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TOP 10 Deal Killers

Sunday, February 12

Commercial lending, for the most part is based on the value and performance of the commercial assets used as collateral. Because of the focus on the asset performance, many borrowers expect commercial loans to be non-recourse. Most borrowers are optimistic investors leaving much to chance. Most private lenders are bullish and use mathematical models to provide risk assessment. Loan originators are jammed up in the middle.Commercial Loan RIP

Private lenders determine risk just as banks do, with some exceptions. The private lending industry has additional obstacles as more and more people jump on the bandwagon to earn huge fees just by providing a referral. Just about anyone with a phone and a PC with internet access can refer deals to a commercial loan broker and expect a sizable commission. This adds burden to the loan and to the deal overall.

Getting a loan into underwriting by a private lender can be challenging as they all have their own criteria for evaluating risk. Some commercial brokers will provide much of the upfront work such as preparing the package and filtering bad deals. Others are no more than a conduit for providing documentation from the borrower. They try to justify their fees by participating in conference calls and prodding the lender for status updates. This micro-management of the file creates animosity between the brokers in the chain and may eventually kill the deal.

Is your deal bullet-proof? If you have any of the following issues your project may be facing insurmountable obstacles. While it’s true that some issues can be overcome at a cost, others are just poison. Hopefully, this article will help you to evaluate your deals and avoid some headaches.

# 10 – Property Issues

Contrary to popular belief private lenders do not like distressed properties and REOs. The mere fact that a property is distressed means there may be issues with title, legal issues, tenant issues, local economy, and ability to service debt. Remember, the banks want to dump these assets. That should be a clue. Subtract 5 for each of these issues, add 10 if the property title is clean and performing.

# 9 – Borrower Investment

Some commercial brokers think they sound experienced by using the term “skin in the game.” Frankly, commercial lending is no game and the borrower’s equity can be evaluated in many ways, depending on the history of the property and the number of owners. On the other hand, if an investor is trying to purchase a property with no cash, he/she is just a dreamer. Subtract 25 for this scenario. Add 5 if the borrower has 5% invested, add 10 if the borrower has 10%, and so on.

# 8 – Management Experience

I was contacted by a pro football player last year who was advised by a fellow player to get into commercial real estate investments. This makes some sense, since an injury can end a career for pro athletes. So he asked me how to buy an apartment complex. You need experience. How does one gain experience? Find an experienced partner. Subtract 10 for no experience.

# 7 – Financial Strength of Principle

Net worth and liquidity are on every lender’s intake form. So why do borrowers and their referral sources ignore the simple facts? Most commercial loans are full recourse. This is typically based on the cash invested in the property and the net worth of the borrower. Borrower credit scores are evaluated just the same as home buyers. Credit scores affect interest rates. If the borrower liquidity is less than 5% subtract 75. If the borrower’s net worth is less than 50% of the loan amount, subtract 25.

# 6 – Broker Chains

The more brokers in the chain, the less likely any lender will consider the loan. There are exceptions – Large attractive deals where the lender stands to make a bundle. They will demand direct communication with the borrower. Two brokers is an acceptable situation. Subtract 10 for each additional broker.

# 5 – Upfront Broker Fees

Brokers do not risk anything by working with borrowers that shop deals. If a broker charges a fee it usually means they are not confident that they can provide a lender. The lender is the one at risk. For that reason, many direct lenders will charge due-diligence fees and a commitment fee up front. These fees are typically credited at closing. The whole idea is to protect the lender from a borrower who shops the loan. Subtract 15 if the broker charges upfront fees.

# 4 – Exit Strategy

Borrowers with poor or no exit strategy are not prepared and show a lack of experience and business expertise. The Lender needs to know how he will get out of the deal. Subtract 10 for poor or no exit strategy.

# 3 – Loan Shopping

Loan shopping at the very least shows deceit on the part of the broker or borrower. At best it shows that the borrower has poor character and no consideration for the effort and cost expended by the lender and brokers. How would you react if you spent 20 or more hours finding a lender, preparing information, evaluating documents, and making a case for your client, only to have them work with someone else? Most borrowers will not sign exclusive agreements. The fact is most brokers provide little value and have not earned their clients’ trust. Subtract 30 if the loan is being shopped.

# 2 – Excessive Fees

This occurs when there are too many brokers in the chain and they are not working in the borrower’s interest. Overcharging fees is a poor reflection on a broker’s character as their motive is based on money, rather than providing a service. You can’t tell other brokers what to charge, but you can certainly refuse to work with them. Subtract 10 for each point, if brokers are charging more than one point each.

# 1 – Debt Service Coverage Ratio (DSCR)

How many times have you heard borrowers say, “The net income on my tax returns is lower than my actual net” …really. Just because they send information all tidy on a spreadsheet does not mean that the income will actually service the loan. The underwriter will verify all this. Most lenders want 1.25 DSCR or above. Check the expenses and ask questions. Subtract 90 if the DSCR is below 1.25, add 75 if above.

