5 Steps to Choose the Right Type of Lender

For a variety of factors, the demand for commercial real estate properties (and corresponding capital) is currently booming. The combination of low interest rates, COVID-19 related government stimulus programs, and changing consumer demands has helped cause a variety of commercial properties to experience a notable increase in value. 

In response to these changes, the marketplace for commercial real estate has become increasingly competitive. According to estimates published by IBIS World, there are currently more than 2 million commercial real estate businesses operating in the United States alone. With the demand for commercial real estate investments continuing to grow, prospective investors are discovering a new range of opportunities. 

To remain competitive in this increasingly crowded space, it is crucial to have access to reliable, experienced lenders. Just as choosing the right lender can help ensure a project’s success, choosing the wrong lender can cause a project to fail. 

With many different lenders—and types of lenders—available to choose from, it can be difficult for aspiring commercial real estate (CRE) firms to know where to begin their search. Below, we will discuss five important steps to take when comparing different lenders. By taking the time to know your needs and do your research, your project will be one step closer to coming to fruition. 

1. Clearly Define your Project 

The CRE lender that is right for you, inevitably, will depend on the unique dynamics of your project. The more you can do to define the type of project you need to borrow for, the easier it will be to find a compatible lending partner. 

At the very least, be sure you can answer the following questions: 

  • What type of property are you hoping to acquire or develop? How intensive will this level of development be? 
  • Will this be a traditional investment property or will it be owner-occupied? 
  • Where is the property currently located? 
  • What level of leverage are you looking for? How much equity do you have to bring to closing? 
  • Do you plan to buy and hold the property or sell it within a short time frame? What is your current exit strategy? 
  • How much capital will you need in order to complete the project? What is your long-term financing plan? 
  • What is the current structure of your business? Do you plan on completing the project internally or contract essential partners? 

By being able to answer these questions, your first meeting with a potential CRE lender will likely be much more productive.  

2. Look for a Specialist 

Commercial real estate (CRE) is a very broad category. Essentially, any property that is purchased specifically for business purposes will fall within the broader CRE umbrella. 

There are six main classifications of commercial properties: office, retail, industrial, multi-family, land, and miscellaneous (a category that includes all other variations). As you might expect, the lender that is ideal for purchasing a multi-family property will not always be the one that is ideal for purchasing a high-risk industrial plant. 

Choosing a specialist that is familiar with the type(s) of property you need will make it much easier to navigate future challenges. Furthermore, you can also be a bit more confident with your lender, knowing they have helped guide comparable projects from start to finish before. 

3. Ask for Tangible Numbers 

The numbers shouldn’t be the only thing you care about when comparing lenders but having tangible numbers available certainly matters. Failing to do any quantitative analysis in advance will likely result in future liquidity, expense, or other financial issues. 

A few of the “hard numbers” you might want to see include: 

  • Experience: how long has the prospective lender been in business and how much experience does the lending team currently have? In a fast-moving industry, experience is often at a premium. 
  • Volume: at what volume does each prospective lender currently operate? How much are they lending per year and what sized loans do they typically issue? Keep in mind, the largest lender may not always be the best lender. 
  • Terms: what is the interest rate? Rate is not always the most important factor. Is there a prepayment penalty?  Will I have a balloon payment?  If so, does it match up to my short/long term goals?  What’s my amortization schedule? 
  • Communication: will you need to deal directly with the bank? How many programs does the bank currently offer? Poor communication structure is a pain point that can sometimes push potential investors away. 

Having tangible figures available will make it easier to not only compare different lenders but also compare the various different loans being offered by each prospective lending option. 

4. Speak with a Real Person 

In the digital era, many deals are completed entirely online. However, even with new technologies and platforms available, it is still a good idea to speak with a real person. 

Speaking with a real person will make it much easier to have your questions immediately answered. Additionally, you’ll be able to learn more about the prospective lenders’ values and whether or not they are trustworthy. A good lender is one that will care about things such as integrity, speed, and dedication—with many different CRE lenders available to choose from, there is never a need to settle for anything else. 

5. Making the Final Decision 

Though you are probably eager to get your CRE project financed and off the ground, it is still a good idea to compare several different options before making any final commitments. By spending just a few extra hours doing your research and exploring the entire spectrum of possible lenders, you may be able to secure the capital you need at a lower rate or find someone that has successfully completed comparable projects. 

Choosing a lender is one of the most important components of the commercial real estate process. It would be foolish to consider all lenders to be equally compatible. The type of lender that is right for your enterprise will depend on the type of property you hope to purchase or develop, your short and long term strategy, and your current capital structure. Still, as long as you can keep these crucial details in mind, you should be one step closer to finding the perfect fit. 

Conclusion 

Entering the competitive commercial real estate investment space can be challenging. Many prospective investors, while they might understand the market’s mechanics, do not enjoy the stress of dealing with lenders and having to continually reapply for different loans. 

At Lincoln James Capital, we help CRE investors and owner occupants find the ideal loans all while sitting on the same side of the “table” with our clients. Simply put, we put our clients’ interests first.  We have connections with lenders across the country, allowing you to explore many different possible financing options with limited amounts of effort. We work diligently to understand your current investment criteria and will help you find a financing solution that is compatible with your current preferences and constraints. We are happy to help you see your commercial real estate investment come to life, no matter how large or long-term your project might be. 

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