Financing solutions could exist for clients who might otherwise pass on a good deal

Craig Grella, co-founder, Cornerstone Funding Services Inc.

As published in Scotsman Guide's Commercial Edition, February 2009.

In today's tight credit market, most conventional mortgage lenders -- such as commercial banks and insurance companies -- are falling back on time-tested, conservative underwriting methods. This includes requiring low loan-to-value ratios (LTVs); high borrower liquidity and net worth; and stable, low-vacancy assets. It's likely harder for many of your clients to get high-leverage loans, and they're often required to put up a larger cash outlay -- receiving a lower return on investment.

Thus, many would-be property-buyers sit on the sidelines to wait out the market, and the volume of brokered deals is decreasing significantly. As a mortgage broker, however, you can help your clients move forward with their deals by helping them find private equity.

Your clients don't have to pass on a good deal just because they're short on liquidity. Many companies offer private equity for real estate transactions, and they operate much like private loan sources.

The major difference is that the money your client receives is not treated like a loan, and private-equity lenders do not take a subordinate-note position behind the first-lien lender. Rather, their money goes into the pot upfront with your client's cash equity. In return, the equity firm receives a split of the cash flow and a split of the profits when your client sells the property.

Finding it

Finding private equity isn't always difficult. In fact, most investors find their first level of private equity from family members, friends and close associates.

If your clients don't have contacts with cash, you can help them dig deeper and get more creative. Make a list of local note-buyers, private lenders and others who have experience investing in commercial real estate and who understand the risks.

To win private-equity investors' money, your client must first earn their trust. To do that, the client must demonstrate the merits of the investment while showing its potential to generate high returns. Your client can do this by highlighting certain property features, including:

• How much equity is required;
• The level of your client's investment compared to the needed investment;
• The investment horizon or holding timeline;
• The property's monthly or yearly cash flow;
• The exit strategy -- will your client refinance the property in three years or sell it?; and
• How much of the monthly cash flow and profit from sale the investor will get in return for the equity.

Determining the cost

There is no standard rate of return for private equity. Some investors will require a simple 10-percent to 15-percent annual return. Others will ask for a split of the cash flow commensurate with the ratio of their investment; a portion of your client's exit cash flow; an overall yearly rate of return that could be greater than 20 percent; or a combination of these.

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