Lender requesting future tax returns

14 Replies

I'm in the process of negotiating through a loan and the lender is requesting us to provide all FUTURE tax returns for the entity purchasing the building, all personal returns for investors associated with the building holding over 10% equity and any other tax returns for businesses unrelated to the entity borrowing the money within 30 days of filing tax returns. The bank states it's for the purpose of proving the quality of the loan to regulating officials for the duration of the loan (aka the next 20 years), but how does an unrelated entity prove the quality of a loan? 

I feel it is a huge hassle to have to send all tax returns for the life of the loan from all members of the LLC or fear breach of contract. After a loan has been dispersed and the property is purchased, isn't the quality of the loan solely based at that point on whether it's paid on time or not?

   I understand when applying for a commercial loan the bank wants personal tax returns, business returns, etc., but I have never seen a bank ask for those items for the lifetime of the loan. Has anyone else had experience with banks asking for information on an annual basis? If so, how were you able to negotiate around those items?

I don't think that's too uncommon for portfolio lenders when you have borrowed a certain amount. My portfolio lender requests those too. I have to send them in and the one larger partner I have on a package deal does as well. It's not that big of a hassle. I get an electronic copy of my tax returns anyways and just email them in. 

Originally posted by @Tyler Derickson :

I'm in the process of negotiating through a loan and the lender is requesting us to provide all FUTURE tax returns for the entity purchasing the building, all personal returns for investors associated with the building holding over 10% equity and any other tax returns for businesses unrelated to the entity borrowing the money within 30 days of filing tax returns. The bank states it's for the purpose of proving the quality of the loan to regulating officials for the duration of the loan (aka the next 20 years), but how does an unrelated entity prove the quality of a loan? 

I feel it is a huge hassle to have to send all tax returns for the life of the loan from all members of the LLC or fear breach of contract. After a loan has been dispersed and the property is purchased, isn't the quality of the loan solely based at that point on whether it's paid on time or not?

   I understand when applying for a commercial loan the bank wants personal tax returns, business returns, etc., but I have never seen a bank ask for those items for the lifetime of the loan. Has anyone else had experience with banks asking for information on an annual basis? If so, how were you able to negotiate around those items?

 Not uncommon for commercial lenders to want periodic updated paperwork. Reportedly this is also the least favorite part of a commercial LO's job, too.

@Tyler Derickson I can totally see a lender wanting all tax returns related to the borrowing entity, the principle owners of that entity and any related entities. Just makes good business sense because they all share credit risk in the loan being made.

But in your post you said 'FUTURE tax returns'. Did you really mean that? I can't believe they would actually expect you to predict FUTURE performance... If so, ask them to specify what the interest rate, unemployment rate, tax rate and government makeup will be then and also ask to borrow their crystal ball....

I'm working through a loan and I've been asked to provide P&L and tax returns for the life of the loan.  Just for the building entity - not personal.  Seems easy enough to agree to that.

@Jeff Kehl I understand supplying all the information when applying for the loan as it does make sense. The bank is wanting tax returns for all of my other unrelated businesses, personal returns and the entity borrowing the money during the life of the loan (after the loan money has been dispersed, sending them my 2018, 2019, 2020, etc tax returns within 30 days of filing during the life of the loan). So they don't want predicted future returns, but in the future provide those returns as I file them with the IRS.

@Jeff Licciardi I wouldn't fuss about the P&L and tax returns of the building entity. I'm trying to guess why they want personal tax returns and unrelated business tax returns (ie. my non-real estate businesses in separate entities with separate partners).

Thanks to all others for the feedback. I'm going to try to negotiate with the bank on the non-borrowing entities, as that is my biggest fuss. 

Very common and a non negotiable point for most commercial lenders above a certain point. Commercial loans often have covenants and annual reporting is only way to test these.

Most of the time as long as you’re current on payments that’s all that matters but some lenders will be more involved with reporting and covenant /coverage tests.

Sweet mercy, commercial loans are looking less attractive by the day....

We closed on a property last year and the lender asked for this. This was a local bank I wanted to build a relationship with so I agreed, plus they gave me a great rate.

Fast-forward to a year later and they sent me 2 emails which I ignored until I had time (figured what would they do if I always pay my mortgage on time), then when I had some time I emailed them 2 docs. Easy enough. But the rep’s first question when he responded to my email was “are you working on anything we can help with?” which started another conversation.

Not saying it’s right for your situation but it wasn’t anything that bothered me.

Originally posted by @Jack B. :

Sweet mercy, commercial loans are looking less attractive by the day....

U want lowest rates this is how you get them.. this is totally normal  .. loan covenants etc.

and what happens when U get out of balance IE your income does not cover DCR get ready for a cash call :)

or U can pay a little higher rate and not worry about these things.

I have been providing quarterly's for going on 25 years now.. so I would not know the difference anyway.. 

if your in the business this stuff should all be at the tip of your fingers anyway.

my main concern is always meeting the net worth requirements ..  Granted I don't have any income property loans.

but for my day to day business this is just part and parcel

Is this the only lender you have called?

The commercial lenders are all different. A lot is based on the LTV as well. If you are getting a high LTV with little down and a long term loan they probably want ultimate security for the risk.

If the loan is 50% LTV then lenders can underwrite differently for risk. Their response on regulators I have seen this before. Certain items of Dodd Frank have or are in the process of being repealed. The banks though are slow to change and until then go by CYA working off the old guide lines even though they might have recently changed.

We had to wait for a client on a Dollar General for an extra week for loan approval by credit just because they were ultra cautious. It was really ridiculous given LTV was 60% and lease was guaranteed by investment grade and tens of thousands of locations. In some smaller towns you get the old guard that is old school and some of the things they do are overkill.

If the area is suburban to urban core I tend to look for lenders that are more easy going but still give good rates and more competitive.