This discussion is relevant to refinances, when there is not a looming loan maturity. 🔍 Should I postpone closing my loan, because I believe interest rates will drop?  This is a personal decision. You could be right in your rate prediction. But you could also be wrong. Here are my thoughts: 💡 The Benefits of Closing as Soon as You Can: “A bird in the hand, is worth two in the bush.” Loan sizing risk:  If you want to wait to max out loan proceeds, this could be dangerous game. What if interest rates only go up from here? Your loan amount could get noticeably smaller. We know what your loan sizes to today. If that works, don’t gamble on rate movements. Lending Market risk:  Never know when there is going to be another COVID style event, where lenders will pause or step back for whatever reason. It’s a low chance, but still a chance. If the markets are functioning now, jump on it. Execution Risk: No lender can guarantee closing at application/signed LOI. These agreements are subject to a number of things: 3rd party reports, approval by loan committee, etc. Let's say you have a 6-month window to close. If you start the loan approval process right now with a lender, and they back out due to some reason or retrade their loan terms, there's still time to jump to another lender. If you wait until 2 months before your loan maturity date, you don't have time to jump to another lender. 💡 The Benefits of Trying to Time Interest Rates: Rates could drop: This would save you money, if you are wanting to lock into a fixed rate loan. This could increase your loan proceeds. 🔍 What projection tools are available for me to time interest rates? This question is especially relevant given the time that I am writing this in late 2025. Short-Term / Floating Rates These are rates based off of Prime or SOFR: Federal Reserve News: The Fed has been talking about possibly lowering the Federal Funds Rate this year. This will lower short-term rates. If you have a loan based on Prime or SOFR, your interest rate should drop in pretty close lockstep with the Fed Funds Rate. Economic News: The Fed makes its decisions based on a number of factors, but the 2 primary factors it has historically focused on are inflation and unemployment. If inflation is getting higher or unemployment is staying constant or dropping, you can typically expect a rise in the Fed Funds Rate. FedWatch Tool: CME has a FedWatch Tool that estimates the probability of a rate reduction based on interest rate traders in the market. See snip below of the September 17, 2025 projection. Traders are projecting that the Fed will lower the Fed Funds Rate by 25bps. Not shown in the snip below, but they are also projecting another 25bps rate reduction in October, and another in December. However, a reduction in short-term rates does mean long-term rates will drop. Long-Term Rates Long term rates impact fixed rates debt options. Chatham Financial: Chatham Financial has a similar tool as CME FedWatch. Except they have market predictions of long-term rates, and it's not shown in a % probability format, but an average projection. This is the 5-year UST projection over the next 10 years. 📌 Important Note: Notice how the Federal Funds Rate is projected to go down (this impacts prime and SOFR based loans), but the market is predicting long-term rates (impacting fixed rates) will actually go up! This makes a major point: Just because the Fed is going to lower the Fed Funds Rate doesn't mean long-term rates will go down. They could go opposite of each other. 🔍 Should I trust any of these tools? My personal view is "yes a little bit" , but "mostly no" . In my view, the market has been a terrible predictor of where rates are going to go, especially over the last years. If you made any major decisions based on where the market thought rates were going to go over the last 5 years, I think there's a good chance your decision was a loss. The Hairy Chart, put together by Chatham Financial, shows how good the market has been at predicting interest rates. The solid blue line shows where interest rates actually went. The gray lines show where the market predicted rates to go at the time. 📢  Final Conclusions: A bird in the hand is worth two in the bush. If you can close now and it makes sense, don’t gamble on which way rates will go. They could go way up, and you could be filing chapter 11 because of this. We just saw a meteoric rise in rates just like this in March 2022. And there’s a lot of investors who are being foreclosed on because of this. Nobody knows which way rates are going to go. If they did, they’d be trillionaires.

