Questions for lenders (and brokers)
Hi All,

I've been in the single family space for a while, and recently started working in CRE on the principal side (but not in acquisitions)

I'm looking to put together my first deal, and I have a couple of questions.



Any advice you could give would be much appreciated.



1) What are the general requirements for recourse/ non-recourse commercial loans? Min credit score? DCR? Debt yield? Other borrower requirements?



2) What’s the lowest balance that non-recourse is available?



3) Is there a net worth requirement for recourse/ non-recourse? If so, is there a way of overcoming this requirement? Will lenders consider the net worth of limited partners?



4) Do I need to get a “letter of intent to invest” first from potential equity partners before I begin shopping around for lenders?



5) How do investors generally show “proof of funds” prior to raising equity? These along with pre-approval letters are important in residential transactions- are they as important in commercial?



6) It’s my understanding that many commercial deals need to be assignable so that investors can buy the property with a newly formed entity (with newly raised capital). Do lenders/ owners/ brokers find this assignment clause problematic?



Thanks folks!
[{"id": "ef8f7h3", "text": "1. Credit score needs to typically be 680+. DSCR depends on the product type, but you will rarely see terms below 1.25x\n2. Lowest non-recourse loan amount is typically $1MM\n3. Yes, you typically need 10% of Loan Amount or 1 years' worth of debt service of Liquidity and at least the loan amount of Net Worth. This is not negotiable for the most part. If you're strapped for cash, you can take out a line of credit and count this as liquidity (retirement accounts are not considered liquid)\n4. Your borrowing entity and all investors should be all set up by the time you look for a lender. You typically will not engage a lender under you have wired your earnest money to the seller and have executed an LOI. You will need to finalize the ownership structure before you engage a lender and at the very least, before rate lock\n5. The only proof-of-funds the lender will care about is of the guarantor(s) and Key Principal(s)\n6. No, all commercial lenders are used to new entities buying the property. Plus, the mortgage will be paid off at the time of sale anyway (mortgage assignments are rare)\n\n&amp;#x200B;", "replies": [{"id": "ef9b1cu", "text": "Hey thank you very much for responding. \n\nIs the net worth requirement only for non-recourse loans?\n\nI know a local investor who recently bought a $40mm office and he definitely isn\u2019t worth ~25mm. \n\nI hear about developers/ jvs all the time where the general partner might only have 5% in the deal. Do they really always have a net worth in excess of the LTV?\n\nHow do you show proof of funds to a broker prior to getting your equity together? Do people send out LOIs before they figure out their equity?\n", "replies": [{"id": "ef9vg5w", "text": "I've done 150+ deals and proof of funds has been requested maybe 5% of the time.  \n\nYes I send out LOI's all the time without figuring out my equity but my personal situation is such that I can usually do them on my own without investors and I have some big fish partners that can do the deal by themselves.  If you're new to the business with a low net worth this will be much more difficult. \n\nSend me a PM if you have a real deal you want to talk about.  ", "replies": [{"id": "ef9wt0i", "text": "Thanks for the response.\n\nI don't have a deal right now, and am still looking at single family renos to grind up \"quick\" cash.\n\nAs I start to stack up experience in CRE, I'm going to want to make the switch eventually.\n\nI'm sitting around $500k net worth... 3/4th is liquid.\n\nI do have several potential capital partners with 7/8 figure net worth who are not in the industry/ retired. Trying to figure out how to utilize these connections/ come to them with a proposal... and most importantly, I want to make sure I'm as educated as possible about the process.\n\nCan you comment at all on net worth requirements of lenders?  \n\n\n&amp;#x200B;\n\n&amp;#x200B;", "replies": [{"id": "ef9xf06", "text": "If it were me - it sounds like you need a track record.  Putting your own money on the line for 100% of the first 3-4 deals and making bank will go a long way on selling the 4th or 5th deal to investors.  Be sure to do a one page summary on each deal after you do it, maybe signed by your accountant or something similar so that when you go to sell ideas to investors you have something to back up your words. ", "replies": [{"id": "efaavq3", "text": "Thanks for the advice. \n\nI think you're right-- and it'll certainly help me understand the process if I do it myself first. \n\nI have prepared summary sheets for my \"flips\" and will surely do the same.\n\n", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "efa6mhj", "text": "Net worth is going to be a requirement across the board and varies for each lender. You'll see NW requirements start at the loan amount for small deals, and decrease as the deals get bigger in size. So the guy who got a $40MM deal may have only needed 50% of the loan amount in NW if that makes sense. Depending in your sophistication, managers and GPs will have ownership ranging from 5% to 100%. If they do not meet NW/L requirements on their own, they can bring in another sponsor as a guarantor to fill the gap. NW/L is based on the sum of all of the guarantors and adding 1 or 2 guarantors for the sake of meeting the requirements is acceptable so long as they have some experience. \n\nI'm on the debt side of the business and don't really know how sellers want to see proof of funds. I imagine they take the earnest money after the LOI and assume all will close once the lender steps in. The responsibility ultimately lies in the buyer and the reputational impact of not having the cash ready at closing is enough to ensure buyers are forthcoming. \n\nI've worked on transactions where someone with your background jumped from condos to buying a 50-unit multifamily building in a complicates structure. I strongly recommend joining someone else and providing just the equity and learning from them before you take the role of manager, GP, or guarantor. It will make your first deal easier to close from a debt standpoint.", "replies": [{"id": "efabv0n", "text": "Thanks for the followup. I'm still not totally clear on this-again, I know several GPs who own/manage portfolios far in excess of their personal net worths... like 10-20x... Perhaps they do have co-guarantors that I'm not aware of. \n\n\nFortunately, I am building experience simply by doing my day job. I'm still new, but I've been working as a junior asset manager for a boutique repe for about 6 months now. I'm learning intimately how institutional level assets operate, and have stepped into the role of \"surrogate owner\" for a couple smaller properties. I just don't have a lot of experience with acquisitions/ the process of structuring a deal. But I'd imagine my experience/ future experience as an asset manager will play well with lenders?\n\nI do agree with your advice about joining someone else's partnership, or recruiting a co-sponsor with buying experience. \n\nThanks again!", "replies": [{"id": "efap48g", "text": "Lenders look at each deal in isolation, so while a borrowers portfolio may be huge, their net worth is only relative the the single deal that the lender is reviewing. Also, there's almost no way a portfolio is 10-20x someone's net worth, if so, they are not breaking out their equity and debt in relation to their ownership of each property.\n\nAsset Management is good experience. The most beneficial experience you can have in regards to ownership will be property management, so learn from your PMs as you're focusing on your job doing high level stuff.", "replies": [{"id": "efctuzb", "text": "&gt;Also, there's almost no way a portfolio is 10-20x someone's net worth, if so, they are not breaking out their equity and debt in relation to their ownership of each property.\n\nI've seen what I've seen, but maybe it's not the whole picture. Several boutique shops in my area have portfolios worth over $500 million, and every deal is set up as a syndication with the same GP... they're not funds/ reits and I highly doubt the principals have $150mm+ in net worth. \n\n\n&gt;Asset Management is good experience. The most beneficial experience you can have in regards to ownership will be property management, so learn from your PMs as you're focusing on your job doing high level stuff.\n\nGreat advice. I do strive to educate myself on major systems as much as I can.\n\n", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]