Financing a commercial real estate transaction is no longer a simple matter. Now, there are many considerations that must be evaluated when selecting a capital provider.
In order to increase projectvelocity, improve operating efficiency, conserve internal capital,increase leverage and lower the overall cost of capital, it isessential that a sponsor develop an integrated capital formationstrategy surrounding acquisition, refinance and development initiatives.
Among the many things those commercial real estate borrowers intoday\'s marketplace need to address when seeking capital are:
- The selection of the appropriate capital provider;
- Level(s) of the capital structure to be addressed;
- Control provisions;
- Rate, term, pricing and structure;
- Closing time frame;
- Inter-creditor or other multi-party agreements;
- Post closing servicing issues;
- Certainty of execution;
- Recourse provisions;
- Exit and pre-payment options;
- Operating considerations;
- Third party requirements;
- The effect of the capital acquired on tax, balance sheet, futureprojects or portfolio considerations, and;
- A whole host of other value-added considerations.
Thefirst thing that borrowers must understand is that all capitalproviders are not created equal. There is a definite hierarchy withinthe world of capital providers and understanding the value-ads offeredby different capital providers is important in choosing a relationship.
While many borrowers believe financing to simply be acommoditized offering, the selection of a capital provider, should takeinto account far more than rate and term considerations. In choosing acapital provider, the goal of any borrower should be to develop a closerelationship with the firm that can provide not only the broadestaccess to capital, but more importantly a firm that offersbest-in-class subject matter expertise, certainty of execution and asmany value-added benefits and services as possible. Capital providerscan most easily be broken-down into three groups:
Direct Lenders - Those that lend their own funds
- Private Lenders
- Commercialreal estate investment banks
- International, national, regional and local banks
- Life Insurance Companies
- Credit Companies
- Pension Plans
- Real Estate Investment Trusts (REIT)
- Agencies (Fannie, Freddie, FHA)
- Mutual Funds, Hedge Funds, Opportunity Funds
Indirect Lenders - Those that place funds on behalf of others
- Mortgage Bankers
- Mortgage Brokers
- Investment Advisors
- Financial Intermediaries
- Syndicators
Hybrid Lenders - Those that do both of the above
- Certain Banks
- Certain Investment Banks
- Certain Credit Companies
- Certain Financial Intermediaries
- Certain Investment Advisors
Oncea borrower has selected the appropriate capital provider, it isessential that the capital provider be engaged as early on, and at ashigh a level as possible. Experienced sponsors realize the benefit ofgetting their capital provider involved early on in the planningprocess. Waiting too long to involve your lender will typically lead toa project built with less leverage and at a higher cost of funds. Byincluding your capital provider in the beginning of the projectplanning process you will end-up with a project plan that is builtaround optimizing capital formation leading to greater projectprofitability.
Effectively utilizing the entire capitalstructure, to maximize leverage while achieving the lowest blended costof funds and isolating risk, is essential to the creation of a solidcapital formation strategy. In general, the farther you move up theleverage curve utilizing more leverage in the senior position the lowerthe overall cost of funds will be. Conversely, the deeper you move downthe capital stack utilizing mezzanineor equity instruments the moreexpensive the cost of capital.
Selecting the appropriate capitalprovider and engaging them properly will aid in the streamlining of theborrowing process. If borrowers will focus on capital formation as apriority at the early stages of project planning the likelihood ofincreasing profits in a risk managed environment is high.
For more information about Pacific Security Capital commercial realestate investment bank, please visit http://www.pacificsecuritycapital.comor call 1-800-844-6085.
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