Peter Pays Paul

Commercial mortage brokers get paid based on the value they bring to the client in a transaction. The truly successful brokers bring value to their clients consistently.

2009 forebodes to be a difficult year for certain commercial real estate sectors. Much in the residential real estate industry has changed since 2006, we can expect similar changes in the commercial real estate. They key is to be one of the survivors that come out on the other side.

Adding Value

Most borrowers would not pay a broker’s fee if they did not get something in return for it. A commercial mortgage broker must provide something  the client “needs”.

The client may “need” a smoother transaction, a greater selection of lenders, a higher LTV, a lower rate, or more flexible loan covenants. In exchange for this the broker receives their loan fee.

All of these were solutions to problems that a broker could provide that might not have come through direct contact with an institutional lender

In the current market brokers are having more difficulty providing these items of value. LTVs have decreased, rates have gone up, and many banks are only lending to existing customers.

How does a broker survive and add value in this market?

Bring Equity

A broker that was able to provide an equity injection to a property that needs refinancing will have no shortage of business. Borrowers that cannot qualify for a refinance with new, lower values may be open to a fresh equity injection to facilitate the refinance and ownership of their property.

Offering this as a solution to a borrower’s problems will make it more palatable. Many borrowers may balk at this idea at first.

However, if the only alternative is foreclosure, this idea is likely to become less offensive.

Finding Equity

This will require some work on your part as the broker. Finding reliable and reasonable sources of equity capital. The equity investor must have the funds available to respond quickly. They also must not be so greedy as to kill a deal and offend your borrower.

One way to do this is call your existing database to see if they know anyone that might be willing to invest in projects for an equity position. Some of your existing clients may have extra cash that they would be willing to invest in the right project.

The deal structure will need to be worked out between your equity investor and the borrower.

Commercial mortgage brokers need to continue to add value to their clients’ transactions in this difficult financing environment. How do you plan to do this for 2009?

Photo credit: somethingstartedcrazy

Very few independent commercial mortgage brokers take the time to interview the lenders on their lenders list. Here are three reasons you should interview your commercial lending sources.

1) It Saves Time.

Commercial brokers will see a variety of deals come across their desk. Instead of calling 100 lenders to find out if they finance retail properties when the deal arrives, a broker can call the 10 lenders that are looking for retail properties to finance. It also allows you to collect the necessary information to accurately present the deal to the commercial lender.

It also saves the lender’s time. You do not end up calling them every five days with a deal that cannot be financed by their institution.

2) It Increases Perceived Professionalism.

We all want to be taken seriously and perceived as professionals in our field. You can appear more professional by consistently calling a lender with deals that are appealing to that lending institution.

A husband knows that his wife likes daisies, is going to score more points for bringing home daisies than petunias. Showing apartment loans to a lender that likes apartment loans, demonstrates that you listened to the lender and are serious about getting deals done with them.

3) It Increases Successful Closes.

Fewer wasted phone calls and a focused plan of attack allow you to devote more time to deal producing activities.

As lenders begin to trust you with the deals that you bring to them, they look forward to working with a person they know and trust. Marginal deals are more likely to get funded if the lender has a relationship with you.

This process also allows you to filter out the deals that you can’t readily place with any lender. This will save you from wasting precious days chasing a deal that is not able to be financed.

I hope you enjoyed my two cents on why you should develop a relationship with your commercial lender. Can you think of other reasons to develop a relationship of this type?

I just created a new page with a calendar of San Francisco Bay Area commercial real estate networking events.

If you are looking for a chance to network or meet other professionals here in the Bay Area please visit the calendar for more information.

Most of the time serious real estate investors do not want to think of calling a hard money lender. The interest rate and fees are likely to give many an investor a heart attack or at least cause them to faint.

However, there are times when a hard money loan makes sense, a lot of sense.

“We’re Out of Time”

Hard money loans are the most effective when time is short. Borrowers or real estate investors that don’t have time to wait for the conventional loan approval should consider a hard money lender.

This situation most often arises when another lender is unable to come through on their promise and a transaction is in danger of falling out of contract. Sometimes this can arise when an opportunity to purchase arises and a discount is offered if the property is closed on by a certain date. This can also arise in the situation of a 1031 exchange, where the purchaser needs to close prior to a looming deadline.

Because hard money lenders use private capital to fund their loans, their organizations are usually much flatter. This means that loans get approved much quicker. So a deal that might take weeks to get approved at a bank, can be closed in a matter of days for a direct private lender.

A Diamond in the Rough

Many real estate investors look for properties that are in need of a little TLC (tender loving care). They need work. Maybe the building is in need of repair or it needs to be reconfigured to maximize the value of the property.

However, with a little bit of vision and a lot of elbow grease this property will be worth significantly more than what the investor paid for it. These are value add deals. The investor adds value to the property and is able to realize the gain through either higher rents or a greater sales price after repairs or upgrades are performed.

These deals too are a good fit for hard money lenders.