What is the most important (and rarely discussed) part of your commercial banking relationship?     Be your bank’s favorite customer.   PART 3: Financial Covenants I. THE SETUP The Closing: You spent months looking for the right property to buy. You finally get one under contract! Your find out your commercial loan request is approved by the bank! The appraisal and environmental reports come in – all good! Your bank sends you the loan documents. You want to be careful, so you hire an attorney to review. You get the green light! You close on the property!   Time to call all your friends and tell them you have the best banker in the world!   (At least this is what we hope you do)   12-24 months have passed…   Then… your banker calls you to set up a meeting. II. THE PROBLEM Operations: Your value-add plan is going well. You hit your projected rents. But expenses are higher than expected. Taxes and insurance went up significantly. You aren't quite hitting your NOI projections, but you can make your monthly payments with a little bit of room. Your Covenant: Per the loan documents, you have a financial covenant that requires you to exceed a 1.25x DSCR every year. Put another way, the cash flow (before making your loan payment) needs to be 125% of your principal and interest payment. For example: Your annual P&I payment is $100,000, your cash flow before making payment needs to be $125,000. Actual: You cash flow is only 110% of the loan payment. You have a 1.10x DSCR. You're required to have a 1.25x DSCR. You're in default of your loan documents. This puts your bank in a bad spot. The risk of your loan just went up, and they are now required to hold more in reserves for your loan. This makes your loan a lot less profitable. The bank now must decide on the next steps: require a loan paydown to get you back into compliance with your DSCR covenant start charging you fees/increasing your interest rate to let you know they are serious about getting back into compliance ask you to sell the property refinance your loan to get it off their books foreclosure give you a grace period to become compliant III. THE SOLUTION Before you are in default: Build cushion into your pro-forma. If the bank requires a 1.25x DSCR by the end of Year 2, request a loan amount that results in a Year 2 DSCR of 1.40x. Now you have 0.15x cushion in the event everything doesn’t go exactly as planned. On a monthly basis, track your cash flow and calculate your DSCR.  What you don't track, you can’t manage. By tracking your DSCR, you’ll have time to make adjustments at the property to hit the required DSCR. After you are in default: Put together a plan that will result in your DSCR going from 1.10x to 1.25x over the next 12 months. Example: reduce payroll, shop for less expensive insurance plans that still meet the lender's requirements, do more grassroots marketing to drive traffic to your property check-in with your property management company weekly instead of monthly Update your loan officer monthly on how things are going with this plan. Use excess cash to pay down the loan. Successfully getting back into compliance with your DSCR covenant will go a long way in solidifying the relationship you have with your bank.  Banker – “When things get tough, this borrower gets it done.” ▶️ Upcoming This is Part 3 of the series: "Be your bank's favorite customer." This will help you: 1.  Get you better loan terms 2. Exceptions that other customers at the bank don't get.

Want better loan terms and faster approvals?   Be your bank's favorite customer.   📢  PART 2: REPORTING. This is very important to banks.   BACKGROUND What is Reporting? When you close a commercial loan with a bank, they will require you to submit business and personal financial statements on a periodic basis.   What reports do banks want? It depends on the type of loan, but here are a few: rent roll, trailing 12-month income statement, balance sheet, personal financial statement and tax returns, etc.   Why do banks ask for this? They want to track the probability of you continuing to make loan payments. This probability is called a Risk Rating. A risk rating is like their own in-house credit score.   WHY IS THIS IMPORTANT TO YOU? Because this could impact: (1) your existing loan and (2) your next loan request 1️⃣  EXISTING LOAN   Profitability: Your existing loan has a risk rating. At some point if you don't submit your statements on time, the risk rating of your loan could be lowered- making your loan less profitable to the bank. Don't hurt your bank's profitability on your loan by not submitting your financial statements on time. That makes you a less profitable customer to them.   Time : A lot of time gets wasted chasing down late financial statements. It's a headache for everyone on the team.   2️⃣  FUTURE LOANS   If you want a second loan from your bank, your reputation matters. If you are showing up on PAST DUE REPORTS on a regular basis, it damages your reputation.   What's a past due report? Each week/month, there is a report that is produced that shows all the customers who have not submitted their financial statements on time. Key decision-makers - like the commercial sales manager and credit officer - see this report. At some banks, these are the only 2 people that need to approve your next loan request.   When your loan officer goes to bat for you in credit committee on your next loan request, they can have an uphill battle because you are always late on your reporting.   The credit officer could see you as someone who doesn't keep their promises to the bank. If the credit officer has this doubt, your next loan request can be harder to get approved or have stricter requirements. ➡️  WHAT SHOULD YOU DO?   Submit your financial statements on time . Best way to be on time? Plan to submit early. Organize your bookkeeper and accountant . Make sure they know what your bank wants and when. Give them what they need to do their job – and then hold everyone accountable. Be accurate.  Trust is the most important currency you have with your bank. Accurate reporting is important.   ▶️  Upcoming This is Part 2 of the series: "Be your bank's favorite customer."   This will help you: Get you better loan terms Exceptions that other customers at the bank don't get.

