Read the full Originate Report August edition here.
There are many kinds of lenders out there, but a relationship lender is different. A relationship lender works with you from the start of your project right through to the end, and then on to your next one. This type of relationship lending offers a number of advantages to the borrower.
Core to the benefits is that the relationship lender knows the history of the borrower and knows the project. As in any relationship, having history and knowledge creates better lines of communication and smooths out the back-and-forth between lender and borrower. Not only does this save the borrower from having to re-explain everything at each step of the project, but the lender, because of their shared experience, will more clearly understand issues when/if they develop and may even actually anticipate them. Being so familiar with the history of a borrower and their past project history means that the lender may be able to anticipate where there is room in terms of time and money, and where there is not.
Given the familiarity with the project, a relationship lender is usually empowered to make decisions, ours certainly are. This is of utmost importance as the project develops. For example, when it’s time for draws the lender will be familiar with the budget and progress to date. And when or if there is a need for a modification, extension or revision to the loan, a borrower isn’t forced to start all over with a less than enthusiastic second (or third) lender.
A lender that knows you and your project also means a faster and more efficient process. Glossing over formalities is not what we advocate, because this is a formal business arrangement after all. However, while there may be the standard preparation required of the borrower, the net effect is a quicker and more efficient process. Focus, and therefore efficiency comes from knowing what forms and discussions require attention.
Dealing with a single decision maker streamlines the entire process. We frequently meet borrowers who complain of the ‘run around’ they get with other lenders. Obstacles after obstacles that could have been cleared up had the borrower been able to jump on the phone with someone familiar with their project, and not just a person reading someone else’s notes in a system.
Issues like this are multiplied, the more underlying investors that are involved. If a loan is sold, for example, to 3 different investors, each with a portion of the loan, a borrower could find themselves negotiating with 3 parties, all with different agendas and timelines. On top of the communication confusion, the drain of time and resources, borrowers are often subjected to an excess of fees because everyone who touches a loan will want to get paid, increasing the net borrowing rate, much of which occurs through hidden or surprise fees.
A skilled and experienced relationship lender is an asset to any project. While borrowers are just a set of numbers on a page to a transactional lender, a relationship lender is not a passive position. As a borrower, you can call and talk to your lender or meet face-to-face, this is what makes this type of relationship work.
As a lender we are plugged-in, seeing approximately 5000 loans per year, whereas an individual borrower may see just a handful. This means, as lenders, we have extensive experience and up-to-date information on rates, contractors (to use or avoid), trends, realtors, shifts in the industry, new products, and services and more. Our knowledge, and willingness to share it, can help to improve the end-results, and at the end of the day, that means borrowers avoid headaches and make more money. Don’t settle for a lender that is absent, difficult to contact, and lacks concern for your success.
We aren’t the only relationship lender out there. Respect goes out to all the lenders who are working hard to improve the borrower/lender business. Here are our 3 tips for those looking for a true lender relationship:
- Ask who you will be dealing with, not just during loan origination but also when you are making payments, and later if you need to discuss modifications. When it comes to clarifying the stream of communication, the more specific the better.
- Ask what the actual process is for a modification. Knowing ahead of time, can help borrowers plan and prepare.
- Ask if the lender sells your loan. If this is a possibility, there is a high likelihood the originator will not be involved in any of the loan support or possible modifications.
Lest you think this type of arrangement only benefits the borrower, note that relationship lending is good for the lender too. Knowing the client and the project, while staying involved, leads to lower default rates, which is a win for everyone. Savings can be passed to the borrowers via lower rates, again cementing a mutually beneficial lending relationship.
Developing this type of relationship has long-term benefits. A lender that understands a borrower’s history, experience, and successful results, is eager to create a smooth loan process and fund future endeavors
David Nielson is a Partner at Boomerang Capital Partners where he serves as the Director of Lending. Borrowers appreciate relationship lending with transparent pricing while LPs enjoy strong yields with low volatility via a REIT structure. The Firm was started in 2006 and has been lending throughout past and current crises.