How CRE Borrowers Can Speed Up a Lagging Underwriting Process

The red-hot CRE investment market should continue into 2022 as new capital enters the fray and inflation mounts—and the question is whether the lending industry can keep up with the frenetic pace. 

“Sellers will continue to drive terms and command short escrow periods for top-notch properties,” writes Rob Murphy, Vice President of Structured Finance and Capital Markets at Transwestern, in a recent blog post.  And while the lending industry is facing pressure to deliver quick closing, “the commercial real estate debt market is firing on all cylinders,” he says.

“Individual property transactions, fueled by low interest rates, have been trending near record levels for the last few months. However, the impressive pace of deal activity following a year of deliberate caution is causing headwinds for commercial real estate lenders,” Murphy notes. “Current staffing shortages, vendor backlogs, and the larger supply chain issues are placing additional stress to closing timelines that lenders routinely met in the past. While it could take time for these issues to iron themselves out, users of acquisition debt are in a tough spot given they’re competing with all-cash buyers in this seller’s market for the best properties.” 

Murphy says having the borrower and lender agree on the property’s pro forma cash flow early in the underwriting process is key to expediting closings: “The pro forma cash flow determines essential factors, such as loan size and structure (including any necessary reserves) and formulates the covenants that are incorporated into the loan documents,” he writes.  “Loan covenants are such a late-stage item in the loan approval process that any delay in incorporating the covenants may cause a hold up in finalizing the loan documents and closing.”

He also notes that private lenders can be more flexible with loan documentation, whereas institutional lenders typically have more exhaustive, lengthy requirements that can add days to the closing process. Borrowers should also take note of whether lenders have discretionary authority to fund loans, or whether they have capital partners that must approve lending. 

“Many lenders have arrangements whereby their investors must also provide loan approval before funding takes place,” Murphy writes. “It is good for the borrower to understand the loan-approval process and any implications prior to selecting the lender.”

Murphy also recommends that borrowers tackle the issue of staffing shortages by asking if lenders are hiring contractors to outsource underwriting, and says borrowers should ask lenders if they have expanded their third-party vendor list to include those with “more manageable turnaround times” than the six-weeks-plus many appraisal companies are currently citing due to COVID-19 backlogs.

“Once a borrower has decided to proceed with a lender, an immediate step should be to provide a deposit to the lender so it can immediately order third-party reports,” Murphy writes. And in a similar vein, “unlike the third-party reports … borrowers manage the title and survey process. Since these are items that the lender’s attorney will want to review, they can require long lead times for approval. Borrowers should order these items very early on in the diligence process.”