Commercial Magazine

Create Tailor-Made Loans

Visualize a project’s bigger picture to capitalize on nontraditional financing

By Milton Franklin

In the decade since the Great Recession began and left a severe impact on the financial world, commercial real estate financing has undergone many evolutionary procedural changes. At first glance, this might be a bad-news scenario. As with most obstacles to humankind and its expansion, however, remedies to this unique situation gradually developed.

What exists today is a pick-and-choose financing environment available to those with the insight and the wherewithal to visualize, comprehend and utilize these new opportunities. It is now possible for commercial mortgage brokers to help borrowers custom-tailor a loan-financing scenario to smoothly transition from short-term to long-term financing when needed for projects with long life expectancies.

The Dodd-Frank Act and the Basel III regulatory accord each left lasting and inescapable limitations on banks and their involvement in the financing of commercial real estate projects. Banks now have much higher reserve-retention requirements and risk-limiting guidelines that serve to reduce available funds and the involvement of traditional lenders in the commercial real estate financing arena.

Initially, regulatory reform was considered to be the death knell of prosperity and continued commercial real estate development within economically advanced nations. Essentially, much less capital would be available for large-scale construction, development and acquisition projects. At first, the growing pains were extreme, with fraud and incompetence perpetrated by so-called private, unregulated funding sources that caused nightmares for those who sought to develop and build, despite the lack of freely available capital.

Many practices came into being that were seemingly devised for the sole purpose of separating well-meaning principals from their hard-earned cash. Advance expense deposits, due-diligence fees and other miscellaneous costs were elements that caused many previously successful developers to turn away from the business completely, which affected business prospects for mortgage brokers as well.

The dust settles

Over the course of roughly seven years, these new tactics came and went, destroying many hopes and dreams in the process. Finally, around 2015, the dust began to settle to the point where much clearer distinctions between what was real or not could be made with a greater degree of certainty.

Traditional banks have yet to regain their former prominence in the industry as the premier go-to sources of financing for the majority of projects. Make no mistake, they still maintain investment levels in the hundreds of billions of dollars in the industry, but it is a much smaller percentage of total cash outlays than traditional banks previously made available.

Traditional banks have yet to regain their former prominence in the industry as the premier go-to sources of financing. 

Today, top-tier banks are typically only willing to risk their more limited investment dollars on highly popular projects being sponsored by equally well-known — and successful — developers and builders. New developers or relatively unknown builders have been unable to secure financing for their projects, but that situation is now turning around, and funding is becoming readily available for most types of projects and borrowers.

Many entrepreneurial lenders have recognized an opportunity instead of an obstacle. The hurdles faced by traditional banks provided an extraordinary opportunity for private lenders, hard-money lenders, nonconforming lenders, bridge lenders and countless blends of all of the above, as well as the mortgage brokers who work with them. The final result of the chaos that overwhelmed the global economy is finally benefiting small and midsize builders and developers in ways that were unimaginable as little as a decade ago.

Conceptualize funding

There are multiple opportunities today for those who are able to think outside the box and consider projects in their entirety instead of as individual segments. Rather than focusing only on the most immediate aspect of the project, borrowers and the mortgage brokers they work with should think more freely and view their endeavor as a work in progress, with a lifespan that may require different financing at future stages. In other words, they should attempt to conceptualize how to finance the entire project with multiple options or mixtures of funding instead of acquiring one type of loan, which was the most common practice in the past.

The choices available to today’s borrowers have increased tremendously from the limited opportunities of the past. Smaller developers used to be stuck with choices between hard money lenders and other expensive financing options. Today’s lending landscape is much different. The vacuum left by the restrictions imposed on traditional banks has been filled by an ever-expanding base of loan products and mixtures of lending techniques, thanks to multiple sources working together.

Commercial mortgage brokers should first have discussions with their clients and/or the principals of a project to determine, in general, what they wish to accomplish. How they plan to finance their efforts and why that plan was developed are important because that may disclose significant financial considerations that must be taken into account. Mortgage brokers and their clients should be willing to provide accurate and specific details regarding their involvement and contributions to the project — both financial and managerial in nature.

There may be a more feasible alternative that is less costly or is more suitable for the borrower’s long-term financial objectives.

They also should describe the participation of any equity partners or other capital sources. The mortgage broker should then contact appropriate funding sources for the type of project, location, loan amount and term, industry segment, exit strategy and any other pertinent information. The immediate objective is to provide an overview of the scope of the entire undertaking.

Despite the fact that these seem like very specific questions, the logic behind asking them is to create a big picture of the overall project, as opposed to focusing narrowly on the specific loan type that the borrower may believe best serves the purpose. In other words, the mortgage broker and borrower should not concentrate on securing a specific type of financing because there may be a more feasible alternative that is less costly or is more suitable for the borrower’s long-term financial objectives.

Know the options

Obviously, there will be times when a borrower or project are limited to certain types of financing, but there will also be opportunities for lenders to exercise creative, single solutions to multiple financing requirements. A lender, for example, could finance a construction loan that automatically converts to a permanent loan after a given length of time, or when the property reaches a predetermined occupancy or stabilization level.

This strategy would eliminate the probability of having to acquire a short-term construction loan, followed by a bridge loan and permanent financing, each of which requires separate fees and, possibly, a balloon payment. Conversely, a single-loan option may be structured to fully amortize and have much lower interest rates over a longer term.

There are enough choices currently available that even lenders with limited options may have associations or quasi-partner arrangements with other lenders who will cover the next phase of financing with minimal costs and favorable exit strategies, terms or rates. Many commercial mortgage brokers and borrowers may consider the above scenario to have near-utopian standards, but all that is required to position yourself to take advantage of these and similar opportunities is the development of strong, direct business relationships with various funding sources.

Your project and/or principal may be the catalyst for a lender to exercise creativity that was previously not considered. The lender has a primary goal — achieving a return on their investment. New methods or different types of investing do not alter that objective.

From the commercial mortgage broker’s perspective, these relationships can lead to a continuous stream of business because of newfound alliances and abilities to offer unique solutions for your clients’ funding needs. The only necessary requirement is to take the time to identify, research and communicate with these funding sources prior to introducing them to potential clients.

Borrowers also can benefit by receiving potential interest rate and fee reductions for future business, as well as quick, simple, less costly and more dependable financing for the entire life cycles of their projects. The only additional investment on their end is the time and patience required to identify and cooperate with the broker and lender, who can structure the transaction in a fundamentally strategic manner.

• • •

All in all, commercial mortgage brokers stand to benefit economically on a personal financial level — and in an industrywide developmental manner — because of the limitations that have been imposed on traditional banks and other conventional funding sources. Initially, this era seemed to signal that financing would be restricted indefinitely. The opposite has transpired, however, and commercial real estate professionals are now free to expand their business functionality beyond what they imagined just a few years ago.


  • Milton Franklin

    Milton Franklin is founder and president of Commercial Mortgage Exchange Inc. (CME), which maintains direct relationships with multiple private and nonconforming funding sources. CME offers a wide range of nonbank lending sources, provides creative financing products and strategies for clients, and offers partnering opportunities for commercial mortgage brokers. Franklin is a graduate of Wharton Business School with 35 years of experience in financial services.

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