Choosing a lender can be a difficult task when you have multiple options. We often see clients focusing heavily on price and proceeds, sometimes to a fault. There are many other important, even critical, factors to consider when selecting a lending partner. We have been part of transactions where a client chose the more expensive option due to the importance of these factors. Principally among these considerations, we find execution, process, and personality to be of paramount importance. Within each of these categories, though, there is certainly more texture.
As the saying goes, “under promise and over deliver.” Unfortunately, some lenders missed this memo and regularly take the opposite approach. They gain interest from borrowers by flashing very attractive terms, but those terms come with a less than desirable probability of close. I would have to say that probably the single most important factor when considering a lender is their ability to execute.
Execution itself is not enough, however. Say you’re in a situation where a bank appraisal has left you high and dry. Now you are staring down a close date only four weeks away and you need someone who can not only execute, but execute quickly. Speed becomes a crucial factor in some situations, but we all know that time is money in this game so I would argue that working with a speedy and efficient lender is always in your best interest. Knowing a partner can close quick when needed is important; the groups that can work under tight deadlines can always work under longer ones.
Another adage is “always do what you say you’ll do.” We recently closed a permanent loan for which we had two primary contenders to select from, both of whom were solid choices. However, feedback from the market was that one has an impeccable reputation for not re-trading deals. During closing, the capital markets were in flux with treasuries moving all over the place and delays from the borrower. Nonetheless, the terms stated on the LOI were the terms we closed on. Keeping your word, or rather working with a lender with a reputation for not re-trading deals, is incredibly valuable.
Do you know the approval process and closing process for the lender you’re about to sign terms with? Maybe you should ask. Some lenders have already gained credit approval before issuing an LOI while others wait until after securing a signed LOI to go before credit committee. This makes a huge difference in terms of timeline. Key questions for a prospective lender may include how long will it take to get credit approval and what is the probability of outcome. Additionally, lender support teams with strong loan processors and closers are essential to an efficient and effective close.
As a part of process, it’s important to know what due diligence and third party reporting the lender may require, and crucial among these is the appraisal. Some bridge lenders might allow for a post close appraisal making this less of a hurdle to close. However, most borrowers know to hold their breath for a bank appraisal. It’s important to explore options with your lender, as some (such as CMBS) have some influence over selection of the appraiser while others do not. This can lead to vastly different outcomes.
Nothing can slow down processing a loan close like documentation. It’s unavoidable, but knowing the details can save time and money. For example, are the loan documents essentially boiler plate and relatively rigid (as typical of laser pro forms used by many banks)? How extensive is the documentation? For situations where the borrower needs an expedited close, this can be problematic. Detailed loan documents, such as those common in the CMBS world, can be costly and burdensome for borrowers and their counsel to review.
One of the advantages of working with a group like ours is that we know the reputation of various lenders. Two terms sheets from two different lenders with the exact same terms are not equal. You have different firm cultures and loan officers standing on either side. Pay close attention to the reputation of a prospective lender. How much value do they place on the relationship? How have they treated other borrowers, especially when things go bad? Anybody can be a nice guy when things go well, but how about in the worst of times? Always seek to do business with those of the utmost integrity, which will go much further than a few basis points.
Additionally, know your loan officer. Issues can come up on any deal so it’s important to find someone who is easy to work with and communicates clearly. Loan officers with the ability to work through problems have always impressed us. Too many times a lender’s risk aversion causes them to not entertain solutions and a problem becomes a non-starter. Engaging someone who will work with you to find a creative solution is critical. Also, ask if your loan officer manages the loan post close; if issues arise after the fact, you want to know who you’ll be dealing with.
Cheapest doesn’t always mean best. We all want to identify the best deal we can, but we don’t want to do that at the mercy of these other critical factors. One of the ways we help our clients is to marry the most optimal financial terms with the strongest and most respected lenders we know. Beyond price and proceeds, I encourage you to consider execution risk, speed, and likelihood of a re-trade. For process, understand the approval and closing as well as due diligence and documentation requirements. Lastly, know your lender’s reputation and the people standing behind the terms. Integrity and creativity are essential qualities in a great lending partner.