Process Can Be Fast-Tracked
Securing financing for your client’s next big deal doesn’t
have to involve a months-long ordeal
By Milton Franklin
Milton Franklin is founder and president of Commercial
Mortgage Exchange Inc. (CME), which maintains direct
relationships with multiple private and nonconforming
funding sources. CME offers a range of transactional-lending
and other creative financing products for clients, as well as
partnership opportunities for commercial mortgage brokers.
Franklin is a graduate of Wharton Business School with
34 years of experience in financial services. Reach him at
(305) 804-7504 or firstname.lastname@example.org.
worries about future cash flows or project viability
are mitigated throughout economic cycles.
n The seller has sold his property at an agreed-upon,
n The buyer has paid only the fees agreed upon with
the seller and the brokerage intermediaries.
n Each and every transaction is entirely negotiable
and agreement to proceed is only accomplished
upon satisfaction of all involved parties.
n Unexpected fees and other expenses are entirely
Other perks of this financing approach include the fact
that all taxes, as well as all legal, title and miscellaneous fees, can be handled by the take-out lender, and
predetermined profits are achieved in the manner and
amounts agreed upon. The buyer also eliminates the
need to provide proof of funds or financial support
from financial entities and, in many cases, the reputation
of the take-out lender will suffice as proof of funds.
In addition, the utilization of major, reputable
title companies and escrow agents will greatly reduce
the potential for fraudulent activities. Obviously, this
transactional-lending approach only works well when
a transaction involves experienced principals and
knowledgeable investors. The bios and track records of
the individuals involved in the deal have to be vetted in
order to establish their ability to successfully complete
the commercial real estate project being financed.
n n n
Mortgage brokers should familiarize themselves with
these transactional-lending shortcuts for moving a
deal forward faster. The dollar amounts that can be
involved in such fast-track deals are unlimited and can
range from millions to billions. The compensation to
brokers is equivalent to brokerage fees involved in
more traditional deals.
The results, when the process works, however, can
include significantly reduced deal-approval time frames.
That benefits brokers and their clients — given that time
is money in the commercial real estate business. n
The commercial mortgage industry typically slows down from November through mid-January, compared with the rest of the year. There are holidays, extended
vacations, family travel and celebrations — all of which
tend to slow the pace of business because many essential
individuals that commercial mortgage brokers deal
with on transactions are simply unavailable.
That can compound an already existing reality of
the business. As we all know, commercial real estate
financing can be a long, grueling, document-intensive
and frustrating process. The wait for procedural and
due-diligence processes, even absent the usual year-end
slowdown, can be as long as 60 to 90 days, if everything
goes well. Add any hiccups or obstacles into the transaction and the process extends.
There’s also the requirement in commercial deals
for the principals to have “skin in the game,” or to individually assume a portion of the financial risk, should
a project not progress smoothly or fail outright. The
amount of investment required to cover the lenders’
concerns on that front can vary and, if too onerous,
may be instrumental in making a project too expensive
— particularly with large-scale projects.
Project principals simply do not have unlimited
time, liquid funds or available cash flows to make every
deal work. There are some options available, however,
that can help commercial mortgage brokers and their
clients better take advantage of the “time value” of
money by speeding up the loan-closing process.
Deadlines in the commercial real estate financing
world must be considered. Contract-expiration dates,
late-penalty clauses, competitive bids and participant
availability all can impact the success of a project or
even the project’s viability. Successful procedural tactics,
however, have been devised that can help a broker
overcome the obstacles to moving a transaction forward
in an efficient manner.
These tactics are best described as transactional lending. That’s when the sponsors of a project have a buyer
and/or take-out lender for the permanent financing
waiting in the wings to relieve them of their financial
burden. These sponsors can then utilize funding sources
for initial financing requirements and allow them to
make millions of dollars in profits in as few as 24 to 48
hours, depending on the size of the transaction.
Your clients also may benefit by acquiring the
properties or projects they are seeking within a couple days, without the requirement of making a large
downpayment or other financial commitments. This
approach requires well-prepared, seasoned borrowers
who have excellent projects or proposals to present.
The uninitiated and/or inexperienced need not apply.
This process can tremendously shorten the traditional
procedures of loan application and submission, review,
conference calls, term-sheet preparation and signing,
due diligence, board meetings, proposal confirmation,
acceptance and deal closing. That process, at best,
normally takes at least 60 to 90 days and it can extend
to 120 days or more if amendments need to be made.
Following this transactional-lending, or fast-track,
approach, if all the pieces are in place, will produce
what everyone in the business loves, and almost certainly
what this industry will graduate to eventually — a one-to three-day funding-approval process. Obviously, the
borrower needs to be prepared, but what does that
preparation look like? There are a few very obvious
steps that need to be taken, many of which are already
part of a more standard 90-day loan-approval process.
Tricks of the trade
For this fast-track process to work, the buyer and seller
must first agree on a deal price. Usually, this involves the
inclusion of a contract, which, in many cases, is required
anyway. As part of this fast-track approach, the contract
price should be at a significant discount or at least at a
level that allows the take-out lender providing the long-term financing to make a profit on their investment.
Before that occurs, however, the transactional lender
that provides the initial short-term funding for the deal
must receive several points on the transaction (six or
more is ideal). Broker compensation, usually one or
two points, also must be factored into the deal — the
same as a traditional transaction.
On top of the points and fees paid to the transactional
lender and broker, the take-out lender has several
choices. They can require a lump-sum payment at
some future date, which will add on a profit. They also
can elect to amortize the loan amount over various
periods of time, take an equity position, or a combination of both.
Based on negotiations between legal representatives
of all parties involved, the take-out lender may decide
to pay legal fees, title fees and other expenses. Regardless of their final determination, the situation results in
a project being financed and all parties benefiting in
various manners, with each party being a participant in
the determination of the final outcome.
This fast-track approach to closing a deal offers
a number of advantages. Following are some of the
n The entire funding process, from submission to
payment distribution, when approached properly,
can be accomplished in 24 to 48 hours, as opposed
to 60 to 90 days.
n The uncertainty of securing a take-out lender, or
final funding source, is eliminated.
n The borrower is in control of his payoff options and