Banks will give their BEST customers better deals than everyone else.   So how do YOU become one of their best customers?   📢  PART 1: DEPOSITS   🔎  Why?   The more deposits you bring to your bank, the more PROFITABLE you are as a customer.   The cheapest source of funding for banks is non-interest bearing (or low interest bearing) Deposits. Banks take these deposits and lend them out to commercial borrowers at 6-8% interest.   Put another way: banks borrow money from you at 0% and earn 6-8% (before operating and other expenses).   You can be a good depository customer if you have a: Checking accounts (non-interest bearing) Savings account (Low interest) CD (Medium-interest) Money Market (High-interest)   The less interest they pay you, the more profitable your deposits are to them.   💡  But will this always get you a better deal on your next loan?   Generally, yes. But it depends. If your bank is HUNGRY for deposits: YES. If your bank is FLUSH with deposits and is having a hard time deploying all its capital into loans: maybe yes, maybe no. However, in 2025, at a time when banks are generally hungry for deposits, the answer is: most likely yes.   ⚠️  Caution When Negotiating   The best approach in business is to create win-wins . You need to win, your bank needs to win. Everyone needs to win.   As soon as someone starts to lose, the relationship can go sour.   You lose if : your bank is charging you too high an interest rate on your loan. You aren't going to be happy when you find out you could have gotten 1.00% better on your deal.   The bank loses if: You beat them up too much on the loan terms and their margins are razor thin. You become a lot less valuable of a client to them. And when you aren't that valuable and times get tough or you need a special request, they might start to wonder why they are doing all this work and not making any money. 💰 Know Your Value All that said, if you know that you are going to bring a lot of deposits to your next lending relationship, tell your banker.   They should give you a better deal on your next loan request.     ▶️  Upcoming   This is Part 1 of a series where I'll be going over: "How do YOU become one of your bank's best customers?"   This will help you know your value, which should: 1. Get you better loan terms 2. Exceptions that other customers at the bank don't get.

