There are numerous owners of real estate who do not always value competency when selecting a banker. In many of these instances, a request comes along with the following questions: What is the spread and amortization, and how much will you lend me?
More often than not, a potential investor answers these questions with answers that meet the following criteria: "Whatever you want to hear." Sometimes this is the last we hear of the transaction. It is more likely, however, that a series of questions will ensue:
* Do you collect reserves for tenant improvements, real estate taxes, replacement reserves, insurance and your children's orthodonture?
* When do I lock interest rates?
* Do your carve-outs make "non-recourse" an oxymoron?
* Is interest calculated on a 30/360 or an actual 360 basis? (Note: most years have either 365 or 366 days.)
* Are legal fees billed by the hour, or does your counsel feel entitled to a percentage of the loan proceeds?
* Have you considered past and current users of the property and surrounding uses as they may impact any potential environmental problem and solution?
* How much money will be spent before I find out if I actually have a firm commitment?
* Do your documents place me in default the day after closing?
* Have you actually done this before?
* In which millennium will I close, anyway?
It takes an experienced banker to navigate these issues properly. This is not just to please the borrower, but to complete a sound investment whereby the mortgage investor will be able to realize his yield, and therefore, live to see another day.
By the time a closing is near, there are usually a handful of issues that need to be resolved. If the borrower is asked which of these are imperative and he answers "all," the lender probably needs the resolve to say "no" to these issues which may truly jeopardize the investment. My experience is that in cases where the borrower got everything he asked for, the lender did not remain in business to see another economic cycle.
This is unhealthy for the industry as most of us remember the deep liquidity crisis of the early-1990s caused by the excesses of the late-1980s. A note for property owners: Lenders need to make a profit, too. A lender willing to work without a profit margin probably is not capable of working with you on the unforeseen and inevitable pre- and post-closing issues.
If I were a real estate borrower, I might add two questions to the aforementioned:
* What can I expect if a value-added opportunity arises during the term of my loan?
* Can I have references of those who are pleased with your originations and servicing well after the origination date?
This is where smart bankers can further distance themselves from the rest. Capitalizing on repositioning opportunities during the term of a permanent loan can be vexing and sometimes unobtainable. There are many other instances, however, where enough return exists whereby both mortgagee and mortgager can profit. Again, these should not be mutually exclusive.
One distinct advantage of portfolio lenders vs. loans that are securitized is the ability to make a decision that benefits the collateral but may be outside of the loan documents. Unfortunately, even the brightest banker and his attorneys cannot anticipate every possibility and how it is dealt with subsequent to the origination date.
At this time, only a portfolio lender can legitimately consider these opportunities. This problem is unlikely to change under the current CMBS system. I could see this eventually changing if special servicers were granted the right to alter loan structures if the bondholders received tangible benefits. Additional funds for these purposes could be raised by the special services if the existing bondholders were to realize additional yields that meet pre-determined minimum criteria. To date, I have yet to see a developer decrease debt in order to capitalize on an opportunity.
It does not take a genius to be a good banker. Common sense and the willingness to lose any deal for a good reason goes a long way.