Commercial Mortgage Loan Process A step-by-step guideline for residential mortgage brokers This document will provide a topical

overview of the origination process. The document should be utilized as an operational guide that describes common industry practices and is not intended to imply specific rules or requirements. Origination practices, fees and quoting procedures vary among lenders. If you have a question regarding a specific lending practice, we advise you to contact the lender directly or call LendingApps at 1888-737-7012.
1. Sourcing Deal Flow Build your commercial pipeline a. Direct Sources i. Commercial Property Owners County/Municipal public record Internet listings ii. Develop relationships with Commercial Real Estate Brokers Pre-arrange financing for existing property listings Proactive meetings and representation at local Realtor functions b. Indirect Sources i. Internet listings ii. Local industry journals c. Potentially difficult issues use caution: i. Special-use properties (gas stations, golf courses, marinas, churches); properties wherein market value is determined/influenced by Going-Concern Value or Value-In-Use. ii. Deals that have been shopped usually an indication that underlying issues exist, causing the deal not to fund. iii. Co-brokered deals be aware of control issues; who can present and negotiate Loan Quotes or a Letter of Interest (LOI)? 2. Securing Your Fee a. It is in your best interest to secure a Fee Agreement between the Broker and the Borrower. Many lenders will request a copy of the signed Fee Agreement in order to protect the Brokers fee at closing. b. The Fee Agreement is generally between the Broker and the Property Owner (an individual). c. Fees range based upon the complexity of the deal, the time needed for proper analysis and securing loan quotes from lenders. Fee size is typically ranges from 0.50 point to two points, though can be higher for smaller deals (<$500,000) or more complicated or hard money deals d. Red Flags: i. Set and manage the borrowers expectations concerning fees. Virtually all borrowers, whether dealing directly with a bank or a mortgage broker, will pay a fee in points. ii. Beware of co-brokered deals. Adding layers of fees erodes the competitiveness of the loan. iii. Should you choose to send your deal to another broker, be prepared to split your fee, or be prepared to charge the borrower an additional fee?

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3. Gathering Information a. Meet with the Borrower. i. Have a list prepared of the information required to analyze and support the loan request. Use the LoanSizer software property worksheets or the property specific, printable applications included within BrokerPro Office as a guideline. The information contained within the property worksheets aids the underwriter in understanding the physical, financial and external issues with the property. This is important in determining replacement reserves, vacancy and other underwriting factors. ii. Additional, property level reporting documents, as indicated below, should always be acquired from either the borrower, the current owner (seller) or their accountant: Property operating statements and/or tax returns 1 A current rent roll and copies of lease abstracts Narrative explanation about the property for the creation of a brief executive summary describing the loan request Digital images of the property A signed fee agreement iii. Ascertain the borrowers desires regarding term, amortization, pre-payment penalty, fixed/variable interest rate sensitivity, and any other substantive issue that may impact the loan request. 4. Analyzing the Deal a. Work smart many deals will not have the financial merit to close. Prior to preparing a comprehensive financing package, obtain the necessary information from the borrower regarding the cash flows of the real estate, analyze market data regarding vacancy, market rents, expense ratios and overall market conditions. With this information, complete a cursory financial analysis to make certain the deal has sufficient financial merit to proceed. i. Determine Property Value using the Income Approach One of the primary means of determining a propertys investment value is the Direct Capitalization method. Direct Capitalization is the process of taking a propertys historic Net Cash Flow (NCF)* and factoring in a market Capitalization Rate (Cap Rate)2 to conclude its value as follows: If: Then: Net Cash Flow* = $100,000 & Market-driven Cap Rate3 = 10.0%

The Direct Capitalized Value = $1,000,000 $100,000 / 0.10 = $1,000,000

Lease Abstract Summary of pertinent lease data including: Tenant name, Suite #, Commencement & Expiration Dates, Square Footage, Base Rent, Rent Escalations, Expense Recoveries, Percentage Rent (Retail only), Subleases, Renewal / Termination Options, Tenant Allowances.

