Corporate deals in disguise

There is a gray area between mortgage lending and corporate lending. For instance, many people might assume that a bowling alley would require a mortgage loan. In actuality, however, it likely is a corporate deal. This is because the bowling alley's intrinsic value is more directly related to successfully renting the lanes than to anything else. Without the equipment and accoutrements a bowling alley is known for, it's really just four walls and a ceiling.

Taking this example even further, assume that the bowling-alley franchisee owns the building, which is worth $2 million of a $10 million package that includes the brand, equipment and more. The $2 million is a real estate asset, but the franchisee needs to borrow $8 million to complete the deal. Only 20 percent of this deal comes from real estate; the other 80 percent uses assets for collateral and therefore is subject to shorter lending terms.

Another property type that often is better suited for corporate lending -- and that may surprise mortgage brokers -- is hotels. Although hotel loans are closer to traditional real estate loans because the property can easily be converted to apartment units, the hotel's value is really based on how well rooms are rented and how long they are occupied. Typically, a loan to a hotel to refurbish the property would be considered a corporate loan rather than a real estate loan and would be subject to corporate-lending guidelines.

Main considerations

For brokers who are new to corporate lending, the lines between mortgage loans and corporate loans may appear blurred. There are two questions to consider:

1. Where does intrinsic value lie?
2. What is the duration of the stay?

For loans related to a property, such as a bowling alley, a hotel, an ice-skating rink or a bar, it comes down to the property's intrinsic value. Is its value built into the four walls, or is it what lies within them?

If it's what lies within them -- which could easily be uprooted and taken to a different property -- it likely is a corporate loan.

The intrinsic-value rule can be more difficult to apply to properties that house tenants. In those cases, brokers should consider the duration of the stay. If tenants are staying on a nightly basis, such as in a hotel, it can be difficult to predict future revenues. In these cases, it would likely be a corporate loan.

For tenants who are committed for a year (e.g., an apartment house) or for five or more years (e.g., an office complex), the value typically lies more with the actual building and would be eligible for a real estate loan.

Mortgage brokers have the skills and experience to earn significant returns in the corporate-lending market. The lending processes are similar enough for brokers to make good use of their real estate background. But they also likely are different enough to help deals that may otherwise go overlooked.

Andrew Bogdanoff has more than 35 years' commercial lending experience and founded Remington Financial Group Inc. in 1993. He has served as the company's president since its inception, and under his leadership, RFG has closed billions of dollars in transactions. Reach Bogdanoff at andy@remingtonfg.com. For more information on RFG, visit www.remingtonfg.com.

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