📖 Bible Reading: Ecclesiastes 11:1-6 1 Ship your grain across the sea;     after many days you may receive a return. 2 Invest in seven ventures, yes, in eight;     you do not know what disaster may come upon the land. Henry Holt 💬: Diversify your investments, because some could go bad. I find it interesting that it says 7 or 8 investments, and not 2 or 3. If one investment goes bad out of 2, that’s 50% of your invested capital at risk in that one investment. 3 If clouds are full of water,     they pour rain on the earth. Whether a tree falls to the south or to the north,     in the place where it falls, there it will lie. 4 Whoever watches the wind will not plant;     whoever looks at the clouds will not reap Henry Holt  💬 : There are things outside of your control, like rain and wind. Don’t sit there watching things outside of your control, focus on the things you can control. In this example, planting and reaping. 5 As you do not know the path of the wind,     or how the body is formed[a] in a mother’s womb, so you cannot understand the work of God,     the Maker of all things. Henry Holt  💬 : Don’t get over-confident in a single investment. God is ultimately in control. I also think that we should be in prayer over our investments. Pray that God would bless our efforts. And seek to glorify Him with these investments, as apart from Him we can do nothing. 6 Sow your seed in the morning,     and at evening let your hands not be idle, for you do not know which will succeed,     whether this or that,     or whether both will do equally well. Henry Holt  💬 : Put in the work and diversify your investments, as you cannot know for sure what's going to be successful and to what degree. 💡 Who is this advice coming from? The Bible in the inspired Word of God, written by humans. First and foremost, God knows best, which is why we should take these verses to heart. Second, it is believed that the human author of these verses was Solomon. It is believed that Solomon wrote Ecclesiastes 3,000 years ago, around 1,000 BC. If you have heard of King David (the same David who killed Goliath), Solomon was his son. Solomon prayed to God for wisdom, and it was granted to him (1 Kings 3:5-12). His wisdom was greater than all the Kings of the earth. He was also the wealthiest king in his lifetime. 📖 Bible Reading: 1 Kings 10:23 23 King Solomon was greater in riches and wisdom than all the other kings of the earth. Given that this advice is the Word of God and written by Solomon who was the wisest and richest of his day, the principle of diversification should be strongly considered when you invest. Note: God might call you to deviate from the path above. But the general principle stands.

Background Lenders underwrite loans based on net operating income (NOI), and one of the largest line items affecting NOI is insurance expense. If insurance comes in higher than expected, your NOI drops—and so does your loan size. Lenders typically fall into two categories: Non-recourse lenders  (e.g. agency, CMBS, debt funds): Can’t pursue the borrower personally, so they focus heavily on the property’s financials and risks. Full-recourse lenders  (e.g. banks): Can pursue both the property and the borrower personally (guarantor), so they underwrite the borrower more deeply than the property. The difference really shows up in how insurance costs are treated during underwriting. How Insurance Estimate Change- and Why it Matters When a lender begins underwriting, they typically use one of these three starting points to estimate insurance costs: Seller’s historical expense  from the trailing 12-month (T-12) financials Lender’s market assumption , based on property type, location, and recent deals Borrower’s underwritten estimate , if the borrower has already obtained quotes But here’s the key: 🔁 These are just preliminary figures.  The actual cost of insurance may only be known weeks into due diligence , after the borrower: Receives loss runs  (claims history) Reviews lender insurance requirements Gets formal quotes from insurance brokers And if the final insurance premium is higher  than the initial estimate, then NOI falls—and loan proceeds get cut . Let's Look at the Math Scenario A: Insurance Comes In as Expected Gross Income: $600,000 Operating Expenses (Excl. Insurance): $350,000 Insurance Estimate (from T-12): $50,000 NOI = $600,000 - $350,000 - $50,000 = $200,000 Loan sizing at 1.25 DSCR, 6.5% interest, 30-year amortization: Monthly debt = $200,000 ÷ 1.25 ÷ 12 = $13,333 Max loan = Payment of $13,333 supports a loan of ~$2,090,000 Scenario B: Insurance Comes in $20,000 Higher Than Expected Insurance (final quote): $70,000 NOI = $600,000 - $350,000 - $70,000 = $180,000 Loan sizing at same DSCR/terms: Monthly debt = $180,000 ÷ 1.25 ÷ 12 = $12,000 Max loan = Payment of $12,000 supports a loan of ~$1,880,000 🔻 Result: Loan proceeds drop by $210,000 due to a $20,000 increase in insurance. That’s a 10% swing in loan dollars over one line item. How Non-Recourse Lenders Handle This Non-recourse lenders almost always reconcile actual insurance costs before finalizing loan proceeds. That means: If insurance ends up higher, they reduce the loan. If it ends up lower (less common), they may increase it, subject to LTV/LTC limits. Why are they strict? Because the property alone is the collateral—they need precision. 