LOS ANGELES-I have been an intermediary between borrowers and lenders for almost 30 years. As a co-founder, managing director, and broker for George Smith Partners, I, and all of our brokers, live by the mantra that honesty with the lender, in all respects, is the best way to get a deal done.

Every deal has its issues. They may include property issues, tenant issues or borrower issues. As of late, many, if not most, borrowers have some credit issues if they were active in real estate during the great recession. 

Borrowers must remember that lenders don't want to find out the bad news themselves. If they do, they become suspicious of all the information provided to them, and will begin to double check every aspect of the borrower and property. Conversely, if you point out negative items up front, the lender will relax, understanding that you are the type of client (or intermediary) who is not planning to hide information from them.

Be prepared to explain the negative. The lender will need to provide mitigants to the negative, and your help in that process will be invaluable to the lender. Lenders look to the borrower and intermediary for information, as well as solutions and ideas to solve potential underwriting issues.  Remember that lenders are in business to make loans, so ultimately they want to fund your loan. 

However, it's likely that you don't want to dump all the negative details on the lender when you first present the loan request. First, determine if the deal fits the lender's basic parameters before you present the loan. Then, as the lender starts the underwriting process, and before they do too much work on the deal, disclose all the negative items you know. Lenders, like any business person, don't appreciate having their time wasted.  

Lenders will perform very detailed due diligence. This includes running litigation searches, obtaining Nexus Lexus reports, and calling local brokers to find out about the market, comps, new tenants and proposed projects in the area.  Lenders even call other finance professionals and developers for references on a client. Bottom line, you just can't hide negative information.  

For example, in a recent deal we worked on, the client had some recent bankruptcies. They were explainable, but the client did not disclose one of the two bankruptcies up front. When the lender found the second bankruptcy themselves, they put the whole process on hold and dug very deep into both bankruptcies, delaying the process by two weeks.

In another situation, there was some litigation filed against the client. It was disclosed to the lender in verbal conversations and some very early e-mail communication, but the lender simply forgot about the litigation in his write up. When credit ran litigation searches, the issue came up, and the entire big bank's machine came to a grinding halt, delaying the process for 10 days.

A third example emerged in a recent retail deal. The lender learned during the site inspection and tenant interviews that one of the major tenants was planning to leave at the end of their term, contrary to what had been disclosed to the lender previously. This information killed the deal immediately. 

In the first two examples, valuable time could have been saved if the disclosures were made at the start of the loan process. On the retail deal, if we had known about the tenant issue, we could have presented the issue to the lender early on, and the financing could have been structured differently in order to factor in this tenant vacancy. However, in all three deals, the lenders ultimately lost trust in the borrowers' abilities when the negative information was discovered, rather than being disclosed up front.

Clients often ask, “should we tell the lender about this?” In response, we always explain that the consequences of not telling (and the lender finding out for themselves) are always far worse.

Borrowers and intermediaries are problem solvers; and so are the lenders. If the information is disclosed up front, then solutions can be found. Don't blindside your lender, or your team by not telling them the whole story.

Your goal with every deal should be to build trust with the lender.  If trust is established, the relationship will build strength, and the lender will be working in the borrower's best interests.

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