Finance Roll

Lenders will check the past two years of Profit-and-Loss Statements, plus the year-to-date one. They'll examine the current Rent Roll and will inspect the exterior and interior of the property. (At first it's just a visual inspection. If they decide to get serious with the deal, they'll send out their own property inspector.)

The great thing about commercial real estate is that much the lending decision rests on the merits of the property and not on your own financial statement. In addition, they'll want a schedule of real estate owned, and will check your credit history.

The next step will be for the lender to send you a Term Sheet. This is between 5 and 30 pages long, explaining the terms of the deal. It indicates whether the deal is Recourse or Non-recourse. Recourse means you are personally liable for the debt, and non-recourse means you are not. The tradeoff is that non-recourse financing often comes with burdensome prepayment penalties. That's okay if you plan to hold the deal for an extended period.

Tip: Investors usually don't realize that the Term Sheet is negotiable. Even though it comes printed on official letterhead, you don't have to take what they give you.

If your deal is good enough (where did we see that point before?), there will be other lenders who would LOVE to do business with you. If there is something in the Term Sheet that you would like to change, call the lender and start negotiating.

If you're not comfortable negotiating the first time out, then have your attorney do it and listen in on the call. Attorneys who specialize in real estate are well-versed in negotiating Term Sheets.

One key negotiating point is the amount of money that the lender will require up front to start the process. It is likely to be between $7,000 and $25,000. For example, one lender wanted $95,000 from a client of mine and he got it down to $9,000. Part of this up-front money is for the costs that lenders incur at this stage. These include reports from the third parties who are doing the appraisal, the environmental study/ies and the property inspection. Make sure the lender orders the appraisal.

The lender will not start the process until the initial fee is paid and a copy of the Purchase and Sale (P&S) Agreement, signed by both parties, is submitted. Why? Because it's not a deal until both parties sign the P&S Agreement.

Someone at the lender's office now gathers up all these reports from you and the lender's own experts, and sends a package to the lender's underwriting unit. That's where they decide whether to do your deal or not.

It is at this stage that you can improve your chances immensely.

How? By creating your presentation to the underwriter. Of course you will not be in the room when your deal is formally discussed, nor are you likely to meet the underwriter, that's all the more reason to prepare a package that can be in the room, and can do all the talking for you.

The reason behind this is to present your deal in such a way that it answers every question that might be on the underwriter's mind, even before it is asked.

You do this by presenting an overwhelming amount of information about yourself and the deal.