How to choose the right resource to arrange hotel financing
Every commercial transaction involves multiple players adding value along the road to closing. These include real estate brokers who manage the buying and selling of the assets, as well as capital brokers who arrange the financing. As in other service industries, the barriers to entry for setting up shop in the loan-brokering business are minimal and the level of skill and expertise can vary widely among those marketing their services. Thanks to today’s technology, anyone can launch a website, send a few emails, and call themselves a loan broker. Therefore, as you engage resources for your next deal, it’s important to understand the nuances among providers. Armed with this knowledge, you will be able to choose the right person who can deliver the outcome you need. Let’s explore the difference between two key types of providers.
1. LOAN BROKERS
Loan brokers are usually salespeople with an iPad and a few bank connections trying to consummate a deal. Because of their limited résumés, most loan brokers focus on transaction types where proprietary expertise isn’t required, such as SBA transactions or conventional bank loans. Since these types of loans are commoditized, getting them to closing doesn’t require expertise in underwriting, property valuation, or even market knowledge. In fact, since most of these transaction types require full borrower recourse, having asset-level analysis skills isn’t even necessary. All that matters is the borrower’s or guarantor’s net worth, the liquidity of his or her balance sheet, and the asset’s global cash flow. With these three data points, almost any loan broker can find an SBA loan from some bank. It’s simply an administrative task of pushing paper. However, if an owner needs a bridge loan for a transitional hotel that is being reflagged, has limited cash flow history, or is seeking a permanent loan for an asset that has stabilized cash flow, the typical loan broker is likely to come up short or even fumble mid-transaction. For more complex transactions and non-recourse financing including CMBS, a skilled mortgage banker is the more prudent choice.
2. MORTGAGE BANKERS
Mortgage bankers are professional intermediaries who leverage an established platform and infrastructure for underwriting, packaging a transaction, and marketing the opportunity to capital markets participants. These tangible assets are combined with deep relationships and a hefty Rolodex of capital sources actively placing debt and equity, as well as dedicated underwriting with approved cash-flow models and closing staff. A successful mortgage banker also will be able to demonstrate a track record of closing transactions with more than one type of capital source, including large banks on Wall Street, life insurance companies, REITs, private-equity funds, hedge funds, bridge funds, and other institutional capital. This broad experience and exposure to larger, more complex financing transactions allows mortgage bankers to offer borrowers more and better choices, including options for pre-payment penalty and fixed vs. floating rates. Advanced skills also make mortgage bankers better at troubleshooting issues, devising creative structures to cure pain points, and designing solutions that are a win-win for both the lender and the borrower.
CHOOSING THE RIGHT RESOURCE FOR THE JOB
Many loan brokers will try to convince their clients they have what it takes to close a capital markets transaction but don’t have the track record, relationships, and professional process to back up their claims. For larger and more complex transactions, including non-recourse financing, borrowers can minimize their risk and maximize results by choosing the most qualified resource for the job – a mortgage banker. As the old adage says, let the plumbers do the plumbing and the electricians do the electrical work.