Negotiating With A Lender

The Real Estate Espresso Podcast

Negotiating With A Lender

Spotify Google Podcast Apple Podcast Subscribe via RSS Leave a Review

Welcome to the Real Estate ~~Express~~ 📝Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about negotiating with a lender. We have a loan application in process that’s taken much longer to finalize than promised. We went through several weeks of radio silence from the lender. The situation was so concerning that our broker was advising us that the lender could not be counted on to perform.

Now, it often happens that a project has complexity associated with it. The lender puts the data room into underwriting, and what comes out the other ~~is~~ 📝end is sometimes surprising. Surprises at this stage are usually not good surprises. Terms of closing can differ significantly from the terms offered in the term sheet that was signed.

And this is where it’s important to ask questions.

Why did you reduce the loan amount? Why did you increase the interest rate? Why did you increase the loan interest reserve to such a high level? Why are you requiring now personal guarantees instead of a corporate guarantee?

It’s through this process that you can gain an understanding of how the lender is looking at the project.

We have a file in front of a lender right now that has experienced several misunderstandings. We were using a shared data room with all of the files associated with the project and the borrower. At one point in the process, the link to the data room wasn’t working. The link was repaired within a matter of minutes, but the lender didn’t see the repair and assumed they had all of the data, so they underwrote the loan using incomplete information.

We had no knowledge of that. That fact alone meant there were numerous assumptions about the project that were incorrect. The loan changed from a non-recourse loan with a corporate guarantee to a full recourse loan with personal guarantees. The interest rate increased from an acceptable rate to an eye-watering rate in the teens.

What was the reason for the increase? What changed that now required personal guarantees?

Turns out, they didn’t see the balance sheet strength they were expecting from the borrower. Here again, the information was in the data room, but they didn’t see it, or perhaps didn’t understand what they were looking at. In the process of walking through the balance sheet strength of the project sponsors, the lender was able to get comfortable with the borrower group, and was committed to reviewing the borrower’s strength. Based on the new information, we felt confident that the loan terms would in fact be returned to the original quoted terms.

We’re often conditioned to think that the lender is to be treated with extreme reverence. What the lender says is the gospel, not to be questioned. While the lender can only underwrite what they understand. If they’re making assumptions about the file because they don’t fully understand it, then that analysis is going to be inaccurate, and the terms are going to be terrible.

In the case of this particular project, construction had already been started. We had not spent any of the contingency allowance in the budget. Specifically, the site work had been completed, concrete foundations had been poured. On that basis, we proposed the contingency budget could be cut in half, and still maintain a budgetary allowance for 10% of the remaining construction. That alone saves the project nearly half a million dollars.

The discussion with the lender can often feel adversarial, but in this case we treated the lender as a partner. We’re working together to establish a common understanding of the project and the risks. Is the lender being lazy? Maybe. But at the end of the day it doesn’t matter. All of the data they need is contained in the data room. If it’s a large file and they don’t necessarily know where to look, they need the help.

So they’re asking us to provide all of the invoices spent to date on the project, ~~add~~ 📝added up to a specific line item in the table of sources and uses. So we provided all the invoices, a second time, this time as an email attachment, even though all the files were fully contained in the lender’s data room. We also created a separate spreadsheet that shows the breakdown and answers their question.

Should we be nervous that they don’t understand the file deeply enough to do the math themselves? We think we’re being clear, but we don’t know. A large project with dozens of files can be overwhelming. Maybe the loan processor is accustomed to much simpler files where the loan is being initiated at the start of the project. After a project is started there’s a lot more documentation to verify and reconcile. ~~An~~ 📝And that complexity increases opportunity for confusion and misunderstanding.

So when we received an updated loan offer that was two and a half million dollars short, demanding higher interest payments and personal guarantees, it’s easy to have an emotional reaction. Instead we didn’t do any of that. We asked for clarification. We provided justification for why we thought our request was both reasonable and safe for the lender. Our communication was phrased in a way that demonstrated understanding of the need for the lender to mitigate their risk. And by showing the lender that we were working with them, and not arm-wrestling with them, we were able to get the loan terms back to where they needed to be.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

Stay connected and discover more about my work in real estate and by visiting and following me on various platforms: