Real Insight. Real Estate.

Posts Tagged ‘borrower’

Editor’s Note: Several of us at Llenrock Group have been teaching a course on the capital markets for commercial real estate broker’s continuing education requirements. As the last installment in a three week blog series, this week Questionable Brokers will  posit questions regarding Deal Structure. Click here for Part 1 (Real Estate Metrics). And click here for part 2 (Types of Capital) Enjoy!

Q: Why haven’t there been as many distressed properties coming to the market as was expected / predicted?

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Editor’s Note: As the second installment in a three week blog series, Questionable Brokers will  posit questions regarding Types of Capital. Last week, the first part of the series examined questions regarding Real Estate Metrics. Next Week week we will wrap up the series with questions Deal Structure. These are real questions from real real estate brokers. Enjoy!

Q: What is the difference between mezzanine debt and preferred equity?

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Editor’s Note: With Valentine’s Day coming up this weekend (order your flowers ASAP!), we figured, why not start off the week with a Cupid-esque topic? We can’t wait to hear your feedback on this one….

When a joint venture partnership occurs in real estate, the term “getting into bed” is often tossed around. And despite the fact that real estate is an industry dominated by men (and therefore subject to more coarse, perverted analogies), this phrase is somewhat appropriate. When you sleep with someone, you want to make sure you are protected (from exactly what, I will leave to the reader’s imagination), right?  Well the same goes for your equity partner in a real estate transaction.  Yet, while all real estate transaction involve some form of due diligence, JV equity partnerships involve an entirely different level of due diligence.

Rather than scoping out the salient facts of the deal, examining the borrowers track record, and crossing all the “t’s” and dotting all the “i’s” of a particular transaction (like a bank might do), an equity partner has to get extremely comfortable with the sponsor’s style and personality in addition to the aforementioned due diligence.  For this reason vetting a JV equity partner has become a lot more like eHarmony than a one night stand. Read the rest of this entry »

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A common theme amongst distressed property owners is their inability to service the outstanding debt on their property.  Owners will handle this in a variety of ways.  Some opt to give up and simply mail the keys back to the lender.  Others will borrow from the cash flows of better performing properties to make up for such a shortfall.  Then there are those who try to negotiate with their lenders.  Typically, this wouldn’t be as big of a problem as you might think.  After all, banks aren’t in the business of owning properties.  Therefore, logic would lead one to believe that a bank would be more than willing to work out a realistic scenario to keep the property in then hands of those who best know how to operate it.  Banks want their yield, and not much more.  However, in the most recent downturn, so much property, and so many mortgages on that property were sold in secondary markets to private investors, that banks weren’t the ones on the other end of the phone.  Special servicers were.

Special servicers are entities that exist solely to handle loans gone bad for investors who want the yields that were promised to them.  Unlike banks, special servicers are often not in your neighborhood.  They don’t understand market dynamics or property fundamentals.  And more importantly….they don’t care. So how best to handle a special servicer?  Should you go the route of forbearance, or opt instead to negotiate a cash flow mortgage? Read the rest of this entry »

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This list of Top 5 Loan Modification Myths is reproduced from the New York Real Estate Lawyer blog written by The Devery Law Group.  It is geared towards borrowers in single-family homes, but I think owners of commercial property can benefit from some of the points as well. 

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There is an interesting parallel between the parties involved in a foreclosure and the parties involved in a bad bet. The following ‘Family Guy’ video personifies what the Borrower/Gambler (played by Brian the Dog) and the Banker/Bookie (played by Stewie the Baby) likely feel like in these similar situations. At first, the Borrower plays coy, pretending that his loan past due isn’t that big of a deal. The Banker then beats up the Borrower (here physically, but in reality with constant threats of foreclosure and recourse) to the point where the borrower is terrified, doing everything in their power to stave off the inevitable, even lying to those around him about how much trouble he is in (here, lying about how he sustained injuries). Finally, after the worst is over for the Borrower (foreclosure), the Banker becomes distraught, realizing he now has to deal with the toxic asset and must wait for the inevitable beating he will soon take. The difference is that with bankers’ heads in the sand, they don’t even know when their beating will come, and are scared to find out (just like Stewie at the end). Take a look:

If you are having trouble viewing, try hitting pause for a minute or two to let the full video load. Trust us, its worth the wait!

