By Mike Myatt
Financing a commercial real estate transaction is no longer asimple matter. Now, there are many considerations that must beevaluated when selecting a capital provider.
In order to increase project velocity, improve operatingefficiency, conserve internal capital, increase leverage andlower the overall cost of capital, it is essential that asponsor develop an integrated capital formation strategysurrounding 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,future projects or portfolio considerations, and;
- A whole host of other value-added considerations.
The first thing that borrowers must understand is that allcapital providers are not created equal. There is a definitehierarchy within the world of capital providers andunderstanding the value-ads offered by different capitalproviders is important in choosing a relationship.
While many borrowers believe financing to simply be acommoditized offering, the selection of a capital provider,should take into account far more than rate and termconsiderations. In choosing a capital provider, the goal of anyborrower should be to develop a close relationship with the firmthat can provide not only the broadest access to capital, butmore importantly a firm that offers best-in-class subject matterexpertise, certainty of execution and as many value-addedbenefits and services as possible. Capital providers can mosteasily be broken-down into three groups:
Direct Lenders – Those that lend their own funds
- Private Lenders
-
- 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
Once a borrower has selected the appropriate capital provider,it is essential that the capital provider be engaged as earlyon, and at as high a level as possible. Experienced sponsorsrealize the benefit of getting their capital provider involvedearly on in the planning process. Waiting too long to involveyour lender will typically lead to a project built with lessleverage and at a higher cost of funds. By including yourcapital provider in the beginning of the project planningprocess you will end-up with a project plan that is built aroundoptimizing capital formation leading to greater projectprofitability.
Effectively utilizing the entire capital structure, to maximizeleverage while achieving the lowest blended cost of funds andisolating risk, is essential to the creation of a solid capitalformation strategy. In general, the farther you move up theleverage curve utilizing more leverage in the senior positionthe lower the overall cost of funds will be. Conversely, thedeeper you move down the capital stack utilizing
Selecting the appropriate capital provider and engaging themproperly will aid in the streamlining of the borrowing process.If borrowers will focus on capital formation as a priority atthe early stages of project planning the likelihood ofincreasing profits in a risk managed environment is high.
Article Source: www.ArticlesBase.com
