Due Diligence

This is one of the most important pages I have on my website – I used to call this “Lenders Due Diligences”, but I have changed my thinking over the years – “Due Diligences” needs to be done by everyone who will be involved in the loan transaction – the borrower, the broker, and the lender. I do not care what type transaction we are talking about whether it is an International Project Development Loan or a simple Commercial Bridge Loan – all parties need to be comfortable with each other. I have found out over the years that if there is any type of deception, lying, fraud or plain simple “BS” from either parties these deals do not close and fund.

A borrower needs to keep in mind that their past credit history, whether it is personal, or business is of their own making, their personal income or business income tax filings are a permanent record – with the government – the “IRS” those records will show what they have achieved in their business life – they will show what the borrower’s past earnings were over the past several years and whether they will be able to service the proposed loan debt. Lenders are in the business of making money – they are looking to make solid loans to borrowers whom can prove to them they will be paid back – lenders are not looking to foreclose on any property, take ownership of any business, or end up in costly litigation with a borrower – if the underwriters feel that at some point those options will be the end game, they prefer not making the loan in the first place.

The borrower also needs to understand lenders will not pay for any type of “Third Party” costs associated with their loan – these include Appraisal Fees, Attorney Fees, Commitment Fees, Market and Feasibility Studies, Engineering Examination Fees, Environmental Audit Fees, Inspection Fees, Surveyor Fees, Legal Fees, including fees of Legal Counsel of the Lender, Lender Loan Fees – the Lender may also require the following reports: Environmental Report – Phase One or Two, Independent 3rd Party Market and Feasibility Study, Engineering Report, Site Inspection, Background Checks, Insurance Coverage Review Report, Tri-Merged Credit Reports, Bun & Bradstreet Business Credit Report and Loan Commitment Exhibits.

For Construction Projects the borrower will need the following – Permits and Approvals, Final Construction Budget, All Consultants Contracts, ALTA Property Surveys, Geological (Soil) Study Report, Contractor Construction Contract, and Architectural Contract. This is pretty much the entire lender’s due diligence process – a lender is “Not” going to require every report nor all the items listed above – their underwriters will give you a needs list of required items that they must have before they will close and fund your deal. If a borrower relates to a potential lender, they are not willing to pay for any type of third party fees, the lender will simply not bother processing or underwriting your loan or project – it will be a turn down.

The Borrower must also perform their own “Due Diligences” as well – it is their responsibility to investigate these lenders to make sure they are legitimate funding sources – this is serious business. Do not let a potential lender give you any “BS” about how they do not give out the names of “clients” whom they have closed loans for in your state, they can give you the city, county, country, district, and court house of where their Closing Attorney or Closing Agent filed the last Commercial Mortgage Loan closing documents for a borrower in your area. – “In other words these type of loans have real estate involved and must be on file at the county court house in-order to be legally enforceable”, a lender that’s originating millions of dollars of loans in a state or country on a monthly basis has to be licensed and regulated – call up the Department of Banking and Finance, the Attorney General’s Office or the Governor’s Office – if there has been any legal action or unresolved complaints they will tell you – they will also tell you if the lender is legally able to make loans in your state, country, or district as well.

Remember, at some point after you get a Commitment Letter or even a Term Sheet of the lender / investors will start asking for monies to pay for commitment fees, professional fees, and third-party reports – most of these monies are non-refundable.