My Commercial Loan Story. (x-post from r/legaladvice)
Ok. I'm at my wits end and I don't know what else to do (wall of text incoming): Here goes...7 months ago, my girlfriend and I decided to do something drastic and bold. It involved purchasing a commercial property to own and operate. It is a dream of mine. We set upon the long and arduous path to making the dream come to life. We decided that if at any point it didn't make sense anymore, financially or otherwise, we'd move on. However, the more we looked into it, the more it made perfect sense. After extensive negotiations and putting 5k down in nonrefundable earnest money, I got it under contract.

So, a commercial lender was in order. I did a lot of research and spoke to a lot of banks before settling on my lender and his bank (when I refer to lender going forward -- it is my contact at the bank and his assistant). The loan was an SBA 7(a) loan, so it included the building, land, construction, equipment, inventory and working capital. I submitted my business plan to my lender back in August. It felt a bit rushed to me and I thought I could have done a little better, but I was still confident the project spoke for itself and my business plan was better than most. The lender got back to me with "REALLY good business plan. The business plan will be the reason it is approved."

I commenced doing all my due diligence. The business is quite complex. Not only is it 7 hours away, but the building is over 100 years old and the amount of due diligence required was immense. I told myself, as long as their are no major issues, we will move forward. During this time, I organized my business team and my core operating team (my girlfriend, myself and one very experienced 3rd member). I retained counsel. I got a new CPA. I began the concurrent liquor license process and paid for it. I paid for a commercial inspection. I paid for a structural engineer to view it twice and an electrician once. I made the long trip several times. This was adding up to a bit of money and a lot of time, but my lender was confident and any $ spent would go towards my down payment.

Meanwhile, the underwriters at my lenders bank started raking me over the coals for "credit enhancements". They would say one thing would do it and then after I secured that enhancement, they would require another. It was difficult and frustrating, but I never thought this would be easy. I caved on one last "credit enhancement" and the lender said it was a done deal.....except nothing happened. After waiting about 5 weeks and getting minimal answers as to why, I finally got a loan commitment on 10/25 (this could be important later). Final components consisted of my down payment (nearly every cent I have), an equity investment by another party, my mom also being a guarantor, and some seller carry on 2 years standby -- all for a total project cost of well over a million dollars.

Once the commitment letter came through, I cried tears of joy and started really planning and telling friends and family. My lender intimated it's just a matter of time now. I paid the bank a check for $10k for survey, environmental report, commercial appraisal and whatever else they needed to check on their end. I proceeded to pay my lawyer for setting up my LLCs, my operating agreements, and a myriad of other expenses. I also drove down another couple times (once with my lender -- good sign) to organize with my GC and handle other odds and ends. I set up property insurance and life insurance. Every step of the way, I requested reassurance from the lender that this was a sure thing. "Nothing will kill this", he said. Things were looking good. One month in and I was told the environmental report and survey were taken care of.....then, things slowed waaaay down and getting answers was difficult again. Closing dates got moved and moved again -- for each closing date, I would consult with the lender and he would confirm the date was realistic. So, when a closing date would approach, my team and I would get even more ready and dialed in...only to hear we are not there yet. I remained driven and worked on design elements, securing the equity investment, strategic partnerships, and about a million other things. My girlfriend even took some relevant and applicable classes.

This is where things start to get weird: There's only 2 things left to do by the bank -- have it appraised and get SBA approval. The appraisal that was ordered and taken care of in early December starts taking a really long time to get received by my lender from his bank. Seems weird to my buyer's agent, but what do I know. A couple days before Christmas, I get notification that the SBA has declined my project and they list a couple of reasons. Of important note here is that my lender has repeatedly said the SBA approval is merely a formality and he has went 20 years working with the SBA and has never been declined. Woah, I'm a bit shocked, but I look at the reasons and they are really just a slap in the face. Whoever read it clearly did not read the full business plan. My lender agrees. This is OK, I say. We shall appeal this decision and my lender agrees with me. I spend 30hrs and 60 pages leaving absolutely no doubt that their "concerns" are more than covered. I'm a bit nervous, but very confident that if a rational person reads this, it will be a successful appeal. My lender agrees with me. I'm now very delayed though. What was supposed to be a November closing is pushing well into January. The biggest problem for me is that my girlfriend and I are now living on my credit cards and we have moved out of our apartment. It'll all be better once we close, I think. In fact, I can't wait!!

