Anyone who has shopped at Costco knows that buying in bulk can often translate to lower prices. Eastern Union aims to prove that the same principle applies to commercial real estate loans.
The national commercial mortgage brokerage firm last month launched a new Pooled Loan Division that will work on behalf of its borrower clients to bundle maturing loans together to secure more favorable rates on refinancing for the entire group. The target size of each pool will be 10 to 30 loans with a total value around $250 million.
“Today, the financing market is pretty much commoditized for most of the transactions. I’m just taking that commoditization to the next level by saying let’s do these deals in bulk,” says Ira Zlotowitz, president and founder of Eastern Union.
The idea behind the pooled loan platform stems from what Zlotowitz sees as a growing disconnect between larger financial institutions and borrowers who need to finance smaller loan amounts. National and regional banks, pension funds, life insurance companies and other institutions are increasingly focused on larger transactions and have been raising the floor on the minimum loan amounts they are willing to finance, notes Zlotowitz. Yet the average loan size in America is probably between $8 million and $10 million, which means there remains a tremendous amount of loans getting done that are not benefitting from competition and the low rates that bigger borrowers are securing, he says.
Founded in 2001, Eastern Union has closed $12 billion in real estate transactions over the past three years. The majority of the firm’s lending volume has been achieved by arranging loans between $1 million and $10 million. Technology allows Eastern Union to capture more information on each deal. The Pooled Loan division will use artificial intelligence combined with Eastern Union’s in-house banking department to identify similar types of properties that can be pooled into a suitable cluster of deals. For example, one pool might consist entirely of garden apartment properties with between 10 and 50 units all located within the same geographic area.
Instead of bringing a lender a one-off $5 million loan, Eastern Union will leverage the scale of the pool to secure lower rates for the group. Lenders will still need to follow their typical underwriting and structure terms for each deal. Lenders also can decide to kick a loan out of the pool if it doesn’t meet their credit standards. “We’re leveraging volume, not credit,” says Zlotowitz. “We’re not forcing any lender to take a bad credit in exchange for getting the whole pool.”
Eastern Union expects lenders to benefit from the efficiencies of having a single point of contact, as well as efficiencies in processing multiple loans with similar characteristics at the same time. “Obviously, the more streamlined the process, the more opportunity there is for savings to grow,” says Zlotowitz. Eastern Union expects to achieve pricing discounts for borrowers that range between one-eighth to one-half a percentage point on the interest rate.
Small and mid-size borrowers are the bread and butter for Eastern Union. “Ira is constantly fighting for the smaller borrowers and trying to get the best deal for us that he can,” says Philip Balderston, founder and CEO of Odin Properties LLC, a multifamily investment firm based in Philadelphia that owns and manages about 8,000 apartment units. Odin Properties has been working with Eastern Union for the past seven years with loans ranging from $5 million to $25 million. “Pooling these loans together gives Eastern Union more leverage in negotiating with lenders, and therefore better pricing. So, it seems like a win-win,” adds Balderston.
The big question for lenders and borrowers is whether Eastern Union will be able to effectively execute on that strategy. According to Zlotowitz, the company has a group of interested lenders on board and is now working on lining up borrowers with similar loans set to mature in the second half of the year. Eastern Union expects the first round of clustered loans to close in the third or fourth quarter of 2020.
“The devil is in the details. Eastern Union is really going to need to be able to coordinate this effort, and the execution will largely depend on the terms Eastern Union structures and their ability to coordinate the program,” says Balderston. “But if they are able to do that, and I don’t see any reason why they can’t, it should be very successful.”
Borrowers care about rate and terms, but they also care about having a responsive lender with a fast, clean closing process, adds Tim Milazzo, CEO and cofounder of StackSource, an online platform for commercial real estate financing. “If you artificially push more loans through a lender's process all at once, the borrower experience is likely to suffer,” he says.