In response to the slowing economy, downturn in real estate values and current "credit crunch" even highly flexible, private "hard money" commercial mortgage lenders have tightened their lending standards and adjusted their criteria.

Cash

The most notable change, and the most painful to borrowers, has been to down-payment requirements. Virtually all lenders, private and conventional, have stopped originating 100% financing. Cash-in-the game is now a, nearly universal mandate.

10% hard equity (cash down or cash previously contributed) is what most commercial hard money people consider reasonable. Before they make a mortgage loan they need to know that that the borrower has made a real, monetary commitment to the building or development. Painful experience has shown that the less cash an investor has put in, the more likely they are to walk away when the going gets tough.

Many lenders will allow fairly large seller carried 2nds or mezzanine loans but total debt can't exceed 90% of the purchase price or total project costs. The hard money lender will insist that their mortgage be in the 1st position. For loans against quality commercial property, hard money professionals will usually lend up-to 50% of the value of land, 60% on vacant buildings or buildings with insufficient cash flow and 65% on income producing commercial buildings such as multi-family, office or retail.

Experience

Today funding sources are worried about the safety of their capital. They prefer to make loans to experienced, licensed professionals. Now is not the time to ask a lender to finance your experiment. If you're buying a gas station it will help if you have real world, on-the-job, automotive industry experience. If you've always had a dream to run a hotel but have no hospitality background, keep dreaming until money starts flowing.

My advice to those lacking relevant experience in any given sector of commercial real estate is to build a team or form a partnership with seasoned professionals in the area you want to break into. First time investors scare loan officers. Team up, split the profits, gain experience, make a name for yourself and it won't be long before lenders are calling you.

Exit

Private loans are short term loans, generally 6-36 month, rarely more. Hard money lenders are not lend-to-own lenders; they don't want to take back your property. Before they close a deal with you they'll want to know precisely how you are going to pay them back. The two most common and obvious exit strategies are: refinance the property or sell the property.

If you plan to refinance at the end of the initial mortgage, you'll need to prove to the lender that both you and the property will be able to qualify when the time comes. It won't be enough to say that you'll cross that bridge when you come to it. Do your homework and show the hard money mortgage source that you know what it will take to refi and you will do what it takes to refi. Your deal will depend on it.

If your exit is a sell out of the collateral property, do market research, put together a marketing plan and a competent marketing team. Be realistic in your sales price projections take the emotion out of setting the sales price by getting an "as-completed" appraisal or a "Brokers Price Opinion" (BPO) done by a commercial specialist.
Your marketing campaign should start immediately and run throughout the whole project.
Potential lenders want to know that you will work as hard paying off a loan as you will to get a loan. A sound, well thought out exit strategy is a must, today more than ever.

Make no mistake about it; funding is harder to come by. Investment and loan standards have tightened up across the entire commercial real estate finance industry. Accept the fact that lenders have stopped financing marginal deals. Today, and for the foreseeable future, a deal will need to be exceptional in-order-to secure a mortgage.

Don't waste your time trying to push a weak deal through, instead bring some cash to the table, work with property types you have good experience with and make sure you have a viable exit plan. That's the formula for getting financed instead of frustrated.

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