BLOG VIEW: I have spent most of my professional career financing commercial real estate. Lending platforms have included banks, credit companies and a public mortgage real estate investment trust.
Since I got tired of running from bank to bank during the mad merger phase of the 1980s, I transitioned to a nationwide commercial mortgage investment banking firm. This move introduced me to new ways of life company financing, Wall Street, and the public agencies, Freddie Mac and Fannie Mae. For years, I thought that these were the only sources I would need to succeed as a mortgage banker.
However, everything changed in 2008. The financial crisis that began that year and lasted until 2011 was beset with widespread capital disruptions and falling property values. During this period, with the exception of the federal agencies, many of these sources retrenched and basically stopped lending. After a relatively short adjustment period, the agencies were the only reliable source of commercial mortgage debt through most of the crisis. This was not a good scenario for a mortgage banker who relied on free flowing, diversified funding sources.
The situation was dire, confusing and stressful for most mortgage bankers. But I soon realized that the most successful mortgage bankers during this period were the ones that had robust relationships with the most lending sources. In order to "stay in the game" – and realizing that there was going to be a lot of stress in the market coming out of the crisis – my focus shifted to the world of bridge financing and building a database of bridge lenders.
Simply put, bridge lenders provide the necessary capital to "fix" and "stabilize" broken commercial and residential real estate properties. Once stabilized, the property can be sold or refinanced with a long-term permanent loan. Characteristics of a bridge loan include shorter terms (one to five years), interest only payments, fixed- and floating-rate options, loan fees in and out, moderate to higher leverage, and staged payout for property and tenant improvements and leasing commissions. Financing is typically available for acquisitions, discounted note payoffs, note purchases and refinancing.
Bridge lenders can be a fantastic and lucrative source of business for a mortgage banker – especially given the current cycle we are in, where all the peak loans from 2005 to 2008 will be maturing in the next few years. So, what is the most beneficial and efficient way to enter the bridge world space? What follows are four principles to be successful in this market:
First, educate yourself and build a database. I receive calls all the time from mortgage bankers saying that they think they have a bridge loan but they don't know anything about them, or that they have never done a bridge loan before. And, can I help them? I appreciate theses calls because they allow me to provide the mortgage bankers with the necessary terminology and structure to go back to their clients and sell them a program that meets their needs. In addition, I always offer to get on a call with the mortgage banker and his client so both can hear the same pitch together. Most are generally satisfied after the call that a product exists that fixes their problem.
Second, once you develop some basic knowledge of the product – and market – you can sell it to your entire customer base. Most of your clients may not know that such a product even exists. Market even to clients who you might think are too well capitalized to benefit from such a product. Be safe and assume that every one of your clients will, at some point, need to restructure or recapitalize one or more assets in his or her portfolio. The bridge lending business is not a commodity business and will change as the market change. So stay current.
Third is customer retention and recognition. While most bankers stick to the traditional sources of capital (Life Company, CMBS, and Agency), these areas are also the most competitive. Spending lots of time and energy on a deal only to lose it over a few basis points or a few extra dollars is demoralizing and frustrating. To customers it's all about who can create the most value for them. Creating the most value comes in the form of who can rectify the client's most vexing problem. Borrowers have good memories and they won't forget who helped them out of a serious problem when the next deal comes down to a few basis points.
Lastly, expect to see higher fee income and subsequent business. You deserve a higher fee given the complexities associated with a property that is in transition. The underwriting doesn't compare to analyzing a permanent loan, where all you need is a rent roll, operating history, a map and a picture (oversimplified, but you get the idea).
Bridge lenders deal with properties that can be completely vacant, so market knowledge is paramount. What are the demand factors in the market, occupancy levels, rental rates, demographics, road systems, traffic counts, leasing costs, etc.? Sponsorship is also a major factor, and it's believed that they have done this before. It takes a lot of work to accumulate this kind of due diligence. Most transactions have short time frames (30 days)Â – so the entire process is condensed. Because of this, a broker deserves greater compensation.
Even better than getting paid once, is getting paid twice. That's what bridge financing can offer. If the originating broker maintains contact with the sponsor throughout the stabilization process, the broker should be in a favorable position to provide the takeout financing with long-term permanent financing, or sell the property – earning another fee!
So the moral of the story is to become familiar with the bridge loan product, diversify your lending sources to differentiate yourself from the pack, provide the opportunity to add unique value to your customer base, maintain a built-in opportunity to have constant contact with your client, and best of all – get paid twice!
David Henrich is executive vice president, A10 Capital, one of the most active lenders in the small- to mid-market bridge loan space.
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