Catch New Business with Corporate Lending
Opportunity could lie in areas mortgage brokers may not have considered previously
By Andrew Bogdanoff, president, Remington Financial Group Inc.
In the past, many mortgage
brokers looked past different types of
deals simply because they were focused
on real estate. Savvy brokers, however, look
beyond their comfort zones and explore
new terrains.
One opportunity could be corporate
lending. It likely has enough similarities
to real estate to allow brokers to use their
pre-existing talents. But it also has enough
differences to open new doors.
Corporate lending takes place when a
company needs funds for any reason other
than real estate. For example, a technology company might need additional funds
to further develop products, or a clothier
might need additional funds to expand
into home goods.
The roots of mortgage and corporate
lending are similar. Corporate investors
make their lending decisions the same way
mortgage lenders do. They want to have a
reasonable level of comfort that they will
get their investment back in a reasonable
amount of time and with an acceptable return on investment.
These two loan types also have clear
differences, however, including the collateral on which the loan is based, how cash
flow factors into the deal and what types
of businesses might qualify. Brokers who
want to dip their toes into corporate lending successfully should know these differences to recognize fundworthy deals.
computers and other technical equipment
that may be obsolete already, making it difficult to collect on its investment.
Many corporate investors know this
and are willing to take the risk. To mitigate
that risk, they often impose a short loan
term, which results in a higher monthly
scrutinizes the cash flow’s predictability
and its vulnerability.
“Corporate investors
don’t want to have
ownership in a
business that has
limited or no value,
and they also don’t
want to make loans
that the cash flow
doesn’t support.”
2. What is the duration of the stay?
For loans related to a property, such as
a bowling alley, a hotel, an ice-skating rink
or a bar, it comes down to the property’s
intrinsic value. Is its value built into the
four walls, or is it what lies within them?
If it’s what lies within them — which
could easily be uprooted and taken to a
different property — it likely is a corporate loan.
The intrinsic-value rule can be more
difficult to apply to properties that house
tenants. In those cases, brokers should
consider the duration of the stay. If tenants
are staying on a nightly basis, such as in a
hotel, it can be difficult to predict future
revenues. In these cases, it would likely be
a corporate loan.
For tenants who are committed for a
year (e.g., an apartment house) or for five
or more years (e.g., an office complex), the
value typically lies more with the actual
building and would be eligible for a real
estate loan.
payment for the borrower. A corporate
loan might have a five- to 10-year term.
Additionally, corporate lending traditionally examines a business’s cash flow
carefully. Corporate lenders want to understand if the existing cash flow will support the higher payment.
When looking at cash flow, lenders
Collateral and cash flow consider how a business makes it revenue
Primarily, corporate loans are based on a and why it is successful. For many compa-
business’s assets. A company might use nies, the value of the business is wrapped
its receivables, inventory or equipment as up in the people running it; if they were
collateral to secure a loan. Although these to leave, the company’s ability to bring in
items might represent millions of dollars, revenue would see great impacts, and the
they can be more difficult for lenders to company’s value might plummet.
liquidate than real property. Corporate investors don’t want to have
Assume a company used its significant ownership in a business that has limited
technology investment to secure a loan or no value, and they also don’t want to
but could not repay the lender. The lender make loans that the cash flow doesn’t
would have to liquidate the company’s support. The underwriting process, then,
Corporate deals in disguise
There is a gray area between mortgage
lending and corporate lending. For instance, many people might assume that
a bowling alley would require a mortgage
loan. In actuality, however, it likely is a
corporate deal. This is because the bowling alley’s intrinsic value is more directly
related to successfully renting the lanes
than to anything else. Without the equipment and accoutrements a bowling alley
is known for, it’s really just four walls and
a ceiling.
Taking this example even further, assume that the bowling-alley franchisee
owns the building, which is worth $2 million of a $10 million package that includes
the brand, equipment and more. The $2
million is a real estate asset, but the franchisee needs to borrow $8 million to complete the deal. Only 20 percent of this deal
comes from real estate; the other 80 percent uses assets for collateral and therefore
is subject to shorter lending terms.
Another property type that often is
better suited for corporate lending — and
that may surprise mortgage brokers — is
hotels. Although hotel loans are closer to
traditional real estate loans because the
property can easily be converted to apartment units, the hotel’s value is really based
on how well rooms are rented and how
long they are occupied. Typically, a loan
to a hotel to refurbish the property would
be considered a corporate loan rather than
a real estate loan and would be subject to
corporate-lending guidelines.
■ ■ ■
Mortgage brokers have the skills and experience to earn significant returns in the
corporate-lending market. The lending
processes are similar enough for brokers
to make good use of their real estate background. But they also likely are different
enough to help deals that may otherwise
go overlooked.
Illustration: Dennis Wunsch
Main considerations
For brokers who are new to corporate lending, the lines between mortgage loans and
corporate loans may appear blurred. There
are two questions to consider:
1. Where does intrinsic value lie?
Andrew Bogdanoff has
more than 35 years’ commercial lending experience
and founded Remington
Financial Group Inc. in
1993. He has served as
the company’s president
since its inception, and under his leadership,
RFG has closed billions of dollars in transactions. Reach Bogdanoff at andy@remingtonfg.
com. For more information on RFG, visit www.
remingtonfg.com.