A few days ago, I get an email saying the bank is refusing to appeal the decision of the SBA. What The Fuck!!. We are left completely hung out to dry! I am now over $35k deep into the project for all the resources needed. This was all going to be used for the down payment and now it's gone?!?! In addition, I have driven the 7 hours back and forth 6 times. My girlfriend and the other core worker have quit their jobs (him to move across the country). My girlfriend and I have have moved out of our apartment and are staying at my moms to save money. My girlfriend and I have put in 7 months of 40+ hour work weeks and the 3rd member has designed a website and set up our social media (which I heavily promoted the day before I received the refusal email!!!). Lastly, my credit score has now dropped considerably and my Personal Financial statement is significantly worse off...so most likely no other banks will take this project on.

I spend a day completely unable to think straight. I wake up the next day more motivated than ever. This can't be real!! I reach out to my lender and after some non-responsiveness, I get ahold of him. He answers me after he's off work and is clearly a bit emotional and at a loss. He explains he doesn't understand anything. No clue why the SBA declined especially since they didn't read it. Really, really no clue why they won't appeal considering the depth we are into the project. It is literally the last step and to have no regard for the lives and time and money of the people involved is absolutely heartless. At least appeal the decision. He also keeps throwing in something about the fact that he never received the results of the appraisal and how that is very concerning. That part doesn't bother me as much because it's probably just on a desk somewhere. He gives me his boss's number (says he's never done this) and we devise a plan for me to sweeten the deal, re-do the business plan (it is a substantially different plan than the one I submitted in August -- way more locked in) and go have a face to face with him -- I have not called yet.

The next day, I text my lender to have his assistant check up on the appraisal. "My assistant is not involved in the appraisal process and has no knowledge thereof." Oh yeah, the bank handles that so it remains objective -- I remember that. Wait a minute!....I have a Kaizer Soze moment. I text him, "Woah. Now I understand why that is so weird." He texts back "Yup"....The bank has the appraisal and is purposely not giving it to my lender! The bank was never gonna let this go through! What was up to my lender to do after the commitment letter?? Let's see, everything up until the appraisal! So, starting in early December: the bank withheld the appraisal -- that I paid for, had the SBA decline it (???), and then refused to appeal even though the SBA concerns were unfounded!!!! At best, the deal was done in early December and at worst, it was never a deal at all. Kaizer Soze

That brings this up to date. What can I do??. I am reaching out for any kind of insight for how I can proceed. I still plan to try and meet with the head manager to plead my case (if he takes my call and agrees to meet -- big if). But, if this is killed and it doesn't matter what I say or do, this can't be right. This is in Colorado, btw.

Speculation: I had a couple drinks with my lender when he came to see the building a couple months ago. He mentioned at that point that the reason it took so long to get the loan commitment (5 weeks) was that everyone loved the project, but the manager's son...who happens to have his job because of nepotism and doesn't know anything about banking (according to my lender). My lender said he had to push it past him or wait until he left for vacation or something. So, either the loan got pushed past him or someone else and it was never gonna go through. Or possibly, the appraisal came back very high and a banker decided they wanted this project for their nephew or something. I really don't know.

**tl;dr 3+ people spent 7 months working on a project and became increasingly more and more involved because of indications from a lender and bank. 2 people quit their jobs. 2 people moved. $35k+ was spent that could only be used for a down payment or it's lost. Social media, websites, partnerships, sub-contractors, etc. were all set up. At the 11th hour, the deal was nixed for seemingly no reason. The information I have makes it look extremely fishy. It may have never been a deal at all and was, at the least, sabotaged over a month ago while we remained diligently at work. The thing is, we've gone too far and cannot turn back now. We are up shit creek without a paddle...and the boat is now on fire.**

Edit #1: Sabotaged is probably too harsh of wording. The commitment letter was given in false confidence (or something along those lines). Also, I paid for an appraisal that was executed and I never received the results despite many attempts by both myself and the lender (my bank contact).

