Scotsman Guide - February 2009 Commercial Edition

Beyond the Broker Role

Today’s market requires mortgage brokers to act like bankers to regain borrower trust

By Baxter Fain, vice president, CB Richard Ellis Capital Markets

Even with the lack of available capital in today’s lending market, commercial real estate buyers still must borrow money to make deals happen. One issue surrounding the current financial crisis, however, is that the trust between borrowers and lenders no longer exists.

To be successful, mortgage brokers must think and act like mortgage bankers to help rebuild the trust between borrowers and lenders.

Here’s what that means: Brokers often are simply intermediaries between two or more parties in a mortgage transaction. Many work solely for the commission and don’t take any ownership over what they do. When you act like a mortgage banker, however, you work with your clients and prospective clients as a trusted adviser rather than just as an agent. You must work diligently with clients to understand everything there is to know about an asset, including the status of all tenants in place, the property’s historical operations, and all risks and corresponding mitigating factors.

Acting as a conduit to simply broker a deal is no longer the school of thought. Rather, you must dive deep into a deal to help protect the lenders and to help mitigate risk for the life of the loan. A successful transaction takes careful planning and due diligence. If you don’t understand a deal’s current and historical details, the borrower’s ability to receive financing will suffer.

Today, focusing on relationships with clients and lenders rather than simply on transactions can help define the course of action and help you achieve successful financing terms for your borrowers.

Helping clients understand

Commercial borrowers who previously had direct relationships with numerous lenders now often need a good mortgage broker. Most are finding they can’t get their deals done because of their bank’s illiquidity or because the bank has reached its maximum exposure level.

Today, countless scenarios make financing a project unachievable. Clients must be educated upfront on the underlying reasons and parameters that affect deals. As their trusted adviser, you can inform clients who are pursuing an acquisition today about the realities of the market before the process starts. If you don’t, your relationship can be strained.

Thus, you must give clients an accurate image of what a feasible loan will look like. Depending on their situation, that loan

might be a 25-year amortization versus 30 years; 60-percent leverage versus 65-per- cent leverage; an 8-percent coupon versus a 7-percent coupon; or recourse versus nonrecourse.

Discuss these points with your clients upfront. The worst thing you can do is give clients a false sense of success and wind up with a commitment that falls short in one or many ways, leading to unnecessary client expenditures.

Rather, you should discuss property values and realistic bid/ask spreads and help them weather the storm with their existing assets by advising them on their options, such as leasing, management or a sale, if necessary.

Evaluating opportunities

In addition to playing more of an adviser role for clients, it is critical to ensure that you don’t waste your time on deals that likely won’t close. The first thing you must do is determine whether a client’s deal is practical and whether it can be executed today. This rule not only applies to the underlying real estate securing the loan but also to what borrowers are willing to accept and what they require for a deal to be viable.

Setting appropriate expectations with clients must be your next move. Doing all your homework upfront will keep you from spending a lot of wasted time and energy on bum deals.

Once you determine that the deal can find financing, control the situation. You must immediately procure a list of all of the lenders and mortgage bankers with whom your client has already spoken. Find out whether you will get an exclusivity agreement for the project.

If one or more of the other mortgage

bankers are working on the assignment, and the client is unwilling to give you an exclusive, then seriously consider passing on the assignment. An exception to this might be if you have a specific lender in mind that the borrower has not already contacted and that would consider doing the deal.

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Baxter Fain is vice president for CB Richard Ellis Capital Markets’ debt-and-equity-financing group in Denver. Since joining the company in May 2005, he has closed more than $500 million in commercial financings. Previously, he was a vice president with Goldman Sachs Commercial Mortgage Capital, closing more than $7.5 billion in securitizations. Fain is a graduate of Southern Methodist University and is active in numerous real estate industry associations. Reach him at (303) 628-1780 or baxter.fain@cbre.com.

The state of the financial and real estate market is uncertain, but commercial mortgage deals are still being done, and loans are still closing. A critical part of your success as a broker — or a banker — is to sift through submitted deals and to concentrate your focus and resources on those that you actually can see through to a successful closing.

With that process, setting the proper expectations with your clients comes hand in hand. By moving beyond simply brokering deals and by acting as a mortgage banker and trusted adviser to your clients, you can help rebuild confidence and faith in the mortgage industry.