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How to Write an Executive Summary for a Commercial Mortgage

By
Real Estate Agent with Maclennan Investment Group, Inc. CalBRE# 01801793

When I am reviewing a loan file one of the first things I look at and look for is the executive summary or loan summary. A well written executive summary speaks to the quality of the borrower and the value of the project. The goal of well written loan summary is to give the underwriter enough information to understand the commercial loan and to determine if the loan will fit within the lender’s lending guidelines.

Below are items that should be included in a well written and complete executive summary.

Salient Facts

Lenders want to know the details of the commercial real estate loan. Property location, property type, number of units, lot size, and the square footage are all important in the underwriting process.

Also include the loan amount and property value. I am always amazed when a loan summary is missing the loan amount or the property value. If the property is being acquired, include the purchase price.

You might also include useful ratios such as loan-to-value (LTV), loan-to-cost (LTC), and the debt-service coverage ratio (DSCR). Rounding these ratios to the nearest 5 or 10 integer can appear deceiving. I personally prefer that these ratios be expressed to two decimal places.

Project History

Include a project history for commercial property that is currently owned by the borrower. This should include the date of acquisition, acquisition costs, and any improvements or monies spent on the project.

Exit Strategy

Owens Financial Group is a bridge lender. Consequently, we are looking to see what the borrower’s strategy is to repay our loan at the end of the loan’s term. The exit strategy may be less important to permanent lenders than to short-term sources of capital.

Sponsor Summary

The sponsor or borrower summary should give relevant facts about the sponsor, but should not be their life story. A more detailed description of the borrower or borrowing entity can be include in a borrower’s resume.

A good summary might look like this:

Fictitious Development Company was started in 1989. Since it’s inception it has developed 32 properties with over 1,000,000 square feet of retail space. With combined sales of $120 million.

Or:

Fictitious Properties Group began acquiring multi-family properties in 1993. Fictitious currently owns in excess of 4,000 units in 7 states with rental revenue of in excess of $3,000,000.

Sources and Uses

This section details the utilization of the loan proceeds as well as the source of any other funds needed for the project. A table or spreadsheet format is most helpful and looks cleaner. If you are seeking a construction loan, this section is vital for the underwriting process. Cost information should only be a summary, because this is the executive summary and not the supporting detail, . The detailed costs should be included with the rest of the packet.

Property Financials

Relevant information regarding the current or projected rental income of a building should be included. The value of income property is determined by dividing the property’s net operating income by a capitalization rate suitable for the market location. Gross Income, total expenses, and vacancy are needed to determine net operating income.

Conclusion

Keep an executive summary short, no more than two pages. Include enough detail for the underwriter to understand the deal and to determine if it will fit in the lender’s parameters. Never mislead or lie on an executive summary. A well written commercial loan summary is often a reflection of the professionalism of the commercial mortgage broker submitting the loan.

Graham Shepherd
US Commercial Finance - Phoenix, AZ

Here is what Price Waterhouse Coopers say on Execvutive Summaries.

B. EXECUTIVE SUMMARY

Many consider this the most important part of the

business plan because it is what investors usually

will read first. It is the .teaser. through which

you need to convince an investor to spend more

time on the plan itself. This section should

always be written last so that each individual

section being summarized has been thought

through and analyzed fully.

The executive summary should be between one

and three pages in length. It should be a concise

and clear highlight of what the company is all

about and what.s in it for the investor. The

executive summary should include a few

sentences on each of the following, while at the

same time remaining concise:

q The Company

When formed?

To pursue what purpose?

q Exploit a particular technology

q Design a new product

q Manufacturing

q Marketing

What are the Company.s goals?

q Short-term

q Long-term

q What are the Company's critical success

factors?

q The Product(s)

What are you selling?

What makes it unique?

Is it a proprietary product? Other entry barriers?

At what stage is its development?

Features that distinguish it from competition:

q Pricing

q Quality

q Speed

q The Market

Current size

Domestic/international

Recent growth (cite sources)

Projected growth (cite sources)

Estimated company market share

q Financial

Financing sought:

q For what purposes?

q Will carry company how far?

q Exit strategy for investors?

Five-year revenue and net income projections

Projection of when profits will begin

q Management

How complete is the team?

Brief past experience

Highlight strengths

May 27, 2008 03:09 PM
Peter Maclennan
Maclennan Investment Group, Inc. - Walnut Creek, CA
Real Estate Sales & Investment Broker

Graham,

There are some good points in what PWC says. Their information seems to relate more to a business loan than a real estate loan. I chose to address only issues that were relevant to commercial real estate loans.

May 28, 2008 04:33 AM
Jeff Rauth
Commercial Finance Advisors, Inc - Birmingham, MI

Peter,  Thank you for your comments regarding hard money commercial loans and the executive summary. 

By the way, you brought up the exit strategy.  Is it prefered to have the strategy be to sell the property, refinance into a term loan, or what?  Also I get a lot of requests for owner occ commercial hard money loans, which seem to be a lot harder to place than on the investment side.  Am I missing smething here? 

Thanks in advance

Jul 07, 2008 03:37 PM
Peter Maclennan
Maclennan Investment Group, Inc. - Walnut Creek, CA
Real Estate Sales & Investment Broker

Jeff,

For owner occupied commercial hard money loans. Usually, the owner is not planning on relocating the business within two years. If this were the case a sale-leaseback may make more sense than for the owner to pay the hard money rates and fees.

In most cases for owner occupied commercial hard money loans a refinance is going to make more sense. SBA loans may make sense if the borrower can qualify for them. Other lending institutions also make loans on owner occupied commercial real estate.

Two factors cause owner occupied loans to be a greater risk factor:

  1. The combined business risk inherent when the tenant is also the owner. This is especially true when the owner is the sole tenant of the property. If the business fails or the owner gets sick, there are no additional tenants to cover the mortgage payments. In theory the chance of default is higher.
  2. Owner occupied loans have a greater likelihood of bankruptcy versus foreclosure. When a person's livelihood is tied to a piece of real estate they are more likely to fight for it. The added costs of fighting a potential bankruptcy make these loans riskier.

Thanks for the questions!

Jul 08, 2008 05:47 AM