Edit #2: There might be some confusion here. The most important part of the process is the bank's approval and their rating with the SBA. The higher 
their rating, the less the SBA even look at the project. Top rated banks don't even have to have the SBA review it at all. My lender was a bit skeptical the bank would give a loan commitment, but not in slightest bit worried about the SBA approval if the bank had already approved it. The bank loans the money. The SBA merely guarantees part of it.
[{"id": "dcel4go", "text": "I'm not reading your ramblings but the gist of it is this is your first ho at commercial financing and it sounds like you tried your best plus get the right team but at the end of the day you're not getting this loan and you'll do better next stab at financing.  This is why we go for more savvier sponsors and not dealing with first timers.  Source, former commercial real estate financing underwriter analyst ", "replies": [{"id": "dcelbyf", "text": "Wow! You just summed up why I didn't get the loan. The underwriters didn't bother to read the business plan.", "replies": [{"id": "dcemabs", "text": "Business plan anyone can write that up.  Try again", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dcete69", "text": "Ask the Seller to give you financing.  Even if for 1-2 years. Try other lenders. \n\nWhy are your so committed to one lender?", "replies": [{"id": "dcf438u", "text": "particularly one that seems to be tripping all over its own dick..... ", "replies": [], "depth": 2}, {"id": "dcfbfnp", "text": "This is indeed my current plan. He already committed to 100k of seller carry at a lower rate than my loan anyways. I'm going to be on the phone to many more lenders on Monday. I guess I was so committed because he was so confident in me and it's my first time...bad move. One problem with seller carry though is the building cost is only half of the total project cost as it needs a lot of construction and renovation.", "replies": [], "depth": 2}], "depth": 1}, {"id": "dcf0asy", "text": "You need a mortgage broker. You need someone who has a better handle on the process and can keep your bank honest through that process and pivot if there are hiccups. \n\nThe SBA is attractive because of 90% leverage but there are plenty of conventional lenders who can get to 80%. You need to explore other banks while you simultaneously work with a qualified SBA lender who can approve SBA deals without needing to actually go to the SBA. \n\nYou will be delayed but all is not lost (at least based on what you wrote). I'm a mortgage broker. PM me and I'd be happy to jump on a call to try to help. ", "replies": [{"id": "dcfannb", "text": "A broker is not what he needs. He needs to work directly with a bank who is a PLP preferred SBA lender. For one thing, they know the difference between an SBA 504 loan, and an SBA 7a loan. They will be able approve the loan in-house, without needing SBA approval. This shortens the process by about 30 days.\n\nOP - when you refer to your \"lender\". You should be referring to the bank, not a broker.  That's how these amateur circuses happen. Get your appraisal,  somewhere there is a copy of it specifically for you.  Bad news is that a different bank may not be able to use it and may require a new one from their list of approved appraisers.  All other project costs you've already incurred should still be able to go towards your equity.", "replies": [{"id": "dcfbl9j", "text": "I was working directly with the bank. My \"lender\" was the bank and not a broker. He does SBA 7(a) loans only and only through his bank. He actually has a great deal of experience with SBA loans and certainly knows the difference between 7(a) and 504 loans, but he fucked this up with the way he interacted with me.", "replies": [{"id": "dcfc4h9", "text": "Okay good.  The 504 vs 7a remark was a reply to the post above me about the 90% leverage. He shouldn't be offering his assistance without knowing what a 7a loan is. \n\nA bank with a 20 year SBA loan program should not be having to get SBA approval for their 7a loans. I would cut bait with this bank and take my appraisal around to other banks that are PLP certified with the SBA. You may need a new appraisal,  but someone may be able to still use it.  ", "replies": [{"id": "dcfcuvg", "text": "Sorry, my contact at the bank (not the bank itself) has 20 years of SBA experience. I will be pushing this project heavily to every SBA bank in the state starting this coming week.", "replies": [{"id": "dcfddat", "text": "Make sure you get your appraisal.  Have invoices for your costs to date. Ask about PLP status of the bank. [More info here](https://www.sba.gov/offices/headquarters/oca/resources/14829)", "replies": [{"id": "dcfdkx9", "text": "Thank You!", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dcf6fhp", "text": "commercial lender here. this reeks of amateur hour by your lender. he should have been able to take one look at your plan and tell you it wouldn't happen. this is what makes a good commercial lender. any noob can string you along for months and thousands of dollars hoping the deal will past muster with underwriting. the good ones know this up front and will tell you point blank. the bad ones don't give a shit and will throw anything against the wall to see if it sticks. your lender was feeding you bullshit the whole time. if he's been in the business for 20 years, he knows the ropes and could smell trouble at the