How to decide whether to use an intermediary for acquisitions and refinancing
In all high-stakes businesses, value is such a fungible concept that it needs to be created and clearly demonstrated before players involved in a transaction will realize its worth. Value can be examined from two different vantage points – intrinsic and extrinsic value. Intrinsic value may be more difficult to quantify, such as the value that an intermediary or investment banker brings to a commercial real estate or hotel financing transaction. Extrinsic value is clearer and can be calculated using a spreadsheet. While maximizing both types of value is important, making the mistake of downplaying the benefit of intrinsic value can cause borrowers to lose time and leave money on the table.
INTRINSIC VALUE
An intermediary or expert with understood knowledge of the industry and its participants brings advantage to a deal that can be hard to articulate. Let’s examine the ins and outs of strategic value creation when borrowers involve the appropriate resources right from the get-go of a transaction.
The best way to realize the intrinsic value of using an intermediary is to work with one. Experienced sponsors who have used professionals to help them finance large-scale real estate in the past already understand that they would not have enjoyed the same outcome without the right advisor’s help. Many would even go so far as to say they wouldn’t even attempt another transaction without that specialist by their side. For borrowers who haven’t used an expert resource, measuring the value that one delivers can be more difficult. Here’s a classic case study of needing to try before you buy. All of us likely have at least one digital video recording device, or DVR, in our households. Accordingly, we can’t imagine life without it. When the technology was first introduced, however, it was a different story. Without using it firsthand, consumers couldn’t understand the value of the device and didn’t see how it would benefit their daily lives. Adoption was slow and without critical mass, early pioneers such as TiVo ended up as casualties. As more companies introduced the concept, however, more consumers had an opportunity to try it out. TV viewers realized the convenience and improved media experience it provided, and the rest is history.
This need to experience value before realizing worth can be directly correlated to valuing a financing intermediary. Borrowers who have never used an intermediary often ask, “Why should I pay a success fee for a service I can just do myself using the internet or by cold calling lenders and equity sources?” Here’s why. One way a good intermediary creates intrinsic value is through an ability to convince lenders or investors to want to fund a deal, purely because of the expert’s close relationship and successful track record with those capital sources.
Another clear benefit an experienced intermediary brings to the table is experience on the financing battlefield. The intermediary has amassed an arsenal of proven strategies, structures, and creative tactics that can make a deal work. As everyone knows, hindsight is 20/20, but having key knowledge up front often leads to millions of dollars in savings in the end. Another way to look at this concept is by considering the potential opportunity cost for not using an expert. What obstacles, wasted time, or unattractive terms could have been avoided by having an expert by your side?
EXTRINSIC VALUE
Using an intermediary can also deliver extrinsic value, which is much easier to quantify. For example, by using market knowledge of bond’s spread and pricing within the greater credit markets, a smart mortgage banker can often negotiate savings that are beyond a single owner or developer’s reach. In addition, there is a clear incentive for lenders and capital sources to protect their relationship with a high-performing deal source, as they don’t want to bite the hand that feeds them. This gives an intermediary more leverage than a borrower, who has a smaller portfolio of potential transactions. Capital sources are also often less inclined to change the deal or re-trade the terms if an experienced mortgage banker is involved vs. an inexperienced mortgage banker or a borrower without proper representation. Yes, a fee saving at closing might seem valuable, but a client without an expert by their side could face increased closing costs, higher reserve requirements, badly negotiated legal terms, and higher rate pricing. These missed savings would likely more than offset any fee an experienced mortgage banker would have charged. Furthermore, an effective advisor can strategically act as the bad cop on behalf of the borrower to negotiate and deliver the absolute best terms on the deal. The mortgage banking business has been around for decades and will continue to be around for decades to come because of the amount of value that is created by experts.
