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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2013

Find Hidden Treasures in Natural Resources

Prospect for untapped opportunities in an often-overlooked niche

Find Hidden Treasures in Natural Resources

With recovery in the commercial real estate market taking hold, competition is increasing among commercial mortgage brokers for good, fundable projects. Like lenders, brokers are becoming much more particular about the types of projects they choose to represent. Fortunately, there are more than enough to go around, but the prime projects will have brokers clamoring for their representation.

In today’s market, multifamily is probably the most preferred type of property because of the continued demand for housing units of all types. As the population ages and lives longer, medical facilities will see an increasing demand, attracting a larger group of brokers to represent these properties. In addition, office space is expected to show adequate growth especially in major markets, and hospitality is seeing a surge as it makes a comeback from its doldrums.

Despite the potential that remains in each of these property types, what many brokers need is to go off the beaten path and find a niche with untapped opportunities. One such niche is natural resources. Developments and projects related to natural resources often have been overlooked because they are considered too specialized. As not many lenders are interested in these deals, few brokers have been willing to take these projects and properties into their portfolios.

Brokers who are willing to go after these opportunities, however, can position themselves for unique deals with precious returns.

Today there are well-funded entities that are looking for properties in the natural-resources sector, which includes oil and gas projects, as well as alluvial and placer mining projects. Because funding sources are often little known, the majority of commercial mortgage brokers may be unwilling to represent these entities. Brokers simply may not know where to place this type of project for funding.

In addition, many lenders and funding sources may give this type of project nothing more than a cursory look. These lenders often lack the due-diligence acumen to make a positive financing decision, which results in them dropping most of these projects, even if they’re good projects. For example, lenders that are comfortable lending on office and retail projects may be quick to reject a mining operation because they do not understand the specifics of the transaction.

With more specialized funding sources available for these projects now, they are expected to become more popular. For brokers, it is critical to be among the first to establish relationships with principals and to seek out individual funding sources that specialize in financing this type of project. By developing relationships with funding sources, brokers can position themselves as experts who can get these deals done.

Explore opportunities

The key to success in this arena is to deal with financing sources that specialize in natural-resources funding. They will be experts, for example, in hydrocarbon exploration (i.e., oil and natural gas exploration and drilling operations) and in gold, silver and other precious metals’ mining operations.

Oil and gas exploration and drilling are at their peak, and now is the perfect time to seek oil and gas exploration and construction project funding. There are funding sources that finance oil and gas construction on a national and global basis. Several lenders provide financing for oil and gas projects in emerging markets and for oil-rig construction. In some cases, they also will assist with oil-drilling equipment and various other aspects of oil and gas financing, such as the construction of related processing and transport facilities.

Keep in mind that oil and natural gas exploration and drilling projects can be expensive, depending on their locale and whether they are onshore or offshore. The majority of these projects typically seek funding between $500,000 and $30 million or more, depending on the size of the project.

Placer mining is the mining of alluvial deposits for minerals. An alluvial deposit is a deposit of sand and gravel in a stream or river bed. Water flow typically moves the metals from their original source to that location, and they make only a small portion of the deposit. The heavier metals like gold are more dense than sand. They tend to accumulate at the base of the placer deposit in places like river bends, where the water flow is not strong enough to continue moving the deposit. Placer mining of alluvial gold is popular because of its low cost compared to other gold-mining methods. Gold is much heavier than the sand and gravel transported with it by the flow of water and can be separated easily from the sand, gravel and other metals using gravity-based techniques.

This results in a high return on investment because production costs per ounce are low. When compared to hard-rock gold-mining methods, placer mining of alluvial deposits also can yield productive results in much shorter periods of time. For these reasons, placer mining is popular and recognized as profitable throughout the United States and around the world.

Placer mining is what the old-time prospectors used when they were panning for gold. Today, however, depending on the size of the placer deposit, much larger equipment and techniques can be utilized to separate the precious metals from the sand and gravel. Many of these placer deposits are large enough to require financing in millions of dollars. There are funding sources for different types of claims, as well as equipment financing for all types of mining equipment. Funding also may include camp construction and financing for operations when there are proven reserves. Alluvial and placer mining is also useful for mining other minerals, diamonds and gemstones.

Getting started

By establishing yourself with one good project, you open the door for many follow-up projects that can be presented to a funding source that specializes in this particular niche. This will make you one of the few commercial real estate brokers who can prospect for this type of transaction successfully. The dollar amounts of these transactions are similar to the values of your typical commercial real estate transactions. There also may be the advantage of including additional fees for equipment leasing, which frequently is included as a part of these transactions. In many cases, the equipment-financing aspects of the transaction alone can be as expensive as an additional real estate transaction.

In essence, brokers may think of these types of projects as gold mines because the number of available projects far outweighs the number of brokers seeking them out. For the lucky few who represent these types of transactions, the number of potential projects is more than they could handle, leaving them with an unlimited source of new deals to present to the appropriate funding sources. In addition, the vast number of these projects allows brokers to cherry-pick the best of the best for presentation to their funding sources.

Most commercial mortgage brokers are competing for hot property sectors where the competition is stiff. Savvy brokers should think outside the box and go after the natural-resources projects niche, domestically and/or globally. Remember, these principals tend to be far more willing to accept the requirements for due-diligence fee payments than their pure real estate counterparts. They know that their financing choices are limited, and many have time constraints in the form of deadlines for the continuation of their mineral-rights agreements. Under this pressure, they typically will be willing to move forward at a much quicker pace than average real estate principals who believe that they have many options available. They also will be eager to provide documentation for their projects and will work to move forward as quickly as possible.

• • •

Taking a small risk and going after a lucrative, yet underserved, market is worthwhile. The demand for natural resources will continue to grow into the foreseeable future, and the suppliers of these products will be expanding and seeking financing constantly. These types of projects can be exactly what serious commercial mortgage brokers need to take their businesses to the next level of financial success.

The transition into natural resources financing is fairly simple. With slight variations for specifics, the process is essentially identical to a standard real estate transaction. The documentation requirements and due-diligence processes also are similar, as are the closing procedures. The learning curve, therefore, may be short or eliminated altogether.

Forward-thinking commercial mortgage brokers should go where the competition is less intense and the compensation is just as great. When working with borrowers and putting a greater effort into presenting themselves and their deals positively to their prospective lenders, the rewards may be even greater when equipment financing and other types of related construction and operations are factored in. This avenue also opens up new revenue sources for commercial mortgage brokers. This is a niche that should not be ignored, especially because it grows more lucrative as time passes and demand for these natural resources increases. 


 


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