Securing a mortgage for commercial real estate can be a complex and time-consuming process. It is challenging for borrowers who need financing for their projects to decide whether to use the capital-markets team offered by the same company as their investment sales team or to select an independent structured-finance firm.
As the commercial real estate industry changes and evolves at an ever-increasing rate, the role of the independent mortgage broker become increasingly important. Brokers need to be able to market themselves to lenders and borrowers. And these independent brokers need to explain the positives gained from their perspective as well as their specialized skills and expertise.
The benefits of allowing an independent mortgage company to arrange financing are clearer than ever. One main reason is that independent brokers can often secure the best financing terms and structures. As outside experts that bring an agnostic approach, independent mortgage professionals can tap into larger pools of capital sources, thus providing more options to consider.
Take, for example, a deal for a 120-unit apartment building where the escrow is scheduled to close in a few weeks. The buyer has already used an extension and has $250,000 in earnest money. Freddie Mac announced a reduction in the loan amount due to underwriting issues and the buyer no longer has enough equity to close. An independent mortgage broker could use their expertise to save the deal. With no alternatives, however, the buyer is forced to walk away from the deal and loses the earnest deposit while the investment team moves on to the next buyer on deck.
Single-source dangers
When discussing their skills with potential clients, a broker needs to make a compelling argument by laying out the advantages that an independent mortgage company brings to the sales transaction. Structured-finance experts (outside of the investment sales team) who arrange funds can deliver value to both the buyer and the seller because they can expedite the entire process.
Borrowers with access to these intermediaries, who have built trusted relationships with capital sources, tend to get deals done quicker and at the best terms because everyone knows their roles and what to expect. As the borrower continues to transact on other properties, the independent mortgage firm essentially acts as the client’s in-house capital-markets team. Utilizing the same group of professionals to finance each transaction creates continuity for the client and streamlines the financing process from deal to deal.
It is wise for borrowers to steer clear of an investment sales team that forces a buyer to use their in-house capital-markets group. These “single-source” deals allow the seller’s side to control all elements of a deal. While this may appear less complicated, it is not always advantageous to the buyer.
Cross-selling to an internal capital-markets team is good for a company that performs work internally to maintain a greater amount of control over the transaction. But it’s not as helpful for the buyer, who is often at the mercy of the seller and their team. There also are underwriting differences, which an independent firm can share with a borrower.
While an investment sales team might boast that their company is a direct agency lender and can thereby offer the most competitive terms, there can be extensive differences in the experience level and effectiveness of their closing teams. With multifamily housing transactions, there also may be differences in how aggressively a lender with Fannie Mae’s Delegated Underwriting and Servicing program or a Freddie Mac seller-servicer underwrites.
It can be important to know how a lender views different markets across the U.S. For instance, some are aggressive in pursuing deals in specific markets based on their internal mandates or focus areas. This means that it’s smart to know which markets and property types they favor before seeking financing.
Competitive advantages
Those who have been in the commercial real estate financing industry for decades know that shopping deals around to different lenders is smart, if done properly. Doing so can result in borrowers getting the best deals, since checking with multiple lenders can expose the deals to a larger pool of capital sources. This, in turn, creates competition and delivers the best options for borrowers to consider.
Savvy independent mortgage experts also understand that there’s a right way to encourage competition. This means negotiating with an eye toward creating long-term lending relationships rather than surface-level price shopping.
This relationship-oriented approach from an independent mortgage broker enables the borrower to overcome obstacles encountered during the process. He or she can lean on the strong bonds that the brokerage has established with third-party lenders. Additionally, this can open up access to the most competitive and sought-after capital sources, which have the luxury of being selective with their time and energy.
An experienced and active independent brokerage can offer a diverse and trusted network of lender relationships. These will provide the best results by opening up access to the most aggressive capital sources, then creating competition to drive the best terms for the benefit of the borrower.
Speed and efficiency
The process of buying or developing commercial real estate can be lengthy and complex. Financing is one key component that an owner or investor will require to move forward. This makes it important for all parties involved to be aligned and focused on the execution of a deal.
There can be speed bumps when borrowers use the in-house capital-markets team at the same company as their investment sales broker. This can occur because, as the process rolls along, there are often separate teams for originating, underwriting and closing. Sometimes people move on to other projects and another team might take over, which can result in less consistency and cohesiveness.
Borrowers today also may require assistance to solve problems or special circumstances like those brought about by the COVID-19 pandemic. Having a well-oiled, independent team working with the lender and the borrower can resolve any deals that hit snags.
Experience and transparency
The financing process is about getting the right loan structure for a specific deal completed as rapidly as possible. An independent and experienced mortgage broker knows what to look at, brings the best analysis, communicates with everyone to work through issues and ultimately helps to create a smoother process.
Having a transaction management team in place that has specialized expertise and previous work experience together can see and anticipate what others with less experience don’t. It goes beyond simply being able to check boxes and fill out forms. It’s about having a tried-and-true process that focuses on communication to negate any issues that may slip through the cracks and surface at closing.
Maybe one of the most compelling reasons a borrower should consider going with an independent mortgage company is to keep everything separate until the right time. Too much transparency too soon may result in a borrower losing leverage at the negotiating table.
Conversely, waiting too long to share information could cause a deal to go south. Since an independent mortgage team sits outside of the investment sales team, it can provide what is required at exactly the right moment. In a single-source situation, it will be tough, if not impossible, for an in-house capital-markets team to keep the borrower’s information from landing on the desk of the seller’s investment team, since they work for the same company.
Additionally, in-house buyer representatives are expected to share information about the borrower. All the cards will then be on the table. The buyer will have lost the ability to negotiate the best terms since the seller will know their position, financial details or other information, thus giving the seller an unfair advantage during negotiations. Working with an independent mortgage firm can help ensure confidentiality and reduce a borrower’s exposure.
For example, sometimes the borrower may need more time to close the transaction. Maybe an equity investor fell through or the loan amount was reduced. Disclosing such issues might encourage the seller to begin formulating backup options. A tactical approach to this problem, however, is for the buyer to note an issue with the property — conceivably, a concern arose on the property-condition report that needs more time to work through.
By using an independent finance team, these reports would be confidential and allow the buyer to maintain some leverage to negotiate an extension of the closing. It’s hard to bluff when the same company that’s selling the property also controls the third-party reports and has complete knowledge of the buyer’s complications.
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To be sure, executing a commercial mortgage deal is an extensive process. Borrowers who tap into the expertise of an independent mortgage company require a structured-finance team.
These intermediaries have extensive market knowledge and relationships. They are skilled at underwriting and apply a comprehensive understanding of capital markets, leases, legal documents, escrow, title, insurance and many other considerations. Hiring an independent finance team with decades of experience — and one that has closed billions of dollars in deals across a wide range of commercial-property types — remains critical as the market continues to evolve. ●
