Today, my guest is Leslie Smith. She is the managing director for Commercial Direct, a National Small, balanced commercial real estate lender. And in just a minute we’re going to speak with Leslie about commercial lending for commercial real estate. But first a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you can subscribe, and as always, you can leave a comment. We’d love to hear from our listeners. And normally also want to just let you know that we do have a YouTube channel. If you’d like to see how attractive our guests are, you can check that out. It’s a commercial real estate pro network. Today we’re not the video option but just so you know that is available. With that I want to welcome my guest, Leslie, welcome to CREPN Radio.
Leslie Smith 0:55
Hi, thank you for having me.
J Darrin Gross 0:57
I’m so glad you could join us today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Leslie Smith 1:08
Sure. Hi, everybody. My name is Leslie Smith. And I, my background really started in banking, like many people, but I started in the call center area. So I ran a call center for many years and then moved over to lending for a private company. And the reason I found that interesting is because if anybody’s worked for a bank, you know, there are a lot of restrictions. Innovation is tough, and in product development and managing a team and making decisions and so moving outside of the banking space, but still in lending was really, you know, exciting and fun. And that’s where I’ve been since then.
J Darrin Gross 1:47
Got it. And you mentioned you were in a call center was that for commercial or was that for residential or
Leslie Smith 1:55
it was mostly residential and mostly credit cards, so highly regulated?
J Darrin Gross 2:00
Got it. Got it? Well, for conversation today, wondering if maybe a good starting point is just the difference between commercial and residential lending.
Is that a fair place to start?
Leslie Smith 2:16
Sure, sure. So, you know, I think, for when you talk about small, balanced commercial, you know, people, there’s different variations of what people think is small. But my business is small. I mean, I start loaned out 100,000. And then up to two, two and a half million and why I start there is because when you’re thinking about someone purchasing a home, you know that that range is much more reasonable than what people think about commercial lending, which is like million to 50 million, 100 million, right. And I think the business itself differences, you know, I am helping small business owners either buy the property that they’ve been operating their businesses in, or I’m helping investors buy single family homes or multi families for investment purposes, you know they’re in they’re trying to grow, build their worth with their, their their wealth and and grow that nest egg. So the main difference between us is a residential lending is someone really buying a home and purchasing a home for themselves and their family. My business is about someone either growing their business or investing in real estate.
J Darrin Gross 3:29
And do you guys do you work direct with consumers or investors or do you go through brokers or how’s that work?
Leslie Smith 3:39
commercial direct, straight direct to the consumer. So consumers come to me directly. A lot of times they are referred maybe by a realtor or a CPA or a lawyer. But a large part of my business is really digital. So people are googling they’re doing their own research or trying to get informed and they come through me through to me through my website.
J Darrin Gross 4:01
It’s amazing how that works anymore. It used to be that you had to have an ad in the yellow pages or something like that. But if you’ve got, if you’ve got some information that people are looking for, they will find you. So,
Leslie Smith 4:17
yeah, definitely, definitely. I mean, I think it shows like this also, it really helped people really understand what’s out there and what’s available.
J Darrin Gross 4:25
Right. So you mentioned small balance, hundred to 2.5 million. Is there a definition for small balance? Or is that basically what you’ve kind of defined it for your your business?
Leslie Smith 4:41
It’s what I’ve defined for my business, I think, you know, when, when in when I go out into the world and I talk to professionals in the lending and commercial lending world, some people say small balance starts at 5 million. And you know, there there are specific people in this industry that there they start at five, there’s others that start at you know, 100 million. So it really is, we’ve defined this as a small because we feel that this is where our space and where our bars are going or needing financing.
J Darrin Gross 5:12
Gotcha. And and are you placing it with like Fannie or Freddie product? Or is this more stuff where
Leslie Smith 5:22
you guys are holding the paper? Or can you? We are so we don’t do any agency. So we are when we when we think of our business we think of we’re lending to people that probably would not be eligible for an agency loan, or would not probably be eligible for a traditional bank loan.
J Darrin Gross 5:41
Gotcha. And for for the listeners, can you express some of the reasons why somebody might not qualify at a bank that would be a good option.
