How to Choose the Right Lender for a Commercial Real Estate Deal

There's a lot of devil in the details. I recently experienced with a client, this one lender. They said, okay, we will do this loan, here's the term sheet. And it was very, very lengthy, very risky. I was like, I don't really feel confident about this lender. I haven't worked with this lender before. I was very transparent with the client. Like this seems like a shark. He ultimately decided to move forward with the loan and it was a total nightmare. Really know who you're working with, have those relationships with quality lenders that you know are going to actually execute. You know how they operate, you know they have a good reputation as a real estate investor. I was always so intimidated by the financing piece of it and it made me hesitant to want to even do it because I'm like, ah, I have to deal with these banks and these credit unions and how do I know who to go to? And so there was always like this financing piece that I didn't really fully understand. That was the problem that I really wanted to solve and, and am sold solving.

What was the red flag that you now look for in other lenders? When you are building a new relationship?

It's what you don't know that gets you in trouble. And I know that I'm young, I know most people are like, who is this girl talking about commercial real estate finance? Like she's a young blonde female in a good old boy, male dominated world, massive conglomerate. But I lean on who, not how. If I want to be the best, I have to partner with the best. That was the first thing. The second thing is what's up?

And welcome back to the Hannah Hammond Show. We got Hannah Hammond and we're just going to go into the powerful impact that she's having in cre, which is commercial real estate lending. And there's so much you're doing there, there's so much innovation that you've brought to the marketplace. And I know you're solving so many problems and I want to give people basically the secret scoop of the best ways to go into this type of lending and some of the problems that you're solving because I think it's going to help a lot of people. So when it came to HB Capital, like what made you want to transition into that from like the real estate brokerage that you had originally? Like what was the opportunity you saw there but also what was the problem that you wanted to solve that maybe you saw? Maybe it was just other people not prioritizing the relationship. Like what was it that you wanted to enter that market and fix.

So as a real estate investor, I was always so intimidated by the financing piece of it and it made me hesitant to want to even do it because I'm like, ah, I have to deal with these banks and these credit unions and how do I know who to go to and how do I know what they're looking for? And how do I get a deal under contract if I don't really know the financing in place? But I can't really get the financing until they underwrite the deal. And you know, what if I don't have the income to qualify for it? As a younger investor, what, what do I need to know in this space? Like, how do I really execute on my dream of having a large commercial real estate portfolio? Helping people create and live their best lives through real estate investing. Take advantage of all the tax advantages and all those things and make it easy and seamless so I could focus on what I did best and let other people focus on the rest and what I didn't do best, which I just kind of dove into the thing I was afraid of. And the thing I was afraid of was financing and how to really get the capital for the projects, whether it was the, the debt side, which is, you know, the lending side, or the equity side, which is your JV CoGP, your capital raising side on equity. And so that was kind of the problem that I wanted to solve for myself. And I got into real estate investing at 18 years old. Started as a commercial real estate broker, still am a commercial real estate broker, owner and designated broker of the firm here in Arizona. And then along the way I was investing in real estate while I was helping other people invest in real estate on their own. And so there was always like this financing piece that I didn't really fully understand. I understood, you know, the deal, the underwriting of the deal, the income of the deal, the cap rate of the deal, the real estate broker side of the transaction. And then there was always just the lender that I was working with. And it was always kind of complicated and complex and I wanted to dive into that and make it an easier, more seamless process and really make sure that my clients were getting the best loan product they could and also knew all the different loan products they could without having to reach out to 7,000 different banks and try to build relationships with all these different banks and try to really understand what they wanted to lend on, what their underwriting criteria was and how that was shifting over time. Because what one bank might see as A deal that they wouldn't touch with a ten foot pole. Another bank or life insurance company or credit union or debt fund might be like, hey, this is a perfect deal for us. We would love to lend on this. And sometimes it might take 100 lenders going through 100 lenders to really find that out. And it's just not realistic to be able to do that type of research and have those kind of relationships. If you are the investor that's also sourcing the deals, managing the projects, you know, running your construction teams, leasing up the deals that, selling the deals and all the things. And that was the problem that I really wanted to solve and, and am solving and still wanting to continue to solve with HB Capital.