Most hard moey lenders are “real estate guys”. They understand real estate and have a good handle on it’s value.

If a deal makes sense and the lender can see the properties future value, then the deal is likely to be approved. However, don’t expect to do many 100% financing deals with hard money lenders.

Cross-Collateralized Properties

Sometimes a borrower does not have enough equity in a single property to get the financing necessary for his needs. Many real estate investors own multiple properties and some of those properties may have a significant amount of equity.

A hard money lender can use one property as the primary collateral and a second property as additional collateral to secure the loan. The properties are said to be “cross-collateralized”.

Because most private money lenders understand commercial real estate value, they are able to be creative and provide these types of solutions.

Getting Deals Done

Hard money lenders are not a good fit for every deal. But in some cases they can provide the best solution to get a difficult deal financed. Borrowers that are facing a huge tax liability for a 1031 exchange gone sour may think a hard money loan fee a small price to pay  in comparison to Uncle Sam’s bill.

Commercial mortgage brokers would do well to take 15 minutes to get acquainted with the lenders on their lender list. While a rate sheet and lending matrix can be helpful, nothing beats a phone or face-to-face interview.

Here are nine questions that will allow a commercial broker to focus their efforts and to target properties to the right lenders.

1. What are your minimum and maximum loan amounts? - Calling a lender with a deal that is either too big or too small is a waste of your time and theirs.
2. Do you have a geographical limitation? – Some lenders can only lend in certain metropolitan areas. A loan outside of these areas is an automatic “No”.
3. What property types do you prefer? – You don’t want to take a loan on an auto body shop to a company that only finances apartments.
4. How long does your average loan take to close? What is the shortest amount of time you have personally seen a deal close? – This is very important to ask if you are dealing with 1031 exchange properties. It can help you weed out lenders for deals that need to close quickly.
5. What is your maximum loan-to-value ratio? – This helps you to eliminate lenders that cannot provide the leverage your borrower needs.
6. What is your minimum debt-service coverage ratio? – Along with the question above this helps you to determine the amount your client can borrow based on the properties income.
7. What information do you require from the borrower in a loan package? – It is frustrating for a lender to receive a trickle of information about a loan over a period of days, weeks, or months. Knowing beforehand what a lender needs, you can  assembled all the necessary documents before you send it to the lender for review and hopefully a quick answer or LOI.
8. What is the best way to contact you if I have a deal? – Contacting the lender through their preferred method shows a deference to working on the lender’s terms. It shows that you want to make things easy for them, not yourself.
9. What loans are you the most competitive on? – Sometimes lenders will tell you that they will lend on a certain type of property, and they probably will. However, the rate, LTV, or DSCR will make it practically impossible to get a loan from them. This question helps to narrow the scope to only the properties they can offer competitive financing for.

These are my nine suggested questions to ask your commercial lender. Do you have any others that you would recommend?

This month’s meeting for the Bay Area Mortgage Association was titled “What get’s financed in 2009?” The three panelists shared what each of their companies would be looking to finance in 2009.

Two life insurance companies and one national bank were represented on the panel. All three institutions expected higher cap rates, lower loan-to-value ratios, and stronger debt-service coverage ratios as requirements for new originations.

The bank is currently only planning to work with customers that have an existing banking relationship.

The life insurance companies face a difficulty because their global portfolio allocation have been skewed by the massive decline in the stock portion of their portfolios. For some of the life companies their portfolio is out of balance towards commercial real estate, as these assets have not lost value at the same rate the stocks have. This means that they will likely see a decrease in the amount of loans they can originate.

Survey Says

In a survey performed by Marcus & Millichap commercial financing ranked as the biggest concern for real estate investors in 2009 reported by Mortgage Bankers Association.

Financing availability, creditworthiness of tenants and rising vacancy rates top concerns for commercial real estate investors responding to a survey conducted by Marcus & Millichap Real Estate Investments, Encino, Calif.

…

Nearly 60 percent expected all-in mortgage rates to increase in the next year; nearly 75 percent believe financing will be as difficult or more difficult to obtain. While 60 percent of commercial real estate investors expected full recovery of the commercial mortgage-backed securities market, they said its return could take at least two years.

This provides a good opportunity for:

1. Commercial mortgage brokers and bankers that are able to find solutions for their clients,
2. Commercial real estate agents that are able to structure deals that get financed,
3. Real estate investors/lenders that have cash.

Creativity will be one of the keys to success in 2009 for those in commercial real estate. “Business as usual” is on vacation.

Photo Credit: The Pack

Calculated Risk’s post More CRE Woes: Multifamily housing details that loans on multifamily properties have seen an increase in delinquencies.

Apartment to Condominium Conversions

Some of this can be attributed to the reconversion of condominium conversion projects.

During the heyday of low interest rates and the housing bubble. Developers were buying apartment buildings, upgrading the units, filing a condominium map, and then selling the complex as condominiums to buyers. Often this was less expensive than buying land and building a brand new condominium project.

