Closing Phase of Commercial Real Estate Lending
Steelhead Capital offers full spectrum Investment Advisory Services for commercial mortgages.
-- Transcript of Capital Synergies Podcast
DARBY: Hello. This is Darby Worley your host for the Capital Synergies Talk Show For Real Estate Investors. Today we have with us one more time, Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital. Sean is here to speak with us about the exciting final phase of the commercial lending process called “Closing.” Welcome back to the show Sean.
SEAN: Thank you for having me.
DARBY: So talk a little bit about closing. What does that phase entail?
SEAN: The term the closing, actually once your loan has been committed, and you’ve paid your commitment fee and the loan’s been approved by the lender we go into what we call the closing of the loan. And that’s basically where all the final documents, the loan documents, the closing documents, all get assembled and all get ready for signatures and execution so that we can close and record the transaction.
DARBY: I remember from buying my house that this is a time when you get together a big pile of papers in front of you, and you have to sign about 40 different pieces papers. Is that similar in the commercial side?
SEAN: Yeah. Exactly, depending on if its multifamily, or industrial, or retail, your going to have your mortgage document, or your deed to trust, your promissory note, but your also going to have some additional items such as assignment the of rents, and the subordination non disturbing agreement document. So there definitely are some more documents that would need to be signed as compared to the residential side.
DARBY: Ok. So lets just to recap all four phases. How long does the whole deal take to put together start to finish. Is there an average timeframe that you can speak to?
SEAN: I think industry average, plus or minus 45 to 60 days, I think is…if everybody is really firing on all cylinders and paying attention to getting everything done, otherwise it could take a little bit longer and it could be done a little sooner.
DARBY: Are there any things that can come up at the very end of the deal that could stop the deal? Are there things people should be looking out for, you know, last minute surprises?
SEAN: Yeah it’s interesting you used the word “last minute surprises.” We kind of have a saying here, “Its not bad news that kills the deals, its surprises.” One thing to always do is once you get under application with a lender is ask for what we like to call “the closing checklist.” Basically its just a list of items of all the things that go into the deal.
Whether its title reports, appraisals, entity documents, reviews, that’s a good little roadmap, and it all ends toward the closing process. That will kind of help you provide any oversight to make sure there are no last minute surprises. They can really vary. That’s why when you get the title report you want to review it and make sure there’s no additional liens on there that the seller may not be aware of. And if there are liens on there, you just want to make sure that the sellers ... making sure that there’s sufficient equity in that property to pay those off so that you can close and take the property in your name and move forward, so the things along those lines.
Some things to keep in mind too, is then you go through these transactions is sometimes the lender that has the underlying loan on the property may require a certain amount of notification in order to have that loan paid off on the commercial side. And you just need to be aware of certain notification periods that may come into play because that could delay a closing. And that would be a surprise, and it could be an unfortunate surprise because it could add additional costs to the transaction on the seller side.
DARBY: How do your buyers find that information out? Is that something that you do?
SEAN: Well, we again, we provide a lot of oversights. When we communicate with the escrow officer on the transaction, we go through the title report, we tell them that, “Hey by the way, we know this need to get this released and this released.” We like to know and ask them, “By the way, have you sent out a demand for the payoff of that underlying loan?” And if they haven’t we ask them to do it, and if they have done it, if there’s any additional cost to it usually by then they’ve already communicated that to the seller. So again, we’re more so about being proactive and just making sure stuff like that is taken care of.
And then on the buyer’s side, something that could slow down the transaction is depending on what type of loan you are getting, and from what type of lender, they may want vesting or title held in what we call the “single asset entity.” There are certain entity documents or paperwork that needs to be filed for that, whether it’s the formation of the new LLC, Limited Liability Company, or a big corporation, or limited partnership. However you plan to take that vesting, it’s really a good idea to get that paperwork started ahead of time, and work with the escrow officer to see when it needs to be delivered in what format. If it’s a newly formed LLC, you need to deal with the Secretary Of State and get your formation documents done, and that’s something that could slow down a closing.
DARBY: Anything with the government definitely can slow down anything you’re trying to do. So for you guys, it sounds like you really do earn your keep on these deals. And I’m wondering how do you all get paid? Can you explain how your fee structure works?
SEAN: Our compensation is really simple. We charge a 1% placement fee for sourcing the lender and placing the debt on behalf of the borrowers, and since we do act more like a private banking group clearly we…our primary responsibility is sourcing that debt, finding that lender, and loan for the client, but we provide a lot of oversight as part of our program here, and so the 1% of the loan amount we think is very fair and reasonable fee at the end of the day.
DARBY: Is that a fee a borrower would pay on top of their purchase price, or is that…do they end up paying anymore for that, or does that just come out of the…?
SEAN: Well its part of the overall closing costs. It’s added to the transaction cost clearly, but it’s not added to the purchase price in the idea where can it be financed, and now it’s treated as part of your closing cost which you would come out of pocket. That’s for a purchase.
If you were look into refinance, and if there was sufficient equity in the property, well then absolutely, we would get paid with the loan proceeds of the refinance. So it really wouldn’t be additional cash out of the borrower’s pocket. It would be paid through the loan proceeds.
DARBY: Well Sean you’ve really provided a great education on the entire commercial lending process. Is there anything that we’ve missed? Anything that you think our listener should hear before we close this thing up?
SEAN: Well, yeah I think just keep in mind that no transaction is the same, and no borrower’s objectives are the same. They may be similar, but not the same. Its an exciting process. I really encourage anybody that’s either on the residential platform, or has investment commercial property right now to stay engaged, and feel free to continue investing in real estate. Long term, it’s a great alternative and we’re here to help. If there’s anything we can do on our side to help somebody reach their goals of owning and managing on the real estate side, by all means, we’re here to provide that for them and be a big supporter and advocate for them.
DARBY: Great and how do they get a hold of you?
SEAN: They can call us on our toll free number, 888-951-6600, or they can reach us through the internet on the webpage at www.steelheadcapital.com.
DARBY: Well Sean thanks so much for sharing your time and your wisdom with our listeners. We really appreciate it.
SEAN: Alright Darby. Well thank you.
DARBY: Alright guys, join us next week on the Capital Synergies Real Estate Talk Show. My name is Darby Worley, and we’ll see you next time.
