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Scotsman Guide Commercial Edition | ScotsmanGuide.com | July 2018 60
he Dodd-Frank Act and the Basel III regulatory accord each left
lasting and inescapable limitations on banks and their involvement in the financing of commercial real estate projects. Banks
now have much higher reserve-retention requirements and
risk-limiting guidelines that serve to reduce available funds and the involvement
of traditional lenders in the commercial real estate financing arena.
Initially, regulatory reform was considered to be the death knell of prosperity
and continued commercial real estate development within economically
advanced nations. Essentially, much less capital would be available for
large-scale construction, development and acquisition projects. At first, the
growing pains were extreme, with fraud and incompetence perpetrated
by so-called private, unregulated funding sources that caused nightmares for those who sought to develop and build, despite the lack of
freely available capital.
Many practices came into being that were seemingly devised for the sole
purpose of separating well-meaning principals from their hard-earned cash.
Advance expense deposits, due-diligence fees and other miscellaneous
costs were elements that caused many previously successful developers to
turn away from the business completely, which affected business prospects
for mortgage brokers as well.
The dust settles
Over the course of roughly seven years, these new tactics came and went,
destroying many hopes and dreams in the process. Finally, around 2015, the
dust began to settle to the point where much clearer distinctions between
what was real or not could be made with a greater degree of certainty.
Traditional banks have yet to regain their former prominence in the
industry as the premier go-to sources of financing for the majority of projects.
Make no mistake, they still maintain investment levels in the hundreds of
billions of dollars in the industry, but it is a much smaller percentage of total
cash outlays than traditional banks previously made available.
Today, top-tier banks are typically only willing to risk their more limited
investment dollars on highly popular projects being sponsored by equally
well-known — and successful — developers and builders. New developers
or relatively unknown builders have been unable to secure financing for
their projects, but that situation is now turning around, and funding is
becoming readily available for most types of projects and borrowers.
Many entrepreneurial lenders have recognized an opportunity instead of
an obstacle. The hurdles faced by traditional banks provided an extraordinary
opportunity for private lenders, hard-money lenders, nonconforming lenders,
bridge lenders and countless blends of all of the above, as well as the mortgage
brokers who work with them. The final result of the chaos that overwhelmed
the global economy is finally benefiting small and midsize builders and
developers in ways that were unimaginable as little as a decade ago.
There are multiple opportunities today for those who are able to think outside the box and consider projects in their entirety instead of as individual
segments. Rather than focusing only on the most immediate aspect of the
project, borrowers and the mortgage brokers they work with should think
more freely and view their endeavor as a work in progress, with a lifespan
that may require different financing at future stages. In other words, they
should attempt to conceptualize how to finance the entire project with multiple
options or mixtures of funding instead of acquiring one type of loan, which
was the most common practice in the past.
The choices available to today’s borrowers have increased tremendously
from the limited opportunities of the past. Smaller developers used to
be stuck with choices between hard money lenders and other expensive
financing options. Today’s lending landscape is much different. The vacuum
left by the restrictions imposed on traditional banks has been filled by an
ever-expanding base of loan products and mixtures of lending techniques,
thanks to multiple sources working together.
Commercial mortgage brokers should first have discussions with their clients
and/or the principals of a project to determine, in general, what they wish
to accomplish. How they plan to finance their efforts and why that plan was
developed are important because that may disclose significant financial
considerations that must be taken into account. Mortgage brokers and their
clients should be willing to provide accurate and specific details regarding
their involvement and contributions to the project — both financial and
managerial in nature.
They also should describe the participation of any equity partners or other
capital sources. The mortgage broker should then contact appropriate funding
sources for the type of project, location, loan amount and term, industry
“Traditional banks have
yet to regain their former
prominence in the industry as
the premier go-to sources