Leslie Smith 5:51
Um, well, this one is credit always so you know where your credit score is. The second thing would be the property type. You know, what is it we land on you know, not your you know, trip, you know, multi families and, you know, really pretty office space, you know, we tend to lend the daycares or restaurants, the bars, the, you know, car repair shop. So, these are property types that a lot of lenders really stay away from. On the agency side, you tend to need need to have experience and you are going to go through a full underwrite of all your personal and business tax returns. And so our program allows you if you want to go the route of full documentation, we can or if you know, we can do an alternative way of looking at you and your business, we have those options as well.
J Darrin Gross 6:47
Gotcha. And is there a length of time that you guys typically hold or a note as a like a short term loan or these is to the mature
Leslie Smith 7:00
Sunil a balloon are, yeah, we have six products, typically our, you know, our typical bar right now, we’ll take a, our average loan size of about 420,000. They typically take a 30 year fixed mortgage, which is really unheard of and commercial 30 year fixed mortgage is typically very much a residential product. But we’ve decided that, you know, for some of our small business owners are not looking to hop around to get alone, you know, every two, three years, every, you know, six months, they really want long term financing. So, our typical bar is in our loan for 30 years. You know, the ELP, you know, loan to value is about you know, 70% and it has a 30 year amortization.
J Darrin Gross 7:44
And for that, is there a kind of a rule of thumb as far as kind of a rate range compared to like what somebody you know, might have heard on TV or something they were they expect to get, you know, advertised rate as opposed to, you know what you’re able to provide.
Leslie Smith 8:04
So typically, you know, our starting rate is about five and a half our typical bars probably a six and a half. Um, depending on the credit score and pricing for us, it’s really driven by your your app your FICO. And again, that’s something different than commercial, you know, typically commercial loans, you know, the the credit score of the individual is not really taken into account when it comes to developing or providing terms. Our starting point is our credit score. So you know, depending on your credit score, then that’ll drive the your rate and your loan to value
J Darrin Gross 8:38
check and you said loan to value go typically as much as 70%.
Leslie Smith 8:44
We love to 80% depending on your credit score.
J Darrin Gross 8:47
Leslie Smith 8:50
And other the other piece that’s different for us is you know, we also give cash out on commercial to people people know about cash out, you know, when they think about their You know, taking out a line on their residential home on home equity line, it’s rare that you can get pull cash out of your commercial investment property or your own owner user property. And that’s another feature that I think bars are seeking. They’re seeking to reinvest in their own businesses and take out cash from the equity that they have in the property. Or you have an investor that has equity on a property and wants to buy another one.
J Darrin Gross 9:26
True. What about somebody that’s that’s purchasing a property that needs some repairs or there’s some sort of renovation budget that they have in conjunction with the acquisition price, is that anything you’re able to provide funding for?
Leslie Smith 9:44
We are looking for stabilized properties. So if there’s really large fixing of the property in order to reposition it and rent it, we that’s not the product that we’re looking for. We’re looking for something that’s pretty much like so Have any percent occupied and that it does need some repair, it’s very cosmetic in nature and not you know, fully I need a roof we need to build, there’s a complete build out, we consider that more of a fix and flip or a construction loan. And you know, that’s not our product. Gotcha.
J Darrin Gross 10:21
You mentioned or we were talking about kind of like qualifying our new investors, are they are you able to work with a newer investor?
Leslie Smith 10:30
We are we are.
J Darrin Gross 10:32
Alright. And what about like debt cover ratio? Do you do you underwrite to a certain percentage?
Leslie Smith 10:40
We do debt service minimum for us is 1.15.
And our minimum credit score is 650.
J Darrin Gross 10:49
All right, well, it certainly seems like that opens up opportunities for
Leslie Smith 10:55
you know what some banks may decline
J Darrin Gross 10:59
Do you think Find it like investors that have a large portfolio. I know, you know anymore borrowing money at a bank that has to follow all the Dodd Frank stuff, it gets kind of a narrow window of opportunity. I’ve talked with numerous investors and it’s, you know, whether they’ve got a number of loans or maybe they’re self employed or, or, you know, what have you. They may not qualify, even though their, their balance sheet is plenty strong and they make plenty of income. Is that somebody that would be a prospective borrower for you?
Leslie Smith 11:38
It would, and just like me, there there, there are many other, you know, companies that really are focused on that bar. They’re really looking at that experience, and the fact that they’re building that, you know, our rail schedule, so there’s definitely opportunity for those and for us in particular, definitely.