Condominium to Apartment Conversions

With lending criteria tightened, demand for condominiums has dramatically fallen.

Developers are being forced to offer these projects not for sale but for rent in order to make loan payments on their construction loans. These condominiums are being returned to rental status.

Rental Supply and Demand

Initially the condominium conversion projects decreased the available supply of rental housing, as apartment projects were bought for conversion. A decrease in supply lead to increasing rental rates.

Today, the opposite is happening. Condominium projects that are rented are increasing the supply of rental units and rental rates should decrease.

Calculated Risk’s post from Friday, The Residential Real Estate Market, details this exact scenario.

Adding to the woes are the fact that thousands of vacant single family residences are still on the market. As these are absorbed demand for rentals is likely to decrease again pushing rental rates even lower.

Bloomberg.com published an article yesterday about the decline of MetLife stock and linked it to the potential for commercial mortgages to fail. However, either the stock purchasers are unable to do simple algebra or the reporter linked the decline to something incidental.

MetLife Drops as Commercial Mortgage Defaults Loom

MetLife Inc. and Prudential Financial Inc., the largest U.S. life insurers, declined in New York trading on concern that losses on commercial mortgages will surge as the recession deepens.

No. 1 MetLife dropped $4.53, or 12 percent, to $32.88 at 4:02 p.m. in New York Stock Exchange composite trading….

MetLife’s commercial mortgage portfolio totals about $36 billion and accounts for about 12 percent of invested assets….

The portfolio’s average loan-to-value ratio is 57 percent, and as of Sept. 30 less than $2 million of the loans were delinquent, Kandarian said.

MetLife Drops as Commercial Mortgage Defaults Loom.

Notice the following items:

1. MetLife’s stock fell 12% and the total value of MetLife’s commercial mortgage portfolio is about 12% of invested assets. Mathematically this means that MetLife investors must have thought that the entire commercial mortgage portfolio was going to fail in order to generate this type of fall.
2. The average loan-to-value ratio is 57%. Meaning that on average each property would have to lose about 43% of value before MetLife would lose money. Possible? Yes. Likely? No.
3. Currently, $2 million of $36 billion (yes with a ‘B’) in commercial loans were delinquent. That is less than 1/100th of 1%. Even if this number tripled it would only equal a 0.0167% delinquency rate. Multiply this by 12% and you have the true impact on the MetLife portfolio caused by commercial mortgages.

If the stock price truly fell because of the expected defaults on commercial mortgages, this is not based on the mathematical fundamentals. Any fall in stock price would be due to irrationality in the market. Market foolishness.

However, it could be that the market is not foolish and that MetLife did fall in value for a legitimate reason. However, this reason is not related to any expected delinquencies in commercial mortgages. Then we have an improperly linked cause and effect. Foolish reporting.

Last week I spent 5 days 8 hours a day in the CCIM 101 course. It was quite an investment of time (and money).

It was worth every penny and minute.

The CCIM course is not for those that are mathematically challenged. (If you hate math, this course will be a challenge.) Much of the course is theoretical and analytical. It is also entirely practical.

The theory and analysis apply to real world situations.

What does CCIM 101 cover?

In the course we reviewed discounting and compounding cash flows, net present value, amortization, and a number of other financial calculations. You will become very familiar with your calculator during the week. (CCIM recommends the HP 10bII Financial Calculator and provides many of the keystrokes in the class text.)

The course briefly covers time value of money, appraisal, taxation, and provides two case studies to bring the calculations and theories to real world scenarios.

You will learn the difference between cap rates, cash on cash returns, internal rates of return (IRR), and capital accumulation and how to calculate each one.

Who should take CCIM 101?

I would recommend this course to commercial real estate professionals that want to provide an advisory service to their clients.

This course can add tremendous value to your clients. It will help you to competently evaluate competing investments and financing scenarios. Then you can advise your client on which is a best fit for their stated investment goals.

This is a great course for leasing agents, sales agents, commercial mortgage brokers, and real estate investors.

What did I take away?

I value CCIM 101 because it is not only, useful now as a hard money lender, but I can use it in my own real estate investments.

I will most likely use this in the short term for discounted note purchases. The discounting calculations will allow me to provide an adequate return on any notes that we buy as a result of the credit crisis.

The instructors were great. They came from different locals in North America and brought a breadth of backgrounds. They were able to convey the material with authority and wisdom that only comes from years of experience.

With so much negativity in the news there is a bright spot and an opportunity for commercial real estate brokers and lenders to market to doctors. This niche seems to still be buying.

While office building transactions have fallen off a cliff in recent months, one bright spot many industry analysts point to is the medical office building market, where sales typically range from $10 million to $30 million. According to the latest data from Real Capital Analytics, sales of medical office properties totaled $3.3 billion in the first nine months of 2008, a 13% drop compared with the same period a year earlier. But that dip pales in comparison to the 62% dive in property sales for the entire office market in the third quarter.

Medical Office Sector Bucks The Cycle.