So good. I'm sure there's so many mistakes you've made, but the mistakes are what make you more of an asset, especially when you learn from them. What would you say was like a story about like an area where you did make a mistake that you've learned from and now you could like share that mistake with people and you're like, hey, don't do this if you're going to go and try and get lending because XYZ will happen. Do you have any sort of those stories that have really helped you and now helps your clients now that you have this post knowledge?

Yeah. So the first one is know who is doing the loan, you know, or if you're raising equity, who your partner is on that. Because there's a lot of devil in the details. And I recently experienced with a client, he was going to, we got a term sheet from a debt fund. It was a very complicated loan. Like 100 lenders said, no, we don't want to do it as land. A lot of lenders don't like lending on land because it doesn't cash flow and it's hard to sell and hard to value and all these things. Right. So this one lender, they said, okay, we will do this loan, here's the term sheet. And they sent the loan commitment and it was very, very lengthy, very extensive, very risky. And so I was like, I don't really feel confident about this lender. I haven't worked with this lender before. I was very transparent with the client. Like this seems like a shark and this seems like a very litigious, litigious lender. And I probably wouldn't go forward with this loan but he had his attorney review it and you know, I made sure he had an attorney involved because it was, you know, far beyond my pay grade as Far as like the legality of it. And he ultimately decided to move forward with the loan and it was a total nightmare. And it was just like attorneys back and forth for months and months and months and the amount of, you know, as the lender they kind of have all the say and he had, they requested a very large commitment fee, like hundreds of thousands of dollars of commitment fee that's non refundable and ultimately they did get to the finish line and it was this whole thing. But anyway that was a big thing is just like really know who you're working with and have those relationships with quality lenders that you know are going to actually execute. You know how they operate, you know they have a good reputation. Yeah. And I was in this kind of challenging position because I knew I hadn't worked with them before and I knew they didn't have a good reputation. But the client ultimately still wanted to go with them because it was kind of his only option at the time. And it, it wasn't a very comfortable feeling for me. So that's why I really love to work on building really strong relationships with various different lenders. And you know, like our executive managing director and partner at HB Capital, he's been a top producing commercial mortgage broker for almost 27 years, has done billions and billions of dollars of loans and he has amazing lender relationships that he can get things done that you're not going to get done if you go walk into that bank, you know. And like he can because of the business and because the relationship that he has with these lenders, he can make things happen like pull strings, make timelines happen, negotiate term streets. That's another thing is like you can actually negotiate a term sheet that the lender proposes. You don't just have to accept it. You can try to work some things out or try to get the rate down if you deposit some money or try to have a carve out on the personal guarantee, like do lots of different strategies that when I was first an investor I didn't know that I could negotiate with the lender. So that's something just the value of the relationship because it's so, so, so important to really like in a sense know who you're getting into bed with because they're technically your partner at that point. Like they have control over the asset.

So much control.

Yeah.

What was it like with that lender that raised a red flag for you of like this could be a shark. Was it just that they were overcomplicating the contract or the terms Was there just how they were conducting business and communicating? Like what was the red flag that you now look for in other lenders when you are building a new relationship?

Super high loan commitment fee that's non refundable. Oh, that was the first one.

Yeah.

Very, very, very, very lengthy and extensive and demanding commitment. Loan commitment. That didn't leave a lot of options for the borrower to have any sort of protection. So and then just their reputation online, you know, the reputation through that we hear from other brokers in the business and other other lenders in the business and just like, ah, these people don't have a good reputation and they really like to take people's fees and not actually close loans and then make it very difficult to close loans. So those are like some of the red flags. And then you know, we have to decide is this something that we even want to present as an option moving forward? I would never present that lender again. Even though I was very transparent about the risks that I saw with the lender, I still in a way thought that, you know, my client is looking to get this loan and if he knows his risks and he wants to move forward and there's transparency there, then it might be something that would work out well for him. But moving forward I would probably just completely opt out of even like introducing him to that lender because they're just not aligned with the integrity of what we do and, and how we operate as a company.

