Do I Really Need An Organization Chart to Get a Loan?Paul Winterowd
“Spectacular achievement is always preceded by unspectacular preparation.” – Robert H. Schuller
Would you be surprised if I told you that one of the most useful documents to lenders in underwriting a multifamily loan is one I rarely receive?
In a hypothetical perfect world, it is the first thing I would want to receive when analyzing the borrower credit profile of any loan I work on.
It is something that really helps lenders clearly understand who is behind the deal and the path we need to take for underwriting the supporting credit profile for the loan.
Obviously from the title of the article I am talking about an Organization Chart.
The Org Chart as the industry lingo goes, is amongst the handful of oft overlooked documents that are quite valuable in efficiently closing a commercial real estate loan.
Ultimately some version of this information must be provided during the underwriting process to close the loan.
I get it – there are so many items and “to do’s” during an acquisition or refinance of a multifamily property it just makes sense to proactively tackle as many items lenders will need as possible prior to even sourcing loan quotes. One of these items is the Org Chart.
“For every minute spent in organizing, an hour is earned.” – Benjamin Franklin
Lenders need to know who the Sponsors/Guarantors/Borrowers will be for the loan they are funding. The Org Chart is the document that spells it all out for them. It names the borrowing entity (typically an LLC), and the ownership structure of that borrowing entity.
The borrowing entity needs to be a Single Asset Entity (SAE), also referred to as a Single Purpose Entity (SPE). This type of structure is required because it insulates the lender’s collateral from claims by any other creditors and restricts the business activities of the owning entity.
Any given SAE used for real estate can and will have a myriad of different ownership structures behind it. Commonly, partners will own different percentages of the SAE either individually or in the name of other business entities.
To create the Org Chart – we start with the borrowing entity at the top. Next, we detail who or what owns that entity. Is it owned by a group of individuals? Other LLC’s that are owned by those individuals? Simply ask the question, who owns this entity, capture that, and repeat until you cannot go any farther.
Each box showing ownership should show the entity name, percentage ownership, and a brief description of what it is (borrower, borrowing entity, holding company, trust, etc.)
We also want to include any asset ownership by trusts. The purpose here is not to get into an asset protection discussion, but rather point out that we need to capture a snapshot of the entire ownership structure which is going to be comprised of business entities, trusts, and individuals.
If a trust owns the LLC in the org chart, we need to document that so the lender can get all the information they need well ahead of closing.
The end game of the Org Chart is to follow the road map of the entities and trusts down to the individual(s) who are providing the loan guarantee and are signing the loan documents.
It will save us a lot of time to know and understand who owns what. This also clarifies who will be required to guaranty the loan or sign the bad boy carve outs for non-recourse.
As I mentioned previously – the lender will need this information sooner than later and the last thing you want is for something so simple to hold up the closing process. If we get everything from the onset, it will go both smoother and faster.
“We should remember that good fortune often happens when opportunity meets with preparation.” – Thomas Edison
To help you further prepare, there will be additional documentation requested once the Org Chart is complete and presented to the lender.
The lender will want to see a copy of the borrowing entity’s Operating Agreement, Articles of Organization, and Employer Identification Number (EIN). We will need completed documents meaning they need to be executed, or when applicable, stamped by the city/county offering proof of existence.
Additionally – I recommend keeping these entities current with any licensing and fees necessary to be in “good standing” with governing bodies. Typically, these fees are nominal, so best to take care of in a timely manner.
Many lenders will do an entity search to ensure there are not any problems with the entities. If you are not current, it can delay the closing process because these governing bodies are not known for efficiency or rapid processing times.
Have all these documents handy and ready for every entity with ownership interest in the SAE. A general rule thumb is any individual or entity with less than 20% ownership is not required to guaranty or provide supporting documentation.
“Champions do not become champions when they win the event, but in the hours, weeks, months and years they spend preparing for it. The victorious performance itself is merely the demonstration of their championship character.” – Alan Armstrong