What Do Lenders Want to See in CRE Debt Packages?

Posted by Marcus Goodwin on Jun 12, 2019 9:59:43 AM
Marcus Goodwin

pixasquare-700115-unsplashObtaining commercial real estate debt financing is no easy task.  In certain scenarios, gathering and organizing the required information can be a monumental undertaking.  Many times, closing timeframes or difficult sellers can make it impossible.  However, when presenting an opportunity to a lender, the more information you can provide the better.  More importantly, you can expect more accurate feedback.  From a lender’s perspective, the overall focus or theme is “don’t lose.”  Because of this directive, lenders can be seen as “Debbie Downers” or “Negative Nellies”, seemingly unable to focus anywhere but on the downside scenario of the opportunity.  Because typical debt structures do not allow the lender to participate in the upside, the downside risks take the majority of the lender’s focus.  From this perspective, it is easy to see why lenders will tend to take a conservative approach.  As a broker (or sponsor), it is important to try and not let a lender replace missing information with overly negative assumptions (sometimes they just can’t help themselves).  A debt package that provides a complete picture of the opportunity will help manage any lender concerns upfront.  This allows the lender to focus on the business plan presented, rather than stalling out with questions about missing information. 

Below is an outline of important parts of any debt package that, when included, will help to keep the lender’s attention on the deal.

  1. Background
  2. Sources & Uses
  3. Capex Budget
  4. Historicals + Pro Forma
  5. Sponsor Background
  6. Market Data


Background on the deal is always helpful.  How did the sponsor find the deal?  Pocket listing?  Off-market?  

If it is a refinance, why are they refinancing the property now?  Did the sponsor experience delays with the initial business plan?  If so, what happened?  If the sponsor has only had debt for a few months, why are they looking to refinance now?  Essentially, the lender will have a lot of questions regarding the timing of the refinancing request.  If the reason of the refinance is not overly obvious, it is better to address these points to keep the lender looking forward rather than getting stuck trying to figure out the “why” of the request.

Sources and Uses

A detailed source and uses section is essential.  


Under a refinance scenario, knowing exactly where money has gone, and where it is anticipated to go, is very important to the lender.  Admittedly, this aspect doesn’t directly affect the value of the real estate.  However, lenders want to understand the “skin in the game” aspect and, under a refinancing scenario, know if a partner is being bought out, or if reserves are being replenished, etc.  


Under the acquisition scenario, a sources and uses section is also important.  In addition to demonstrating how much equity will be brought to the table at closing, the sources and uses can be used to lay out the preferred structure for follow-on dollars.  Does the sponsor prefer that the lender provide 100% of the follow-on dollars or is a pari-passu structure more preferred?   

Additionally, it is always helpful to understand the basic equity structure, giving the lender insight into borrower structure and contribution percentages.  Overall, a clear sources and uses section allows the lender to quickly understand the basic capital structure contemplated.

Capex Budget

In many transitional real estate opportunities, value is created through additional capital expenditures invested into the property.  Understandably, budgets can be more fluid in the initial stages, however, it is still a good idea to give a rough outline of the budget even if it may need tweaks as the business plan develops.  A good budget allows the lender to better comprehend the business plan and get a better feel for the opportunity.   

Historicals + Pro Forma 

Historicals are very helpful, especially when the broker or sponsor has taken the time to compile and “clean them up” (adding or deducting the appropriate expenses/revenues).  The lender’s relative unfamiliarity of the deal (relative to the broker or sponsor) makes cleaning up P&Ls an inefficient use of time, and, more often than not, will move the deal to the side.  Lenders are required to sift through multiple deals every day and the ability to quickly follow the basic historical financials greatly helps in this effort, not to mention saves significant time in due diligence further down the road.

Equally important, especially on value-add opportunities, is a pro forma (for the next two to five years depending on the business plan), that demonstrates the economics of the business plan.  Ideally, lease up assumptions, capex timing, and exit values will be incorporated into the pro forma.  Annual data is necessary, and where possible, a monthly breakdown is helpful, giving the lender a better idea of what is anticipated as most transitional real estate opportunities don’t show consistent cash flow.

Sponsor Background

Lenders need to have a clear picture of the sponsor(s) including their background and experience.  Ensure that you point out any experience related to the subject’s asset type and market.  If the sponsor is a newly formed group, detailing the past experience of the principals is helpful, especially experience that is most directly related to the business plan currently seeking financing.  Additionally, be sure to highlight the sponsor’s experience within the subject market, if any.  This type of local experience carries significant weight and is always well received.

Additional questions to consider when providing sponsorship background include:

  • Where are a majority of the sponsor’s investments located?
  • Are there any case studies you can share? Case studies do not need to be terribly detailed, rather, effective case studies could include the following data points:
    • Address
    • Date purchased/sold
    • Acquisition price/disposition price
    • Capex invested
    • A couple of pictures and a sentence or two describing anything unique to the deal 

Market Data

Market reports from Costar or other brokerage shops are helpful.  Going beyond the market and submarket reports and diving into the property’s competitive set gives the deal significant tailwinds, as this type of information is extremely helpful to the lender.  Most lenders have access to basic market data, so being able to communicate market and submarket details that are not immediately recognizable in basic reports is very helpful.  For example, be sure to mention if a new company is moving to the area or if there has been significant leasing activity at neighboring properties that might have an effect on the subject and so forth.  Detailed market analysis can be very helpful to the lender, alleviating unknowns from the lender’s perspective, allowing the lender to be more comfortable, and hopefully, more aggressive with their quote.

Follow-up Questions

Many times, after making an initial review of the deal, the lender may have follow-up questions.  Be sure to answer these as thoroughly as possible.  If a question posed by the lender does not have an answer, still address the question, even if it is a “not sure” or a “will get back to you.”  Sometimes the lender can get by with the questions already answered, and, if not, the lender will be sure to reach back out.  Follow-up questions demonstrate the lender’s interest, so be sure to capitalize on the momentum and provide timely responses so the deal continues to move forward and stays at the top of the pile.

In most situations, waiting until all or a majority of the information is gathered is the best option. Following the tips outlined above will help create a more complete picture of the transaction, leaving the lender with fewer questions and the ability to provide a sharper quote.  

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Topics: Brokers, Sponsors

Marcus Goodwin
Written by Marcus Goodwin