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Many times, when an individual, or a large developer/operator purchases a commercial property, they buy it through a limited partnership or limited liability company.  There are many reasons as to why they do this.  Anonymity is one.  Most wealthy people are private, and do not want to be bothered, whether it is by brokers or any other third party looking to drum up new business.  Probably the chief reason, however, has to do with tax law, as property level gains are not attributed the same way to the individuals who are members of the LP or LLC as if they owned the property outright as individuals.  Essentially it provides a corporate veil of ownership, both in terms of who actually owns the property, as well as how Uncle Sam views its capital gains/losses.  Furthermore, if there is ever an accident, or other mitigating factor whereby a lawsuit is brought upon the owner of a property, it again can help protect the personal assets of the actual owners if they are found guilty of a civil lawsuit, limiting the plaintiff solely to property level monies. But wait, there’s one other big reason single purpose entities (SPE’s) exist… and it isn’t to protect the owner. Read the rest of this entry »

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Today we are going to do a throwback to your introductory microeconomics course in college.  For those not familiar with game theory, it is a branch of applied mathematics that is used in the social sciences, most notably economics, and is gaining momentum for its practical uses in everyday life.  Game theory attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others.  Traditional applications of game theory attempt to find equilibria in these games. In an equilibrium, each player of the game has adopted a strategy that they are unlikely to change.

The reason this is interesting to the world of commercial real estate, is that currently, the credit markets are frozen because nobody is certain of the potential outcomes of their decisions.  Ideally, with that information, players in this “game” can assess the outcomes of different choices, weighing the options of others into the assessments of their own choice. In this game, as in all game theory, the only concern of each individual player is maximizing his own payoff, without any concern for the other player’s payoff. With that in mind, let’s see if we can apply it to what is currently going on in the world of commercial real estate finance. Read the rest of this entry »

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Earlier this week, there was an article in the Washington Post outlining how GE outsmarted the system, because their failure would pose a “systemic risk” to the market if allowed to fail. “This was crisis management on steroids,” said a person familiar with the process. “A lot was made up on the fly.”

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Except a mortgage broker. Many people ask me what I do, and its often difficult to answer them both concisely, and in layman’s terms. Even those who know a thing or two about real estate, too often confuse my role with that of a mortgage broker.

A mortgage broker is a matchmaker of sorts, marrying borrower and lender together…at least until one of them wants a divorce. Sometimes the borrower cheats on the lender in the form of shopping for better rates to take out the existing lender through refinancing, and sometimes the lender cheats on the borrower by packaging their loan and selling it off to a third party.

The simple fact of the matter is that while they want to see a successful partnership, mortgage brokers don’t work for the borrower, or the bank, but for themselves. Many consumers assume that a mortgage broker works for them for free, in the form of shopping for the best rates and terms, and then gets paid by the lender for providing them the ability to loan money. Funny. That’s the equivalent of a commercial broker telling a buyer that they’ve scoured the market for better deals, and can’t find one better than the deal they are listing for sale.

The truth is that if you, as a consumer, aren’t paying the broker a fee directly, then the broker isn’t working for you. Sometimes lenders will offer brokers a rate to push to their consumers, and the only way a broker makes money is by inflating this rate until the spread reaches a number representing a fee for which the broker is willing to work. The bigger problem however, is that in recent years, banks offered brokers more to push certain loan terms like adjustable rate mortgages. “The ways brokers were paid created a conflict of interest and really meant that the broker to a very large extent was financially rewarded by betraying the trust of the borrower,” said Representative Brad Miller, a Democrat from North Carolina who co-sponsored the legislation in the House of Representatives.

Real Estate Investment Bankers are different for a whole host of reasons. First and most obviously, is that we offer capital solutions spanning the entire capital stack, not just straight debt. This means we can provide access to secured and unsecured mezzanine, and preferred and joint venture equity in addition to debt. We also provide more ancillary services like access to high net worth individuals for credit enhancements, bridge debt, and hard money. It is our network and creativity in addition to our services that provide value to our clients.

Most importantly of course, is that while any intermediary technically has two clients, the seller and buyer, borrower and lender or what have you, investment banking counsel really only works for one of them, the borrower. Lenders are our client in the sense that they are a vital partner to our business. By working closely with them, we can better understand their needs, desires and constraints to doing business, which in turn helps make our job easier on behalf of the borrower, our true client. It is the borrower who retains us for our services. We earn our fee in that we are only paid thereafter for success. Lenders value investment banking counsel for the relationships we bring to them, not any services we provide them.

Borrowers on the other hand value us for an array of things. First and foremost is our access to capital. Banking is a relationship business, and in today’s economy specifically, if you don’t have a relationship, you’ve got nothing at all (deposits help a lot, though!). Second is our ability to structure a client’s deal in a way that presents their case to potential lending sources in the most favorable light. This means that we increase the likelihood of funding since we understand how bankers want information presented to them. Third is our industry knowledge. By working with lenders frequently, we know what types of deals they want to see, which means we know the most likely candidates to be competitive for each specific deal. Fourth, we save the client time, and time is money. Many of our clients are successful real estate operators, but they didn’t become successful by wasting their time on the phone with 100 capital partners, shopping for the best terms. Others are business owners, where real estate is not their forte. In either case, we act as a trusted advisor to our client. Furthermore, no lender would dare call a real estate investment banker’s bluff if we told them we can do better.

So next time when you are speaking with your investment banking counsel, remember why they might be upset with you for insinuating they are “simply” a mortgage broker, and choose your words wisely.

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