Capitalization Rate (Cap Rate) A factor representing the rate of return a property is expected to generate for investment purposes. A propertys Cap Rate = Net Operating Income (NOI) / Sale Price.
Conversely:

Sales Price = NOI / Cap Rate

3

Market Cap Rate Cap Rates as achieved in a market area based on current sales data.

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To the direct capitalized value, apply the Maximum LTV constraint (as recommended in LoanSizer) to estimate the maximum loan amount. If: Then: Direct Capitalized Value = $1,000,000 & Max LTV = 75% The Maximum Loan Amount = $750,000 $1,000,000 X .75 = $750,000 ii. Based upon this analysis, determine whether your assessment of the financials is in line with your clients. Discuss your preliminary findings with your client. b. Reconciling Property Value: If your client feels the value of the property is significantly different than your estimation using the direct capitalization approach, seek to understand the issues that may be affecting the buildings cash flow. Commonly misclassified expenses that will influence property value include: i. The inclusion of income and expenses that are not related specifically to the real estate (i.e. the inclusion of payroll for individual shop employees in a retail property. Shop employees are an expense of the shop owner leasing the space, not the real estate. Security personnel, however, are an expense of the real estate) ii. The inclusion of Tenant Improvements/Leasing Commissions (TI/LC), renovations or improvements that should be classified as Extraordinary Capital Expenses (i.e. new roof, new carpeting, new cabinetry). Capital Expenses, TIs and LCs are not deducted from Net Cash Flow (NCF) when using the Income Approach to Value. c. Red Flags: i. Are the clients expectations regarding the deal realistic? ii. Is the client prepared to pay fees when you provide a quote? Is there reluctance from the borrower to sign the Fee Agreement? iii. Are other parties involved in the deal that need to sign off before a deal can close?

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5. Originating the Loan a. Complete LoanSizer BrokerPro Software inputs i. Accurately calculate PGI ii. Normalize historic income and expenses - Adjust for any anomalies in prior years such as repairs associated with a burst water pipe (an item that would likely be reimbursed with insurance proceeds). iii. Apply property-specific underwriting parameters: Use the Underwriting Guide included in BrokerPro Office for ranges of input within industry standards. Any parameter entered that is outside of the standard range should be justified by adding a note. For example, the standard range for vacancy on a multifamily building is the greater of actual or market vacancy, typically 3% to 10%. If 2% were entered for the vacancy reserve, a note should be added stating, Vacancy has been underwritten at 2% as historic vacancy at the property has averaged 1.5% over the last 3 years. If no reason is offered for entering an underwriting parameter outside of the standard range, the lenders underwriter will likely change the figure back to one within the standard for purposes of sizing the loan amount. iv. Calculate Net Cash Flow (NCF) v. Using NCF, calculate the Direct Capitalized Value, maximum loan amount at Maximum LTV and maximum loan at Minimum DSCR (Debt Service Coverage 4 Ratio) . b. Sell the deal in the Executive Summary - The Executive Summary is your first opportunity to present the deal. You'll want to summarize the deal points, highlight the propertys good points, mitigate any negative points and give the reader a mental image of the real estate. The Executive summary should include: i. The Type of Loan youre Seeking: For example, A 10 yr., fixed rate loan in the amount of $850,000. ii. How the loan will be secured: For example: A newly constructed, low-rise, class B, office building located in a highly desirable area with historically low vacancy rates and little opportunity for new construction due to lack of available land. (Any good news should be highlighted in the Exec. Summary) iii. Any other strong selling points about the deal. For example: a high DSCR or a strong the tenant base, long term leases in place with solid tenants that are well established in their respective industries. Granted, no statements should be made that are not accurate. iv. Deal Weaknesses: For example: high vacancies should be mitigated with comments that give the lender comfort such as: "Although the property is currently only 85% occupied, the project still achieves a 1.30 DSC assuming an underwritten vacancy rate of 20%."

DSCR Debt Service Coverage Ratio The ratio of NCF to debt service payments. Minimum DSCRs are 1 of the standard terms used in commercial lending. For example, a DSCR requirement of 1.20 means a propertys underwritten NCF must be 120% of the debt service payment.