J Darrin Gross 11:57
Got it. So stabilized property. qualified lender and suitably qualified borrower.
Leslie Smith 12:05
And longer terms.
J Darrin Gross 12:09
Is that kind of the sweet spot for you guys?
Leslie Smith 12:12
It is and just as a, you know, we, you know, our average days to close is about 48 days. So when you think about a commercial loan and the process to get a loan closed, you know, that’s pretty much and more in line with residential than it is with standard commercial.
J Darrin Gross 12:29
That seems pretty, pretty aggressive. They’re
gonna ask you
talking about closing time, if you can’t remember now, who can you as far as the the, you mentioned, like the the average loan amount is there? You typically are most of your borrowers, are they owner occupied type things with you know, like an actual business you mentioned yourself do that or is it more defined more of the investor that’s
buying for a non owner occupied?
Leslie Smith 13:06
It’s a 6040 split for us. So 60% of what we see is investor and 40% is owner.
J Darrin Gross 13:15
I’m trying to think of there’s Is there any Can you point any other like a highlight or a low light or a challenge you’ve seen that people, you know, may not hear about in the, in the normal course of getting alone that you guys have been able to overcome?
Leslie Smith 13:36
Yeah, I think that, you know, I think a story is really important, you know, especially when you’re talking about a small business owner and I think that it’s important for us, you know, small business owners, you know, especially when you think about, you know, a small business making it through the last recession, it’s pretty incredible. And so I think another a differentiating factors, a lot of data we can pull we can look at a lot of different things but a small business owner someone that’s looking for a $300,000 loan, you know, their documentation could be messy, maybe not as organized and maybe, you know, a traditional tax return, you know, even a bank statement might tell you, right, that tell you the story that this person can run their business. And there’s value in that real estate. So I think a differentiate is for us, it’s like, it’s important for us to know because ultimately, what we want to figure out is this person’s going to pay and if they’re, if this is their bread and butter, this is how they plan to retire or this is where this is a family owned business. It’s important to understand those types of variables.
J Darrin Gross 14:35
No, that makes complete sense. I my dad was a banker all through his career and and I didn’t understand what he did you know, I it just didn’t make sense to me but your money in the bank and, and at the time, you could get interest but, but I know looking back that, you know, a lot of what he did was, you know, somebody come over And, and my dad and the other person needed to be in the kitchen or they’d be on the driveway and talk and and, and a lot of that getting to know somebody and kind of understanding what their story was was really important to making the relationship and and, you know, essentially qualifying for the loan so it makes sense. Do you guys have any kind of territory restrictions?
Leslie Smith 15:26
We’re a national lender, I think we’re, you know, I would say where we’re not lending is really rule. So like you’re talking about the North Dakota, South Dakota is I think that’s where we stay away from. But but generally in a major, you know, we there’s 40, we lend in 40 in 46 states. So, it’s pretty much covered the math. And we, you know, we have we have a varied amount of different property types that we land on. So I think that that’s of interest to bars, because a lot of times it’s Doesn’t that cookie cutter? You know, it’s not you know, something that someone can really understand easily. Typically it’s even, it’s just a no
J Darrin Gross 16:10
doubt you mentioned you know how you guys go on FIFO but then you you’d mentioned kind of the property type and the occupancy type is Do you find it is more of the non mainstream occupant is kind of your your sweet spot on that?
Leslie Smith 16:33
Yes, definitely. Okay,
J Darrin Gross 16:35
gotcha now so you’re talking about the auto shops and, and not so much multifamily. But anything that that? Well, so you’re Bankston, not to William nuts. That’s a good opportunity for you.
Leslie Smith 16:51
As very few people understand like warehouse or sell storage or light industrial like, you know, for a banker, it’s like What does that look like? You know, you know, what would the appraisal look like? And for us that’s that’s really very much our sweet spot.
J Darrin Gross 17:09
And you know, this is kind of more of a curiosity of mine. When you when you underwrite for the loan and that valuing a property if it’s a unique property or something, are you looking based on the again because it’s stabilized and you can you can basically factor in what the current rents are the current tenants pain, is that kind of your starting point for an income analysis.