100%. It just makes your life harder. It gives you now a bad reputation and it just affects both parties in a negative way instead of becoming a win win.

Yeah.

Except yeah, so I guess with like how you're doing business, like where do you feel like you're creating better innovation? Like whether it's like the software or AI tools you're using, like how is it that you're like really standing out against, you know, pe, other similar companies who, who are competing with you.

Yeah. So partnering up with somebody who's been a top producing commercial mortgage broker, you know, on the debt and equity side for almost as long as I've been alive was a big one. Because it's what you don't know that gets you in trouble. And I know that I'm young, I know most people are like, who is this girl talking about commercial real estate finance? Like she's a young blonde female in a good old boy, male dominated world, massive conglomerate, you know, companies that are competing with us in this world. But I lean on who, not how, you know, and I under, I've been in real estate, 11 years in commercial real estate. I understand how it works. I know that I don't have the 30 years or 50 years or any of that amount of experience. You know, I'm about five years in the lending space which started from launching my own private lending firm with my own money. So I made some serious mistakes there too that I actually was the lender. But I wasn't just getting a commission for helping navigate the deal or find the right lender. I was lending my own capital. And I really learned quickly like how to underwrite a deal and what to look for and what the red flags are because I gave out about a bunch of bad loans on bad assets, bad borrowers, bad credit, not solid underwriting, like not really looking at the financials, not really having good surveys or appraisals or any, any of that stuff. Right. So I made all those mistakes, which helps me now as an owner of a capital advisory firm. But leaning on that relationship and his team and his experience and understanding. Like if I want to be the best, I have to partner with the best. That was the first thing. The second thing is one, finding a partner who has his skills are not mine and my skills are not his. And so being able to come together and build a team of all the skills and I fill in where other people on the team lack and they fill in where I lack. And we all kind of have our lane and our unique gifts and abilities. Something that I'm very good at is technology. I'm very good at systems. You know, I as systems engineer and industrial engineer. And so business efficiency, eliminating waste in a process, eliminating unnecessary steps in a process, optimizing the outcome, the output, the quality of the output is something that I'm really good at. And then implementing technology. And so I've been on the cutting edge of AI like diving into AI. We were talking about this last time as I really want to hire a chief of AI immediately, if not sooner. If anybody's watching this that wants to be our chief of AI, let me know or director of AI. And you know, one of the edges we have at HP Capital that a lot of our large competitors don't have, like you know, CBRE would be a big competitor of ours, jll, Northmark, Walker and Dunlap, all these, some of them are multi billion dollar firms and they are so big that they just can't be as nimble and quick to adopt some of these new technologies as we can. And there's abundance in the world, like there's always Enough debt to business to go around. Like the commercial real estate market is like massive. It's so massive, it's. I don't know what the market cap is, but it's very big. And anyway, so what we did is we brought in an AI driven software that basically has our entire database of all of our lender relationships in it. Like over 7, 000 lenders, it knows all their underwriting criteria, it knows every single loan they're closing. It knows what deals they like, what deals they don't like, what volume they like, where they lend, what type of loans. And these are lenders that, you know, my partner has built up over his 30 year career and all his team has built up over all of their careers and other people at the company have built as well as lenders that we've gathered from systems like from technology to be able to go out there and search who are the lenders both on the debt and equity side in the marketplace, what are their underwriting criteria, how can we start to build these relationships with them, understand how they work? And so it also helps us basically create a deal room for each opportunity. So when a client comes to us and said, hey, we're doing this retail shopping center development project in, let's just say Arizona, because that's where we're at right now in Arizona. We want you to help us finance the property, get the best financing. Well now our job is to make that process as seamless, as quick and as easy as possible, and for them to get the absolute best rate in terms and as they possibly can for that project. And each project has so many nuances. Different things are important to different people and for different projects. So you might say it's very important. I don't sign a personal guarantee. I'm not comfortable with it. I do not want to sign a personal guarantee. And you're like, but I'm willing to put more money down because I understand there's more risk for the lender. Yeah, great. So we're going to use this software and use our relationships to know what lenders are going to be a good fit for you based on what your goals are for that project.