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You are trying to establish a relationship with these lenders and they'd like to know that you're on their team. Keep in mind that they want the business as much as you do and if you help them do their job by highlighting the strong points and mitigating the weak points, you'll be creating a lasting and profitable business relationship. Lenders always appreciate the broker or borrower that is forthcoming about any negative aspects a deal might have. Lenders know how to solve deal issues but they don't want to waste time with someone that's hiding information that could end up killing the deal down the road. c. Red Flags: i. If the lower of maximum loan at Max. LTV or Min. DSCR differs significantly from your clients expectations, discuss these issues with your client and agree to proceed or not to proceed.

d. Download a demo copy of LoanSizer BrokerPro at www.LendingApps.com 6. Finding Lenders a. Based on your analysis of the deal, determine whether a CMBS, Portfolio or Non-bank Lender is right for your client interest rates, terms and fees can be significantly different between each type of lender. b. Work only with the wholesale rep at each lending institution. The wholesale reps are usually not at the local-branch level and can be difficult to find. c. Most lenders do not require sign ups or broker packages, but will work with you if your loan request is packaged professionally and clearly identifies the key issues. d. Using LoanSizer BrokerPro Matching Engine, view which lenders of over 90 lenders have programs appropriate for your deal. e. Red Flags: i. If you are submitting to a new lender, determine if the lender a direct lender, a correspondent or another broker Does the lender fund from its own balance sheet or does the lender utilize a warehouse line? Is the lender licensed to lend in the state in which the property is located? ii. Carefully examine all transaction fees including origination, processing, underwriting, lender legal, doc prep, etc. Determine if you are required to pay a fee to the company or person that helped me find this lender? 7. Submit to Lenders a. Prepare loan package with LoanSizer BrokerPro b. The loan package should include: i. Clear and concise executive summary describing the deal points ii. Property and building information iii. Historical income and expenses iv. Underwriting results, presenting underwriting constraints and parameters used to determine loan amount 5 v. Current Rent Roll , including tenant name, leased area, start date, end date, etc. vi. TI/LC Analysis (for Office, Retail, Industrial, Mixed Use) vii. Photographs
Rent Roll Standard monthly property report in which vacant and occupied units/suites are listed with tenant detail including rent amount.
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Using LoanSizer Broker Pro, electronically submit your application to over 90 lenders nationwide. d. Lenders generally respond within 24 to 48 hours. e. Following your submission, contact the lender. It may not be beneficial to call the lender to discuss deal before the lender has the information, unless it is to determine if the lender has a program for your loan f. Red Flags: i. Is this lender responsive and interested? ii. Does the loan package represent the suggested underwriting and the main issues of the property to ensure a fast and accurate quote? 8. Reviewing Loan Quotes a. Be prepared to support your derivation of stabilized net cash flow, the underwriting parameters, and the main issues of the deal. b. Lender Underwriting & Loan Terms: The lender may return with a quote based on underwriting factors that are different from those you submitted. For example, the DSC requirement, interest rate, and replacement reserve requirement may be higher than as submitted at application depending on the lenders interpretation of deal risk. Be prepared to support your derivation of stabilized NCF, the underwriting parameters and the main issues of the deal. c. Interest Rate Components: Index & Spread: The Index represents the yield on a standard market security. The index chosen will correspond in length to that of loan term. For example, a 10 year loan would likely have as an index the 10 Year US Treasury. The spread is that amount over the index that includes the lenders profit, the lenders cost of doing business, servicing and issuer fees and potentially any additional points that may qualify the loan for securitization. In combination the Spread and Index = the Total Interest Rate. For Example: 230 over the 10-year T means a 230-basis point (or 2.3%) spread added to the Interest Rate Index, the 10-year US Treasury Bond. If the current yield on the 10year US Treasury is 4.05% and the spread is 230 basis points, the final note rate is 6.35% 4.05% +2.30% = 6.35% d. Loan Fees may include all or some of the following: i. Appraisal ii. Environmental iii. Legal iv. Underwriting/Administrative v. Processing vi. Origination Fee vii. Doc prep, recording fees, etc. e. Fees are generally paid at acceptance of the quote and/or at closing. Be cautious of lenders that ask for large fees going in to the transaction. Typically, fees at time of quote include origination fee, appraisal, engineering, environmental and credit.

c.

