Preparing a Loan Package

Most lenders require the submission of a loan package so they can properly assess the risks and the yields associated with the loan. Lenders may also require other materials such as copies of precommitted leases, title reports, appraisals, and in the case of new construction, evidence of a permanent loan commitment.

Lenders look at the property information as well as the quality of the presentation. The loan package should be thorough and professional; it should present the potential borrower as knowledgeable and experienced. A well-prepared loan package can sometimes make the difference between obtaining a loan and being turned down.

Loan Package Components
A standard loan submission package consists of the following main sections:

• Cover letter
• Project overview
• Appraisal analysis
• Borrower analysis
• Rental analysis
• Supporting exhibits

Cover Letter
The cover letter is the first document to be read and can be thought of as the executive summary of the loan package. Therefore, it should emphasize the strong points of the property and summarize the basic loan terms the borrower requests.

Project Overview
The project overview should be a one-page review of the project that describes the improvements, operating costs, net operating income, and debt service. This overview enables the loan committee to get the essential property facts at a glance.

Appraisal Analysis
The appraisal analysis (also called a feasibility analysis) is the substantive information in the loan package. A standard appraisal analysis includes the following sections:

• Site analysis: should emphasize the adequacy of the site to support the intended use.
• Improvement analysis: should focus on the quality and cost-effectiveness of the improvements. Other important aspects include the saleable nature of the real estate and its potential for conversion to another use. Lenders prefer functional, general-purpose properties.
• Neighborhood analysis: calls for a detailed knowledge of the immediate surroundings. An assessment should be made of the local market and of any competition or special benefits in close proximity to the property that will help secure the loan.
• Regional analysis: may be brief, especially if the property is located in an urban area well known to the investment community.
• Real estate tax analysis: is an important part of the overall income and expense analysis because real estate taxes typically are the single highest item of annual expense, and they directly affect the cash flow.
• Economic analysis: is the most important section of the submission, because it details projected future income. The projected future income is converted into value by using an appropriate methodology, such as capitalization.
• Physical analysis: describes the costs associated with a new project’s development. This analysis affects the economic analysis.

Borrower Analysis
The borrower analysis section should contain an analysis of the loan applicant that describes the type of entity, character and reputation, track record, management capabilities, and financial strength.

Rental Analysis
The rental analysis section describes each occupant of the property, including the tenant’s ability to pay rent. Particular emphasis should be placed on lease clauses that might impact rent payments, such as escalation, cancellation rights, subordination, and assignment. See the following table for more detailed information regarding the items a loan package typically includes.

Contents of a Loan Package
The following items are representative of those used in a typical loan package.

Cover Letter

Cover Page

• Photo or illustration of property

Title Page

• Name and address of property
• Name of preparer
• Date of preparation

Table of Contents

Project Overview

• Objective
• Description of project

Appraisal Analysis

Site analysis

• Photo of site
• Site plan showing boundaries, dimensions, and total area

Improvement analysis

• Plans and information showing property improvements

Neighborhood analysis

• Map of neighborhood with boundaries
• Competition
• Benefits within proximity of property

Regional analysis

• Map of region and/or city with boundaries
• Competition
• Demographic data of region
• Economic data of region

Real estate tax analysis

• Tax-related documents

Economic analysis

• Relation of net operating income to value
• Debt service and cash flow projections
• Return on equity
• Loan analysis
• Absorption

Physical analysis (for new projects)

• Land cost
• Demolition
• Construction and contingencies
• Other development costs
• Construction and lease-up timetables
• Architectural and engineering drawings
• Project supervision
• Performance bond
• Construction insurance
• Real estate taxes during construction
• Legal and closing costs
• Operating deficit during lease-up period
• Permits

Borrower Analysis

• Type and description of entity
• Names of individuals
• Character references
• Historical performance
• Financial data

Rental Analysis

• Tenant profiles
• Rent roll
• Vacancy rates
• Lease clauses pertaining to rent
• Promotion and leasing
• Marketing timetable

Appendices

• Specifications for construction
• Contractors and consultants employed
• Soil test reports
• Lease details
• Regional and neighborhood data
• Financial statements

Exhibits

• Detailed plans and renderings
• Newspaper clippings about project