So how did you score? Anything above 75 is promising. Below that, you may want to rethink your situation.

Andy Sabo is the President of TOP 10 Funding, LLC.

TOP 10 Funding currently represents over 75 private lenders and we are constantly vetting new sources. We have access to Billions of dollars to lend for commercial projects, such as shopping centers, multifamily, assisted living, and office building purchases and refinance, new developments and commercial construction loans in most cities in the US.

We have great relationships with DIRECT private commercial lenders.

There are no up-front broker fees and the application process is simple and fast. An executive summary and a short intake form will get you an answer in a few days.

Phone:  (808) 375-4845

Email:  [email protected]


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Twitter:  @andysabo808

The Art of Writing an Executive Summary for Private Lending

Wednesday, April 13

I usually start my blogs out with something amusing to get the readers’ attention.

This time I thought the picture makes a great point. Every business plan is good for something – then there’s that whole perceived value thing.Private lending

This article will give some tips to creating an executive summary targeted to private lenders for commercial real estate.

Personalize Each Submission

Investors looking for funding or joint ventures should tailor their documents to match the recipient’s interest if they wish to be taken seriously. Because of competition in the industry, private lenders don’t publish their criteria, rates, or preferred deals. Each deal is evaluated on its own merit and a decision to work with a borrower or JV partner is based on a small window of opportunity via the executive summary.

Integrity of the Borrower

One of the biggest challenges in the private lending business is extracting information from executive summaries and gathering information to present to our lending groups. Loan requests and business proposals should be prepared with the intent to answer all of the lender or investor’s questions. Trust and integrity is a big part of the presentation. A lack of financial information or a reluctance to give information about the borrower raises a red flag to the lender.

Document Format

PowerPoint presentations are great when you are in a meeting setting, but should not be used as a request to do business. Your ES should be limited to two pages of text in a Word document or PDF.  Use a file name that indicates the project name and the amount of the loan. For example, Venus and Mars Apartment Purchase – 4MM.pdf. If you feel the need to send a complete business plan or photos of the property, include those as separate documents.

Your Objective

Tell the lender what you are after. If you want a loan, be specific. If you want an investor or joint venture, give the investor an idea of what this is going to cost him. The objective answers the first question for the lender. Give the loan amount, LTV, and terms you are asking for.

The Property

The lender wants to know how the loan will be secured and what his risk is. What is the property worth? You should always have an appraisal before asking for a loan. The type of property and class should be indicated. What are you paying for it? Do you have a purchase contract? Are there deadlines?  Why are you buying this property? Lenders are specific about which cities they will invest in and need to evaluate the property based on current financials.

The Management

Many investment proposals indicate that the buyer will make improvements and change management to improve occupancy rates and cash flows. Indicate the experience of the management team, developer, or contractor and their track record. Indicate why you think you will manage the property better than the current owner. The lender may also ask for resumes.

Financial Summary

Your financial summary should include the acquisition costs, income, expense, cash flow, and financial indicators.  The borrower’s down payment or equity should be clear. Indicate current and stabilized NOI, occupancy rates, and optimal IRR, debt coverage ratio, and capitalization rate.

Personal Financial Statement

Strength of the borrower is one of the main deciding factors in every deal. Some investors believe they can hide behind the corporate veil or use an LLC as the purchasing entity. Most CRE loans are recourse loans and the lender will ask for a PFS for anyone with 20% or more ownership. A majority ownership in this business is defined by 81% ownership. Along with the PFS the lender will ask for three years’ tax returns. This does not need to be included in the ES, but should be mentioned in the cover letter.

The Market

Understanding economics is necessary when determining the market demand and why the market is stable or improving. This information can be obtained by commercial real estate firms in the area. Secondary market research from a credible source goes a long way. Include rents and occupancy rates in the surrounding area for similar property types and class.

Exit Strategy

Multiple exit strategies are a good thing. Your plan should briefly describe what improvements are needed and their cost, how much money you expect to make and the timeframe.  You should also indicate your contingency plan if things go wrong and how to access the profits or future financing plans.

The executive summary is a summary of the essential elements of your business plan. Many summaries come across as propaganda or include information that does not pertain to the property itself; instead, they contain mission statements, and photos of non-related properties. Customizing the ES for a lender or investor, along with a well written cover letter will result in consideration and respect as a professional investor.

Andy Sabo is the President of TOP 10 Funding, LLC.

TOP 10 Funding represents private lenders with access to $400 Billion to lend for commercial real estate projects, such as multifamily, assisted living, and office building purchases and refinance, business financing, new developments and construction in most cities in the US.

We have great relationships with DIRECT lenders for Commercial Real Estate.

There are no up-front fees and the application process is simple and fast. An executive summary and a two-page application will get you an answer in a few days.

Phone:             (808) 375-4845       Email: [email protected] Website: Andy’s Blog: LinkedIn: Facebook: Twitter: @andysabo808