LOS ANGELES-Now that the recession is coming to an end, real estate sponsors are becoming more active. The challenge, however, is that many, if not most, of these sponsors had difficult lending issues during the recession which negatively affected their credit. As a commercial real estate loan broker for almost 30 years, I am regularly asked how to get new loans approved for these “credit impacted” sponsors.

To answer this, we must first identify the sponsor's response to his lending issues. There were three main types of sponsors' reactions, including:

• Those who had the means and chose to repay all debts to maintain their credit
• Those who walked from bad deals with non-recourse loans without putting up a fight
• Those who fought with lenders to save as much of their net worth as possible, contrary to the lenders' contractual rights.

Of course, lenders love to do business with the first group of borrowers who repaid their debts, even by adding new equity. They also have no problem at all dealing with the second group of sponsors, those who walked away without a fight; “giving the keys” to the lender, either through a deed in lieu or a pre-negotiated foreclosure.

The third type of sponsor is more difficult to finance and will be discussed below.  

As background, it's important to understand that many of today's loan officers were transferred to workout departments during the recession, where they learned first-hand about the “quality” of a sponsor. These loan officers know what to look for. They understand that almost anyone who had real estate holdings during the recession has had some type of credit issue or bankruptcy. For them, the most important factor is how the sponsor dealt with their issues.

They want to know the details of all the credit issues before making a loan. They understand that things happened during the recession that were beyond the sponsor's control. Markets collapsed, lenders didn't perform on their obligations, loans were sold, and borrowers wanted to protect their equity. 

The most productive strategy is to share all details for credit issues early on. Lenders do not want to discover a sponsor's credit issue on their own. If this happens, the sponsor instantly loses credibility, forcing the lender to “double check” everything.

Issues should be disclosed and explained before the lender does any substantial amount of work on their underwriting, and most certainly long before the lender issues an application. The simple fact that something was not disclosed, no matter how trivial it may seem, can often become the deciding factor for lenders on whether or not to fund a loan.

As part of today's credit review process, lenders often insist on speaking to the workout officer who worked with the sponsor during their past credit issue. Sponsors should be prepared for this, and should maintain those contacts and/or obtain a written letter from the workout officer which explains, hopefully in a positive light, how the sponsor dealt with the situation.  For example, a comment such as, “Yes, he had a bankruptcy or a foreclosure, but he dealt with us in a fair and responsible manner, and we would lend to him again” can be very important to a potential lender.

To ensure the credit review process goes smoothly, we recommend that sponsors prepare a full narrative on any credit issue(s), with back up documents and reference letters from the loan officers involved, before applying for a new loan. As the years go by, these materials can be hard to find for the sponsor, but might be requested by lenders for many years to come.

Even with this preparation, there are still some areas which will be difficult for lenders to accept.

For example, a big issue is when a sponsor previously put a property into bankruptcy to prevent a foreclosure of a non-recourse loan, or when a sponsor sued a lender. It's “expected” that a sponsor will put a property into bankruptcy to prevent the lender from going after a personal guarantee on a recourse loan.  In this last situation, it is understood that the sponsor hopes to force the lender to accept a reasonable court-ordered settlement agreement.

Lenders will look at these situations differently.  Some banks will not accept any sponsors with credit issues, while others will.  Non-recourse lenders, such as CMBS or life insurance companies, will typically be more flexible. 

Either way, full disclosure of any and all issues ahead of time should be the rule, and will provide the best chance of securing financing. It's a lot like dating:  some potential partners are more forgiving about past transgressions, while others are not. And, just like dating, you eventually need to tell the truth about your past.

Steve Bram is principal and managing director of George Smith Partners. The views expressed in this column are the author's own.