Crazy.

Yeah. And then we might have another client that's like all signed personal guarantees all day long. I already have 400 million personal personally guaranteed. Like what's another 20 million? And we just want the Max LTV, the Max loan to value. We want as much debt coverage on this as we can get. Great. We're going to go out there and we're going to find the lender that is okay with personal guarantee and they're going to give the max debt coverage. And so if they didn't work with us and the value that we really provide is that investor or that developer, instead of using their unique gift and their highest and best use of time to source deals, manage projects, lease up deals, sell deals, all the deal things that, that their gift is in, and they're spending all their time trying to go find the one out of these 10,000 different lenders that could potentially be a good fit for the deal or the best fit for the deal. That's going to take them a lot of time. They're not going to be able to build those relationships that quickly. And it's not the best use of their time. And there's opportunity cost because now their time is being spent trying to find financing instead of looking for more deals or making sure that this project is going well and running smooth and that they're going to maximize their potential profit on the deal. And so that's one thing, and we see a lot of a big mistake we see a lot of investors and developers make is they just go to the same bank all the time because it's easy. It's the path of least resistance. Right. The bank has the file, they know the, they have the financials, they have the balance sheet, they have the deal, they have everything. And they've already have the relationship. And so they just keep lending with that bank or borrowing from that bank rather. But they have no idea what other banks out there, out of the thousands and thousands and thousands of banks might be like, actually we'll lend you more money, we won't do a personal guarantee and we're going to give you a rate that's 200 basis points lower.

Wow.

And when you add those numbers into a project, I mean we could be talking hundreds of thousands, we could be talking millions or tens of billions depending on the scope of the project. Some of these projects people do are in the billions. So these little numbers, if it's a 5% rate versus a 7% rate, that adds up, especially if you have a long term loan. Yeah. So those are, those are some of the keys. So our job is to really automate the process, really understand all the options out there for our clients. And it could be various different asset classes in different stages of the deal. So like let's say you found a distressed retail center or storage facility that's in default and it's, you know, about to be in pre foreclosure the bank has this defaulted note and the bank wants to sell the asset at a discount. You have someone with the relationship or you know, your mortgage broker knows the relationship and knows what you're looking for and brings that opportunity to you. And there could be a couple options on this deal. Either a, we could try to negotiate with that bank to extend the loan and allow you time to get it performed forming or you could also, we could find a debt fund or a private investor to give you a bridge loan on that property, which is going to be a higher interest rate. But generally, you know, it may or may not be personally guaranteed depending on the the fund. But basically they're going to provide you quick capital to take advantage of getting that deal at a lower price and getting a big discount on the deal. So let's say if we're doing a bridge loan with a debt fund, it may be a 12% rate for a 12 or 18 month term, so you're paying a higher interest rate, but you're able to take down that property, you're able to add value to it, get it stabilized, get it repositioned, and then we can go to another lender, whether a bank or credit union or life insurance company, cmbs, anything like that, and then get you alone into permanent financing and make sure you're getting the best rate in terms there, maybe at a five and a half or six or six and a half percent rate, just depending on the deal and where we're at. So that's kind of where we come in is having those different relationships to be able to get different loan products for different phases of the deal. Yeah. So just having that flexibility and that ability to use financing to weather storms and to take advantage of opportunities is a big value that we provide, 100%.

And the most valuable thing out of all of that, which ties it all together, is how much time you save people. It's just the crazy amount of time people spend on their research and like making sure they're going with the right lender. Like, what a nightmare. So the fact that you're able to do that and you're innovating the technology to save that time as well is insane. Like for you, like, what do you feel like is one of the best opportunities? Like if somebody's trying to look for the right asset class, like what do you think is like one of the best asset classes personally to you, based on what you've seen in your industry?