first hint of delay. of course, what does it hurt him to keep pushing the the deal? worst case scenario you're out some time and money but no sweat off his back. \n\nbased on what you've explained above, this loan should never have gone commercial to begin with. commercial financing is not for first time deals, speculative deals, start-ups or anything like that. you should have pursued personal financing and just lent the money to your business instead. it's much easier to secure personal financing based on your home or other assets than try and obtain a commercial loan on your first deal. if you don't have personal assets sufficient to do this, you're not ready to go commercial. \n\nspend some time buying SFR and renting them out like so many others. that's a much more reasonable way to build your assets and portfolio to break into commercial. swinging for the fences on your first go, using up all your assets and cash to make this happen only speaks to your inexperience and lack of risk management skills. no commercial lender wants to lend to someone that can't make these type of judgement calls with their own money.", "replies": [{"id": "dcfbxyq", "text": "He took one look and said it would happen. I understand your third paragraph, but my team is very educated and we were literally going to live in the building working all hours of the day. I have a background in business and I know it was risky, but I am a driven entrepreneur who refuses to fail.", "replies": [{"id": "dcfez35", "text": "&gt; we were literally going to live in the building working all hours of the day\n\nhuge red flag here. no commercial lender wants their borrowers occupying their business collateral as a primary residence. this is not how a business operates. if you go out of business, a lender needs to look at the sustainability of another owner coming along and being able to operate it with similar amounts of debt and risk. \n\nyou can take all the risk and cut all the corners you want with your own money. but we aren't talking about your money here, we're talking about the bank's. they don't want to know that the only way this plan works is by you putting everything you have on the line. this is incredibly risky and isn't sustainable. your plan rests too much on putting all your eggs in this one basket. that's why this isn't a good candidate for a commercial loan. \n\ncommercial loans aren't based on \"i have a dream\" type of plans that require the owners/operators to sink everything they have into making it work. we want to know you have options, and fall back plans. what happens if you hit hard times, can't make your revenue goals and your business suffers a sharp decline in NOI? how are you going to make this right? what confidence does the lender have that you can make debt service in a sustained down market? based on what you've posted above, you have no reserves to lean on in hard times. no reasonable lender would look at this plan and approve it. \n\nit sounds like you negotiated a good deal on a commercial property and are trying to make it work without having the capital to back it up. the reason you're getting a good deal is probably because the building lacks tenants. a good commercial loan has the ability to make debt service regardless of the owner's personal income situation. they have a history of recurring income coming from a variety (multi-tenant ftw) of sources and a history of operating at an NOI sufficient to cover at least 120% your debt service. it sounds like you're looking at an empty building that relies on you being the primary source of income after you get your startup business up and running. this screams run to any seasoned commercial lender.\n\nedit: just something else to consider; a good lender will give you a quick no and a long yes the others will give you a quick yes and a long no.", "replies": [{"id": "dcffjku", "text": "It is an extremely large building and one of it's uses is as a hotel. Living there is always where the manager will be. I was going to move out after learning everything and securing it's future.\n\nThe building was once an extremely prominent building. It has been dormant for 30 years now. The town has seen an incredible recent economic development. The current owner is in his 70s.\n\nThe 3 initial members will be the primary source of income. One of which is also co-owner and co-operator and has extensive experience in this niche industry.", "replies": [{"id": "dcfg4hj", "text": "that's actually worse than what i had in mind. hospitality is tough to begin with. start up hospitality in a dilapidated building (over 30 years, yikes!!) with no in-place cash flow from another business to support it, and guarantors with the bare minimum capital to close on the real estate (not to mention anything about the primary tenant's start-up costs) is not gonna fly anywhere. \n\ni'm not trying to beat you up here, i'm just trying to be realistic with you. your plan isn't remotely close to meeting the minimum requirements of any commercial loan program i've ever heard of. i don't even know of any hard money lenders that would give this consideration. the sooner you cut your losses and move on the better. \n\nedit; actually there is one option you might have. as mentioned elsewhere, seller financing is probably they only way this gets done.