5 Ways to Improve Your Loan Package

When trying to complete a commercial real estate (CRE) project, there are countless things you’ll need to consider. You might already have a firm plan in place regarding the type of property you want to purchase (or develop), where the property will be located, and how that property will generate future income. But, even from the very beginning, the most important question you ought to be asking yourself is how will this project be financed? 

Finding a better loan package will eventually lead to better financial outcomes. Looking for ways to lower the rate, increase liquidity, increase flexibility, or otherwise improve the capital stack will all continue to pay tangible dividends over time. Because CRE enterprises operate at such a large scale, even minor changes to the loan package can have lasting, compounding, effects. 

If you are looking for ways to improve your current CRE loan package, you are certainly not alone. The world of commercial real estate can be very difficult to navigate—especially if this is your first major financing project or you are pursuing the project entirely on your own. However, there is hope. Following any of the actions mentioned below can help improve your overall loan package. 

1. Work with a CRE-Finance Broker 

Financing a commercial real estate investment can often be very complicated, which is why working with a CRE (commercial real estate) finance broker can be extremely beneficial. A CRE broker will make it easy to explore a wide variety of different loans and financing options, ranging from the very simple to the very complicated. 

Hiring a broker, as opposed to trying to navigate the market entirely on your own, will make it much easier to directly access quality capital and also obtain a reasonable interest rate. These brokers are very familiar with the industry, are aware of all relevant rules and regulations (thus offering an additional layer of protection), and can help guide your loan from start to finish. They are constantly following new trends and developments within the broader commercial real estate industry and will gladly answer any of the questions you might have about CRE financing. 

2. Compare Multiple Different Loan Types 

As any CRE broker will surely tell you, not all commercial real estate financing options should be considered equal. In addition to the specific terms of each loan—the payment period, the payment structure (linear or weighted), interest rates, etc.—you’ll also want to consider the specific type of commercial real estate financing you are actively applying for. 

Are you looking for a fixed-rate loan? A bridge loan? A mezzanine loan? Something else? How you answer these specific questions will directly affect the lender you end up partnering with and the loans you consider applying for. Fortunately, an experienced CRE finance broker can help you easily understand the important differences between these loans. 

3. Diversify the Capital Stack 

The term “capital stack” is used to describe the many different types of financing that might be attached to a specific project. In commercial real estate, especially for much larger projects, it is very common for financing to come from many different locations. Trying to finance a project with a single loan or source might not be achievable or, even if it is, might result in you paying more in interest than is truly necessary. 

Combining multiple different types of loans within the capital stack can help you optimize the loan to meet your specific needs. The capital stack that makes the most sense for your firm will depend on the leverage you currently have available, your already-existing capital situation, your preferred investment timeline, and myriad other factors. Once again, it becomes easy to see that exploring many different options will help ensure you find the perfect financing fit. 

4. Issue Preferred Equity 

Preferred equity, according to Lincoln James Capital, “is typically utilized when a sponsor needs to close a financing gap and/or when the sponsor wants to reduce their leverage and increase their own liquidity.” Essentially, preferred equity functions very similarly to preferred stocks—issuing preferred equity entitles shareholders to a claim on the company’s balance sheet. 

Though preferred equity does mean you are forfeiting a portion of the ownership, it is a very effective method for raising additional capital. Preferred equity helps expand your pool of potential investors, enabling you to expand your offerings to individual investors, venture capitalists, other real estate developers, and numerous other parties. If you prefer liquidity and capital to having total control—and if you need to raise funds quickly—the issuing preferred equity might be a good idea. 

5. Maximize Leverage of Current Assets 

If your real estate development company (or investment fund) already has some capital available, then it might be able to leverage this capital in order to access even more. One common method of increasing your leverage is through the use of a CMBS. CMBS, which stands for commercial mortgage-backed securities, uses already-existing collateral in order to expand the capital stack. 

Collateral loans can be used for most types of commercial real estate investments, including multi-family homes, malls, office spaces, stores, and some industrial spaces. By being willing to risk more—which is, in essence, what issuing more leverage actually is—you can access greater amounts of capital or potentially lower the total cost of borrowing. Any current asset you have could, in theory, be used as leverage, but it still remains very important to understand the structural risks involved. 

Conclusion 

The quality and size of your loan package will directly affect whether your commercial real estate project is able to succeed. Any modifications to the loan package, for better or for worse, will ultimately be reflected on both your balance sheet and your income statement and, ultimately, directly impact your IRR. This is why taking the time to compare your options and work with a CRE finance broker is so fundamentally important. By doing just a little bit of extra work upfront, the efficacy of your loan package can significantly improve. 

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