I think investors can really win in every asset class. Now with that said, it comes down to your experience and your relationships is super, super key. If you have been a storage facility developer and investor for 25 years, probably doesn't make sense to jump into office 25 years later, right? Like you have all the expertise, you have the knowledge, you have an edge, you have a big edge. And so leaning into like where you're already an expert I think is always a good thing. But that's not to say that there's never a time to shift and pivot into a different sector or asset class. And then with that different asset classes have different opportunities. For instance, office, it's the most distressed asset class. Defaults are at cmbs, which is commercial mortgage backed securities. Those are hovering around 10% nationally right now. I think their economist, I think it was the economist I was listening to on the podcast for CMBS, he said he wouldn't be surprised if they hit 20 defaults by the end of the year. So you might say asset class or office is the worst asset class to be in or you might say office is the biggest opportunity bags. So it kind of depends, right? It is the worst asset class right now as far as performance goes. However, it is the biggest opportunity as far as getting a big discount goes. You know we're seeing some office buildings trade at 50 to 60 cents on the dollar for like land value. And these can be converted or repositioned or scraped, you know, and, and a different asset class rebuilt, like a mixed use or retail or co living is a big thing popping up. So it really just depends. But overall like office is a very challenged sector right now. Industrial is very strong, especially with near shoring or on shoring coming back and the AI revolution and the need for big, big, big, big, big power centers, data centers. The industrial is strong, storage is still a very strong asset class. Although we are seeing some over saturation in certain markets that were a little bit overbuilt. A lot of supply hit. So it, you know, it can become very market, it is very market specific, specific, even micro market specific. Like downtown Phoenix might be really struggling in multi family, but Scottsdale might be doing really well in multifamily. And it kind of comes down to supply and demand and absorption rates and all that stuff. So it's very specific. But I like retail has actually done really well since COVID Vacancy rates are down to 4.5% nationally, which is really good because during COVID a lot of people stopped developing retail and there's a need for really nice like experience based power centers out there. And so I think you really can win in all of them. And it ultimately comes down to supply and demand.

Yeah, 100%. That's so good. The amount of time you save and just like the amount that you can maximize in terms of the ROI is insane. If somebody wanted to get a hold of you or ask some questions or learn about what you might do in their shoes, what's the best way for them to like reach out to you or learn more about HB Capital.

Yeah. So our website is hbcapitalre.com or you can DM me on LinkedIn, Hannah Hammond on Instagram, Facebook, any of those things. But just go to the website. You can fill out a form fill, or you can email me directly at Hannah H-A-N N a h@hbcapitalre.com.

Wow. Thank you so much for sharing all that. That was gold, Hannah.

Thank you.

Just like your presidential excite.

Yeah.

Which means she knows what she's saying.

Talking about. Yeah, I don't know about that.

I know. She's humble too.

Yeah, it's exciting. You know, everyone loves to talk about commercial real estate finance, about the most boring topic ever. But I think it's exciting because there's just so much creativity and something that I value so much and have been really great at in my life has been relationships, because I truly love people. I love working with amazing people, I love connecting amazing people. And so I really value trying to be that end to end solution for investors, whether they need financing, whether they need equity capital, or whether they're looking for off market properties. And those types of opportunities is just how can I connect them with my network. And I have an amazing network that I've built over time through masterminds and teaching and talking and podcasting and doing business. And so really, if I could ever be a resource for anything, even if it's not directly you need a loan on your commercial property, let me know and I'm happy to connect you with whoever can help.

Yeah, you're the great connector, by the way, in the book the Go Giver, which you got to read sometime.

Have you read it? One of my favorites.

Yeah. The Connector. The Connector was the most valuable person out of everybody. And so if you need connections or, you know, lending, Hannah's your girl. Thanks so much for being on Hannah.

Thank you.