Understanding Large-Scale Commercial Mortgage Financing Part-03

This third and final installment of the mini series regarding large-scale commercial mortgage financing will generally discuss how to select a commercial mortgage broker or banker, issues you can expect to deal with and how to protect yourself in the process. If you have not read part 01 and 02 of this series, you should do so now.

As mentioned, the commercial mortgage brokerage business is not well regulated and there are many unscrupulous and crooked operators in the market—shysters who will require up-front fees before you get a loan. And depending on the amount of financing you are seeking, these fees can be substantial, typically one percent (1%) of the loan amount. In reality, there is no value in paying a commercial mortgage “broker” any up-front fees to get a commercial mortgage for a grade-A income producing property. Why? Typically, commercial mortgage brokers do not provide financing directly to the borrower. Instead, they tend to represent mortgage “banking firms”, a much more qualified and professional level of operation, who represent life insurance companies in the market. Now, paying fees to mortgage banking firms is a different story because you are dealing with a legal representative of the insurance company providing the financing and applications fees are normally paid to these banking firms at the appropriate time (generally discussed in part 1-2).

Dishonesty, however, runs in both directions in this business and borrowers can be just as crooked as the brokers. For this reason, brokers often demand borrowers to sign non-disclosure/non-circumvention agreements (non-comps) to prevent the borrower from going around the broker directly to the lending organization. This is fair. The mortgage broker has taken time and money to develop conduit relationships with mortgage banking firms which you would not find own your own unless you are already a player with some deals under your belt.

Before you sign any agreements with a broker, make sure you get legal review, even if you think that you understand the agreement. Many non-comp agreements tend to run in perpetuity and can bind you for a long, long, time from ever seeking financing own your own without the broker. There are a variety of non-comps floating around and some are better than others. Make sure you have an attorney review them before signing. If you do sign a non-comp, makes sure you get a registered list of the broker’s lenders, in writing, so that you are limited only to their current source of lenders. This way you can deal with lenders not on the list directly.

The only time it is reasonable to pay a broker a fee, and I was in the business for quite awhile, is if they are preparing loan request packages for submission to banks (typically business and/or construction loans). Another occasion to pay fees if the broker is consulting and advising you for the assembly of legal and financial documents needed to facilitate a loan. In this case, there may be some justification for fees and it is a matter of what you are willing to pay. What’s the hourly rate worth? That’s a gut call, around $50.00 hour for every actual billable hour with per-project limits pre-set to say $250.00. When they hit the $250.00 mark, you want to see an audit trail of the billable schedule before authorizing another $250.00 project. Always work in phases to maintain control. What does a bank package cost? For business and construction loans it is not uncommon to pay $1,500 to $5,000.00 or more depending on the size and complexity of the deal. There is a big difference between a $100,000.00 construction loan and a $1,000,000.00 loan.

As with any business relationship in which you find yourself pressed to sign legal documentation it is always a good idea to get legal review first. I have repeated this many times throughout these articles because many people ignore this advice until they sign a document, and them it is to late.

To your success!

Do you like this tip? You haven’t seen anything yet! Check out our Smart Books Business products by clicking the link below. We have business kits, books and ebooks to help you get smart-fast. Check us out…. We’ll save you a TON of time and money.

Copyright © 2006 James W. Hart, IV All Rights reserved

If you are looking for a small business loan or commercial mortgage then please call us today at 866.529.6044 or complete the form below: