Commercial Real Estate Loans & Investment Sales

How to Choose a Capital Provider

The first thing that borrowers must understand is that all capital providers are not created equal. There is a definite hierarchy within the world of capital providers and understanding the value-ads offered by different capital providers is important in choosing a relationship.

While many borrowers believe financing to simply be a commoditized offering, the selection of a capital provider should take into account far more than rate and term considerations. In choosing a capital provider, the goal of any borrower should be to develop a close relationship with the firm that can provide not only the broadest access to capital, but more importantly a firm that offers best-in-class subject matter expertise, certainty of execution and as many value-added benefits and services as possible. Capital providers can most easily be broken-down into three groups: Direct Lenders, those that lend their own funds; Indirect Lenders, those that place funds on behalf of others, and; Hybrid Lenders, those that do both.

Direct Lenders

• Investment Banks

• International, national, regional and local banks

• Life Insurance Companies

• Agencies (Fannie, Freddie, FHA)

• Pension Plans

• Real Estate Investment Trusts (REIT)

• Mutual Funds, Hedge Funds,

  Opportunity

  Funds

• Credit Companies

• Private Lenders

Indirect Lenders

• Financial Intermediaries

• Investment Advisors

• Syndicators

• Mortgage Bankers

• Mortgage Brokers

Hybrid Lenders

• Certain Investment Banks

• Certain Investment Advisors

• Certain Banks

• Certain Credit Companies

• Certain Financial Intermediaries

The following analysis of capital providers is not all inclusive, is a high level analysis and exceptions may be found in certain circumstances. While there will always be debate amongst industry pundits and there are certainly pro’s and con’s that can be identified when evaluating any capital provider, all other things being equal it is almost always to the benefit of the borrower to try and have their cake and eat it too when aligning themselves with a capital provider. I have chosen to profile the following genres of capital providers as they are most often accessed by the mass of borrowers in the market place:

• Banks.

Pros: banks are direct lenders and excellent sources for construction/mini-perm financing. They have excellent staffing levels and local market knowledge. Banks have the ability to be very fee competitive when they choose to do so.

Cons: While more and more banks are developing broader product lines (Agency, CMBS and mezz products) they are new to those product lines and are still primarily construction lenders. Most permanent loans originated by banks are still portfolio loans which mean that they are short term, floating rate, full recourse loans and are therefore rarely competitive. Certainty of execution can often times be an issue due to post acquisition integration issues caused by bank merger mania or the fact that often times the relationship officer dealing with the borrower has no impact on credit decisioning. Other than when dealing with very large banks a borrower may run afoul of geographic, loan-to-one or legal lending limit constraints.

Conclusion: Most often your best source for construction financing…rarely competitive for other forms of financing.

• Mortgage Brokers.

Pros: mortgage brokers are often ex-lenders who have left an institutional environment for the entrepreneurial life. They will often have a solid knowledge of their local market and close relationships with local banks. They will often times engage smaller borrowers, smaller projects or projects that fall outside of traditional underwriting guidelines. Good mortgage brokers can be hard to find, but when you do find them they can be an effective advocate.

Cons: mortgage brokers are more often times than not smaller, local organizations that do not lend their own funds, and typically have no formal or contractual relationships with direct lenders. They rarely have warehouse or servicing capability and typically have few employees and little invested in infrastructure. While many mortgage brokers attempt to work out of market, they typically don’t have the staffing, market knowledge or capital markets contacts to do so effectively. There is also often times increased fee burden when working with mortgage brokers as they maybe required by the lender to collect their fee from the borrower.

Conclusion: Make sure that you are dealing with a reputable and experienced mortgage broker. Most often mortgage brokers will be the best option for projects under $1MM in value, projects that have underwriting issues or borrowers that have suitability issues.

• Mortgage Bankers.

Pros: mortgage bankers are most times a step-up in the food chain from mortgage brokers. Mortgage bankers are usually very seasoned commercial mortgage professionals. They will usually have more staffing and infrastructure than mortgage brokers. Mortgage bankers will usually possess warehouse and servicing capabilities. Additionally, many mortgage bankers have geographically exclusive correspondent relationships with life insurance companies. Many mortgage banking firms will also have agency, pension and conduit access as well. Most often times mortgage bankers will provide par pricing to borrowers.

Cons: most mortgage banking firms while larger than most mortgage brokers are still relatively small organizations. While mortgage bankers will typically possess correspondent relationships they usually will not truly be direct lenders. With rare exception most mortgage banking firms are also locally or regionally focused. Most mortgage banking firms will tend to possess more expertise in senior debt and have less expertise and fewer options for structured finance. Very few mortgage banking firms offer professional services.

Conclusion: since the mortgage banker’s greatest value proposition is usually a correspondent relationship with a life insurance company they will most often use that as their preferred solution and will be most effective when seeking low to moderate leverage non-recourse permanent financing. Note that other lenders such as financial intermediaries and investment banks will also typically have life insurance relationships as well. Furthermore many life insurance companies are moving toward open shops and away from correspondent lending. Mortgage bankers are a viable option for local borrowers with limited needs.