Leslie Smith 17:38
So we do order an appraisal for each of the properties and typically the instruction to our appraiser when they go out is that they also look at comps locally, you know, what, locally what other sales were there with a similar type of structure. You know, sometimes it’s it’s easier to get that Calm depending on if you’re in, you know, in any of the boroughs in New York or in Miami, Florida, pretty easy to get comps, other places not so easy. But then that’s the starting point for us that value really will come with the comparison to other properties like it
J Darrin Gross 18:20
is an insurance guy I got to ask is his flood, you know, properties in a flood zone or anything like that is that that’s something that you guys shy away from? Are you as long as there’s flood insurance in place for that? That’d be something you’d be able to do.
Leslie Smith 18:33
Yeah, we’d be able to do that. So um, we do run a flood cert at a fair and then we will we’ll let the borrower know that it’s in a flood cert and if they have flood insurance.
J Darrin Gross 18:44
Hey, Leslie. Before we started recording I mentioned to you by day, I’m an insurance broker. And as an insurance broker, we work with our clients to manage risk. There’s a couple of different strategies we, we look to the The first is we ask the question, can we avoid the risk? If that’s not possible, then we ask, Is there a way to minimize the risk? And if we can’t avoid it or minimize it, then we look to see Is there a way we can transfer the risk? That’s essentially what an insurance policy is. And I like to ask my guests, if they can take a look at, you know, whether it be their business or the way they see, you know, real estate investors, if they can identify what they consider that the biggest risk. And just to be clear, I’m not necessarily looking at or looking for a an insurance related answer, because I do believe that, that risk is everywhere. But if you’re willing, I’d like to ask you, Leslie Smith, what is the biggest risk?
Leslie Smith 19:54
I think, you know, I’ll speak about investing. I think what’s really important when We see investors, one of the things that it’s hard for us, and when we’re trying to when we’re when I mentioned earlier about the story is that, you know, they don’t really know what their objective is as an investor. So, you know, if they don’t have like, an objective is okay, I want to, I want to own 12 properties, and they need to live like this, and this is how I’m going to manage them, it’s really difficult for us to see whether they’re going to be successful in growing that real estate portfolio. You know, you know, investing in real estate is not it’s not a sprint, it’s a marathon. And you really have to be methodical and thoughtful about what you’re doing. Because you can get yourself in a lot of trouble, you know, quickly, and you know, and that’s your nest egg that you’re building. I think risk is that there’s a lot of folks that say, Oh, you know what, I don’t really want to invest in stocks, and I think I need to buy real estate. They’re just they’re not thoughtful about the plan, and then the plan. Then if you don’t have a plan, then what kind of lender Are you going to, you know, seek, and that could get you into some not so great. loans. And we’ve seen that a lot with refinance people were, you know, they thought they were getting, you know, they were buying this property and it was their investment and then, you know, it’s like a double digit rate, and that’s tough. And so that’s really what we see as risky, because then you have a lot more default, you have a person that, you know, really thought they were making a smart investment, and really protecting themselves long term. And it turned out to be, you know, a loss for them.
J Darrin Gross 21:26
No, that’s, that’s great, great input there. I think the I am going to plan and understand the time it’s going to take to execute the plan. It’s definitely more than just a click of a button and, and, you know, try and watch it go up kind of thing, which I think unfortunately, in this digital age, there’s a lot of people that get kind of swayed by, you know, recent success that people have had and they get all excited and, you know,
Leslie Smith 21:57
y eah, and
J Darrin Gross 21:58
so definitely No worthy there appreciate you sharing that. Leslie Where can the listeners go if they would like to learn more or connect with you
Leslie Smith 22:10
to listen to they go to my to our website, commercialdirect.com, And you can either call us, you can chat with us so you can apply online. There’s a lot of information about commercial real estate if you’re new to commercial real estate, so we put a lot of educational blogs and videos to help people kind of go at their own pace. It’s up to them, you know how they want to interact with us.
J Darrin Gross 22:33
It’s great. Leslie, I can’t say thanks enough for taking the time. I’ve been enjoyed talking with you learned a lot. And I hope we can do it again soon.
Leslie Smith 22:44
Thank you, Darrin. Appreciate it.
J Darrin Gross 22:46
All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro network. CREPN Radio