\n\nedit; so as not just be a negative nancy, if i had to do the deal, i might look something like this: 50% LTV, 6.5% fixed on a 3/20 amort, full debt service in escrow, full repair reserves (based on PCA) in escrow, full recourse on all owners and primary tenant (assuming its a closely related entity). the key being you have to bring a lot of cash to the table before this starts to make sense.", "replies": [{"id": "dcfjlvd", "text": "*one of it's uses is as a hotel. Hotel is not the main revenue generator. Although it is one of the 4 revenue streams. You are looking at this through the eyes of a commercial lender at a non-SBA bank. With an SBA loan, which we do qualify for based on what they require, we will have construction covered and the building will no longer be dilapidated. Just because it hasn't been used for what I intend to use it for, doesn't mean it hasn't been used. It is technically a turn-key hotel right now. I have larger plans. Also, I intentionally made that post make me seem a little helpless with no other plans. It was a \"story\" to see if I could get legal recourse if my bank fucked me.\n\nIn fact, the business plan is being updated currently, I can raise more capital and get more seller carry, and every SBA bank in the state will hear from us this week. Also, my credit score is still very high. I remain very confident in the project as long as the owner will let us work it out.", "replies": [{"id": "dcfl8uz", "text": "You need a lender with hospitality experience.  I'm dealing with this right now with a client who is trying to purchase his first hotel.  He wanted to use a lender he had previously had an SBA loan through.  They looked over the deal, which is priced very well with a strong DCR and stable cash flows and declined lending on it.  Most banks do not have the experience or knowledge of hospitality underwriting to be able to identify a good loan.\n\nSource: I sell hotels. ", "replies": [{"id": "dcfmat7", "text": "Cool. I'll keep that in mind on the search.", "replies": [], "depth": 8}, {"id": "dcjonua", "text": "As a newer CRE analyst we hold something like 5 billion in hotel debt.\n\nWho would be the hotel operator? \n\nIf you're financing the rehab, whos the GC and what's their experience?\n\nIf those two items aren't top tier partners, we would be passing. ", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "dchvaok", "text": "Just trying to wrap my hear around this, you are saying the loan \"should have never gone commercial\"...what do you mean by that?\n\nWasn't OP pursuing an SBA loan?", "replies": [], "depth": 2}], "depth": 1}, {"id": "dcfa8s3", "text": "&gt;Edit #2: There might be some confusion here. The most important part of the process is the bank's approval and their rating with the SBA. The higher their rating, the less the SBA even look at the project. Top rated banks don't even have to have the SBA review it at all. My lender was a bit skeptical the bank would give a loan commitment, but not in slightest bit worried about the SBA approval if the bank had already approved it. The bank loans the money. The SBA merely guarantees part of it.\n\nHas anyone else ever heard of this?  Every SBA loan I have done (both 7a and 504) needs SBA sign off and I primarily work with big banks (Wells, BofA, etc...).  I hate to say this, because you have invested so much into this, but a 7a loan for a startup is really really rare.  \n\nAs I broker, I cannot help a group looking for an SBA loan with less than 2 years of operating expenses that show the business cash flows and can afford the loan payment.  I know it won't be approved (unless there is huge money backing it, and even then you have to be really careful).\n\nIf you want to pursue this you will likely be better off going outside of the SBA to either the seller as /u/Liveyo mentioned or conventional financing (which will require more down).  Alternately, if you have a partner with an amazing financial statement, I have seen one group pursue an equity line that was backed (guaranteed) by the partner's balance sheet.\n\nBest of luck with whatever you choose to do.", "replies": [{"id": "dcfbhzt", "text": "Yes,  a PLP lender can approve without SBA review. ", "replies": [], "depth": 2}, {"id": "dcfc7sq", "text": "I know it is rare, but, once again, my lender was extremely confident. I thought I had gotten lucky with a good bank. I did have some relevant data as the building had previously been used for the purpose I was going to use it for...just not since the early 90s. However, I had very recent data for operating expenses because the building is still in use, but not for the way I was going to use it. I used conservative COGS calculations to calculate the unknown expenses.", "replies": [], "depth": 2}, {"id": "dcjqul1", "text": "I was an SBA underwriter for a regional bank. When the SBA had the door open for startups which it does from time to time, it's up to bank credit policy to determine if they are going to allow startup deals. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "dcjr8hv", "text": "I don't understand why they can't talk to you about the appraisal. You should have signed something when you paid for it up front regarding who owns the appraisal, what rights you have regarding review, timing, etc.   \n\nIf you are purchasing an existing business, why is this being considered a startup venture? Are you completely changing the use of the property and the nature of the business? If so, what is the new business? Could it be ineligible for SBA financing? ", "replies": [], "depth": 1}]