halfway to your goal. [i]Lorenzo Hills is co-founder and managing director of East Coast Commercial Finance, a commercial real estate finance company based in Charlotte, N.C. The company provides direct commercial lending, note sales and advisory services, and financing for commercial real estate construction. Hills can be contacted at (704) 332-6551, ext. 306, or


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