🧠 Borrower Tip: Get ahead of this by working with your insurance broker early—ideally between LOI and PSA. Provide early insurance quotes to your lender. Underwrite conservatively to avoid surprises. If costs come in lower, that’s a win. If higher, you’re already prepared. Real-World Win A borrower of mine was refinancing with Fannie Mae. We initially underwrote to a $20,000 insurance quote. But Fannie required much more coverage—quotes came in at $30,000. That $10,000 increase would’ve reduced loan proceeds by almost $100,000. We asked the lender for a recommended insurance broker who understood Fannie’s requirements. They connected us with someone who secured a compliant policy for $20,000/year. ✅ Result: NOI went back up Loan proceeds increased by nearly $120,000 We hit the borrower’s cash-out target The deal closed cleanly What About Full-Recourse Lenders? Full-recourse lenders like banks typically don’t re-underwrite your final insurance premium —at least not formally. They focus more on: Guarantor’s personal tax returns Global cash flow Debt service across all owned properties Liquidity and net worth Because they can chase the borrower personally , they often accept more risk on the property-level financials—including insurance. ⚠️ Important: Some bank lenders do  check final insurance binders before closing, especially on large or complex deals. But it’s less common than with non-recourse lenders. Key Takeaways: Insurance can make or break your loan size. Don’t trust the seller’s T-12 blindly—get your own quotes. The earlier you bring your insurance agent into the process, the better. If you're working with a non-recourse lender, expect a true-up of insurance costs before closing. If you're working with a full-recourse lender, expect more underwriting on you—and possibly fewer questions about the insurance.

Background I had been working with a client for over a year and a half to plan for the refinance of his multifamily property. He originally purchased the asset with a bridge loan, and it was time to transition into permanent financing. The Analysis A s part of our underwriting process, I put together a detailed sources and uses chart. We concluded that a new loan would not only pay off the existing bridge loan, but also allow him to pull out equity to pay off several other unrelated loans. Everything penciled out cleanly—on paper, we were ready. The Surprise at Closing Prior to closing, we hit an unexpected snag: the equity cash-out was going to be $70,000 less than anticipated. What happened? The loan was through Fannie Mae—which was the best execution available. It offered the highest loan proceeds, lowest interest rate, and longest amortization. However, Fannie Mae requires a Property Condition Assessment (PCA) , which evaluates the physical condition of the property and identifies any “immediate repairs”  that need to be addressed in the near term (typically within 1–12 months). In our case, two major items flagged by the PCA were: Parking lot repairs Foundation work To ensure these repairs are completed, Fannie Mae holds back a portion of the loan proceeds in a repair escrow. Once the borrower completes the repairs, any unused funds may be released. This holdback structure incentivizes borrowers to make repairs quickly and cost-effectively. The Lesson Learned I was already familiar with this requirement from Fannie Mae. What I could have done better was prepare the client  for this possibility. While the exact amount of the required repair escrow is unknowable until the PCA is completed, I could have better managed expectations. The property was in good shape—fully renovated units, well-maintained overall—but even properties in good condition can require immediate repairs by the PCA. What I’ll Do Differently Going forward, I plan to include a placeholder line in the sources and uses chart  titled “Immediate Repair Budget” with a value of $0. I'll explain to the client that: This amount is currently unknown It could end up being $0— but probably not They should expect that something might be flagged, and that there may be a corresponding holdback This simple adjustment will help clients be more emotionally and financially prepared for last-minute adjustments at closing. Final Note: Context Matters Bridge lenders also typically require a PCA and identify immediate repairs. But since borrowers using bridge loans are usually planning value-add improvements anyway, these repairs often overlap with the borrower’s renovation budget. As a result, the immediate repair holdback doesn’t come as a surprise—it’s often already baked into their strategy. With a refinance, however, the borrower already owns the property and may not believe anything needs to be repaired at their property. If they weren’t planning to make additional improvements, a lender-required repair holdback can feel like an unexpected cost. That’s where proactive expectation-setting becomes helpful.