In the commercial loan world, retrades happen often. You might be given great terms by a lender, but then a discovery is made during due diligence that causes the risk profile to change and a retrade to happen.
Fortunately there are some ways to avoid retrades, according to Mac Dobson, senior vice president, originations, Aries/Conlon Capital.
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He said there are some reasons why terms would change during a transaction, including: the borrower didn’t share the whole story; factors outside the borrower’s control; information surfacing during due diligence; lender overpromised and underdelivered; and intermediary laziness, negligence or inexperience.
“Some things are outside of the borrower’s control,” he said during a webinar hosted by the Asian American Hotel Owners Association. “For example, some new supply came online in your competitive set in your market. Your [revenue per available room] takes a dive toward closing. You can’t control it, but it can lead to terms changing.”
To avoid a deal retrade, Dobson said it’s important not to over-shop your deal. He said there is a common myth in the industry that the more lenders who look at your deal, the better the results will be. The truth is that it sets you up for a retrade—especially in frothy markets.
“What we find is that particularly right now the hotel market is very frothy, and deals are trading at crazy cap rates and multiples of revenue. There is money to be made,” Dobson said. “When you shop your deal around, it increases the likelihood you’re going to get involved with a bad actor.”
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During good times, he said disreputable lenders will purposely offer below-market terms as bait to win deals. Then, once you are too far down the path to make a switch in direction, the lender will retrade your loan terms.
“The bottom line is if it sounds too good to be true, expect to be retraded,” he said. “Trust your gut when you’re working with people and having conversations with people. Your gut is usually right.”
Dobson said it’s important to choose an experienced intermediary and ask hard questions.
“Ask what other properties they have closed recently, who they maintain relationships with, ask them to walk you through a term sheet, and be transparent with you about the deal and the conversations they are having,” he said.
Dobson said a good intermediary will:
- be actively closing deals in your market and property type at borrower-favorable terms;
- accurately preunderwrite the loan;
- professionally package your loan request;
- be transparent about pain points and risk of any changes to the deal story;
- demonstrate leverage in the process; and
- maintain control from start to end.
“The quality of who you trust at the beginning will determine the quality of your results in the end,” Dobson said.