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f.

Because fee income commonly varies based on loan amount, larger loan amounts may receive preferential treatment because the profit potential is higher.

g. Recourse, non-recourse, or partial recourse? Generally, national lenders will securitize their loans. In securitizations, loans are commonly non-recourse meaning the borrower does not sign a personal guarantee and only the property is collateral for the loan. For smaller or more local deals, banks will often require recourse, or personal guarantees, from the borrower. i. Recourse: borrower signs a personal guarantee on the loan, in the event of foreclosure, the lender maintains the right to secure a lien against the borrower for any deficiency in loan amount if the lender is not made whole following the disposition of the asset. ii. Partial recourse: commonly applied when a property is unstabilized or in transition; the borrower will sign a personal guarantee that expires (or burns off) once a predetermined condition is met (e.g. once the occupancy reaches 85%). iii. Non-recourse: the borrower does not sign a personal guarantee; the property is the sole security for the loan. h. Red Flags: i. Understand if the quote is a soft quote or a firm quote. Soft quotes may change prior to funding. Beware of re-trading. ii. Was my assessment of the issues of the property in line with the lenders assessment and quote?

9. Closing a. Generally, your fee will be collected at closing by the lender; disbursement of your origination fee may occur following closing based upon the quote. When you are ready to start working on commercial mortgage loans, visit www.LendingApps.com for everything you need. We offer a complete training package to get you started, as well as our top selling BrokerPro Software to automate the entire process directly with the wholesale reps at over 90 direct commercial mortgage lenders for CMBS, Portfolio and Non-bank transactions. Lenders included ARCS, Arbor, Bear Stearns, CIT Group, Citibank, CNL, Column Financial, Comerica, LaSalle / ABN AMRO, Lehman Brothers, Morgan Stanley, M&T, Newman Financial, PNC, SunTrust, US Bank, Wachovia, Washington Mutual and Wells Fargo.

Download BrokerPro Software and try before you buy at www.LendingApps.com Or call 1-888-737-9977 ext. 7031 or 7037 for more information

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Purchase online at www.LendingApps.com or call 1-888-737-7012.

BrokerPro Software $1,100.00 Commercial mortgage loan origination software for mortgage brokers that automates the entire commercial mortgage loan process, including automated underwriting using the CMSA format, and electronic lender matching and submission. Installs on your computer. Purchase Includes: BrokerPro Software with Lender Interface Single-seat license (single user, one computer installation)) 1 Year of Lender Matching Engine (access to lender database) 1 Year of technical support & product updates After the first year, there is an annual fee of $500, which covers software maintenance & support.

ADD BrokerPro OFFICE + $400.00* Start-up package for mortgage brokers who are just starting commercial mortgage lending. Includes the following on CD ROM: 6 Origination Training Videos on 1 CD Rom (90 minutes) Underwriting Manual for Office, Retail, Industrial, Multifamily, Hotel, Self Storage, Mixed Use, and Healthcare properties (96 pages) Lead Sources and Marketing Materials including: Business Development Guide, Sample Ads Fee Agreement, Closing Cost worksheet, commercial mortgage interest rates and more (56 pages) Live loan support from commercial mortgage experts

ADD BrokerPro SBA OFFICE + $500.00* For mortgage brokers who want to offer business loans in addition to commercial mortgage loans. Includes the following on CD ROM: SBA Software: Guidelines for determining the types of commercial real estate loans [e.g., SBA, business, special purpose, mortgage, construction and bridge] (10 pages) Instructions for completing the SBA 7(a) and SBA 504 loan programs (50 pages) Electronic Forms required by SBA lenders for the SBA 7(a) and 504 loan programs (100 pages) SBA Closing Cost Electronic Worksheet (1 page) Searchable Database of Business & SBA Lenders and Contact Information (1,000+ Lenders) After the first year, an annual fee of $250 covers software maintenance & support. (Not Included: a full-version of Adobe Acrobat is required to use the forms)

ADD Second Seat + $295.00 Each additional seat after the initial two will be $500

* Office and/or SBA Office pricing is only available with the purchase of BrokerPro Software or BrokerProWeb. Individual retail pricing will be higher.

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