• Financial Intermediaries.

Pros: intermediaries are essentially an evolved form of old school mortgage bankers. While most financial intermediaries are not truly direct lenders, they typically possess extremely close capital markets relationships. Unlike most mortgage brokers and mortgage bankers, financial intermediaries often have a national footprint with offices in most major markets. The intermediary may also possess warehouse, servicing, loan sale and brokerage services. Financial intermediaries typically have a better knowledge of structured finance than their banking, mortgage broker and mortgage banker counterparts.

Cons: most intermediaries are still not direct lenders and offer limited professional services offerings. They have typically grown by merger or acquisition and have many of the same post transaction integration issues as do their banking counterparts. Furthermore there is not tremendous consistency of subject matter expertise or core competencies between offices and the borrower’s fate will largely be placed in the hands of the local office they happen to be working with.

Conclusion: a very capable and more sophisticated version of the mortgage banker. Intermediaries are suitable options for borrowers needing more expertise or coverage than old school mortgage bankers might offer.

• Investment Banks.

Pros: Investment banks typically have an international footprint, offer the broadest access to capital by lending and investing their own funds as well as the funds of other investors. Investment banks typically offer the most competitive and sophisticated financing solutions. Investment banks have typically grown on an organic basis which means that they offer borrowers more continuity of process and culture than banks and financial intermediaries. Investment banks have more experience in structured finance than the aforementioned capital providers. Investment banks offer a depth and breadth of subject matter expertise not offered by other capital providers in that they will often times have investment advisory arms and professional services groups that will allow borrowers to leverage market research, financial engineering, construction management, project management and a variety of other value added service offerings.

Cons: investment banks will often times have higher minimums and more rigorous sponsorship suitability requirements making it more difficult for smaller borrowers or smaller projects to get through the door.

Conclusion: investment banks provide larger and more sophisticated borrowers with broader access to capital and offer more value-added services than the other lenders mentioned above. There are rarely sound reasons for a borrower to limit their access to capital, subject matter expertise or value-added services other than lack of access or exposure.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085

Capital Formation Advice

If one were to poll the general public as to the perceived level of capital markets sophistication of the average commercial real estate sponsor, I believe the consensus opinion would show them to be savvy financial professionals. However, the reality is that I have witnessed time and again these perceived savvy, experienced commercial real estate sponsors arrive at their capital formation strategy by default, rather than by design.

Rather than financially engineering a well conceived capital formation strategy based upon solid underlying business logic and then identifying assets that fit within the plan, many sponsors fall in love with a transaction and just hope that they can pull the necessary financing together in time to get the deal closed.

In order to increase project velocity, improve operating efficiency, conserve internal capital and lower the overall cost of third party capital it is essential that a sponsor develop an integrated capital formation strategy surrounding acquisition/development intitiatives. The content provided in this posting is a draft capital formation model that if properly implemented will meet the aforementioned program goals.

Capital Structure:
Effectively utilizing the entire capital structure to maximize leverage while achieving the lowest blended cost of funds and isolating risk is essential to the creation of a solid capital formation strategy. In general, the farther you move up the leverage curve utilizing more senior position debt the lower the overall cost of funds. Conversely, the deeper you move down the captial stack utilizing mezz or equity instruments the more expensive the cost of capital.

Common Capital Structure Options
Senior Debt
Mezzanine Debt
Junior Subordinated Debt
Preferred Equity
Pari-pasu Equity
Hybrid, Derivative and Synthetic instruments

Top Structural Considerations
Accounting/Tax Considerations
Balance Sheet/Operational Considerations
Control Considerations
Cost of Funds Considerations
Leverage Considerations
Recourse Considerations
Liquidity Considerations
Exit Considerations

If most of the aforementioned items are addressed in the early stages of project planning the likelihood of increasing profits in a risk managed environment is high.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085

Why CMBS loans make sense for borrowers

It has been our experience that many borrowers tend to shy away from the CMBS markets do to what amounts to a general lack of understanding of the conduit world.

Without a doubt conduit financing provides the best pricing available in the market for permanent loans and can also climb the leverage curve in an aggressive fashion.

There is also a misconception that CMBS financing involves a higher degree of complexity and therefore is more difficult to work through the closing process. At Pacific Security Capital we close transactions in the agency, life company, and CMBS world and of the three, we believe there is more certainty of execution with less complexity in the conduit world than either of the other two arenas.

The only real issue that could surface as a complicating factor is dealing with operating issues that run afoul of loan covenants post securitization as dealing with the sub-servicer or master-servicer can at times provide some difficulty. However, the key to navigating the CMBS world is in understanding the process going in so that you can manage your transactional risk.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085

Start the project planning process by including your commercial real estate lender

Experienced sponsors realize the benefit of getting their commercial real estate lender involved early on in the planning process. Waiting too long to invlove your lender will typically lead to a project built with less leverage and at a higher cost of funds.

By including your lender in the beginning of the project planning process you will end-up with a project plan that is built around optimizing capital formation leading to greater project profitability.

While architectural and engineering input are critical to a project's success, designing a project to secure the attention of the capital markets is even more critical.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085