The commercial mortgage industry typically slows down from November through mid-January, compared with the rest of the year. There are holidays, extended vacations, family travel and celebrations — all of which tend to slow the pace of business because many essential individuals that commercial mortgage brokers deal with on transactions are simply unavailable.
That can compound an already existing reality of the business. As we all know, commercial real estate financing can be a long, grueling, document-intensive and frustrating process. The wait for procedural and due-diligence processes, even absent the usual year-end slowdown, can be as long as 60 to 90 days, if everything goes well. Add any hiccups or obstacles into the transaction and the process extends.
There’s also the requirement in commercial deals for the principals to have “skin in the game,” or to individually assume a portion of the financial risk, should a project not progress smoothly or fail outright. The amount of investment required to cover the lenders’ concerns on that front can vary and, if too onerous, may be instrumental in making a project too expensive — particularly with large-scale projects.
Project principals simply do not have unlimited time, liquid funds or available cash flows to make every deal work. There are some options available, however, that can help commercial mortgage brokers and their clients better take advantage of the “time value” of money by speeding up the loan-closing process.
Deadlines in the commercial real estate financing world must be considered. Contract-expiration dates, late-penalty clauses, competitive bids and participant availability all can impact the success of a project or even the project’s viability. Successful procedural tactics, however, have been devised that can help a broker overcome the obstacles to moving a transaction forward in an efficient manner.
These tactics are best described as transactional lending. That’s when the sponsors of a project have a buyer and/or take-out lender for the permanent financing waiting in the wings to relieve them of their financial burden. These sponsors can then utilize funding sources for initial financing requirements and allow them to make millions of dollars in profits in as few as 24 to 48 hours, depending on the size of the transaction.
“ This transitional-lending approach only works well when a transaction involves experienced principals and knowledgeable investors. ”
Your clients also may benefit by acquiring the properties or projects they are seeking within a couple days, without the requirement of making a large downpayment or other financial commitments. This approach requires well-prepared, seasoned borrowers who have excellent projects or proposals to present. The uninitiated and/or inexperienced need not apply.
This process can tremendously shorten the traditional procedures of loan application and submission, review, conference calls, term-sheet preparation and signing, due diligence, board meetings, proposal confirmation, acceptance and deal closing. That process, at best, normally takes at least 60 to 90 days and it can extend to 120 days or more if amendments need to be made.
Following this transactional-lending, or fast-track, approach, if all the pieces are in place, will produce what everyone in the business loves, and almost certainly what this industry will graduate to eventually — a one- to three-day funding-approval process. Obviously, the borrower needs to be prepared, but what does that preparation look like? There are a few very obvious steps that need to be taken, many of which are already part of a more standard 90-day loan-approval process.
Tricks of the trade
For this fast-track process to work, the buyer and seller must first agree on a deal price. Usually, this involves the inclusion of a contract, which, in many cases, is required anyway. As part of this fast-track approach, the contract price should be at a significant discount or at least at a level that allows the take-out lender providing the long-term financing to make a profit on their investment.
Before that occurs, however, the transactional lender that provides the initial short-term funding for the deal must receive several points on the transaction (six or more is ideal). Broker compensation, usually one or two points, also must be factored into the deal — the same as a traditional transaction.
On top of the points and fees paid to the transactional lender and broker, the take-out lender has several choices. They can require a lump-sum payment at some future date, which will add on a profit. They also can elect to amortize the loan amount over various periods of time, take an equity position, or a combination of both.
Based on negotiations between legal representatives of all parties involved, the take-out lender may decide to pay legal fees, title fees and other expenses. Regardless of their final determination, the situation results in a project being financed and all parties benefiting in various manners, with each party being a participant in the determination of the final outcome.
This fast-track approach to closing a deal offers a number of advantages. Following are some of the positive outcomes:
- The entire funding process, from submission to payment distribution, when approached properly, can be accomplished in 24 to 48 hours, as opposed to 60 to 90 days.
- The uncertainty of securing a take-out lender, or final funding source, is eliminated.
- The borrower is in control of his payoff options and worries about future cash flows or project viability are mitigated throughout economic cycles.
- The seller has sold his property at an agreed-upon, predetermined price.
- The buyer has paid only the fees agreed upon with the seller and the brokerage intermediaries.
- Each and every transaction is entirely negotiable and agreement to proceed is only accomplished upon satisfaction of all involved parties.
- Unexpected fees and other expenses are entirely eliminated.
Other perks of this financing approach include the fact that all taxes, as well as all legal, title and miscellaneous fees, can be handled by the take-out lender, and predetermined profits are achieved in the manner and amounts agreed upon. The buyer also eliminates the need to provide proof of funds or financial support from financial entities and, in many cases, the reputation of the take-out lender will suffice as proof of funds.
In addition, the utilization of major, reputable title companies and escrow agents will greatly reduce the potential for fraudulent activities. Obviously, this transactional-lending approach only works well when a transaction involves experienced principals and knowledgeable investors. The bios and track records of the individuals involved in the deal have to be vetted in order to establish their ability to successfully complete the commercial real estate project being financed.
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Mortgage brokers should familiarize themselves with these transactional-lending shortcuts for moving a deal forward faster. The dollar amounts that can be involved in such fast-track deals are unlimited and can range from millions to billions. The compensation to brokers is equivalent to brokerage fees involved in more traditional deals.
The results, when the process works, however, can include significantly reduced deal-approval time frames. That benefits brokers and their clients — given that time is money in the commercial real estate business.