The Importance of Independent Mortgage Brokers

By Adam S. Finkel, CCIM, Principal and Co-Founder of Tower Capital

The volatility in the economic markets is creating a need for commercial real estate borrowers to include an experienced and independent mortgage team to close deals today. Investors require financing experts who can move with speed and efficiency, while still bring a deep understanding of capital markets – especially given the rapid shifts and adjustments transactions can face as a closing date approaches. But an often-overlooked aspect of getting deals done is to consider whether both buyer and seller are properly represented in the financing process.

Securing financing for a commercial real estate property can be a complex and time-consuming process. It is challenging for borrowers needing financing for their projects to decide whether to use the capital markets team offered by the same company as the investment sales team or to select an independent structured finance firm to arrange the financing. An independent capital markets team can present the best strategy and options to a buyer along with a strong commitment to get the deal executed.

A major reason to select an independent mortgage broker is that since it is not affiliated with or beholden to any one lender or company practice it can consider the best interests of both buyer and seller. Typically, capital markets teams who work for the same company as the investment sales or property listing team are less likely to fight as hard for the buyer as they will a seller since that may put a sales commission in jeopardy. Those factors are important today because deals can quickly change, and buyers can lose deals if all parties are not aligned to see it through to the end.

Here’s an example of how that can play out in transactions. Let’s say escrow was scheduled to close in two and a half weeks with lender Freddie Mac on a 120-unit, garden-style, apartment building. By that time, the buyer will be deep into the transaction, likely already used an extension and placed $250,000 in hard earnest money. At that point, if Freddie Mac decided to reduce the loan amount significantly due to underwriting issues that were uncovered, it could mean trouble if the buyer no longer had sufficient equity to close. With no alternatives, the buyer could be forced to walk away from the deal and lose its earnest deposit. While the investment sales team likely would move on to the next buyer on deck, garnering an even higher price for their client, the seller. While that’s good for the sell side, the buyer would have benefitted from having an independent mortgage team involved who could have worked to keep the deal alive or it may have even recognized the underwriting issues would arise and suggested a different lender to begin with.

As the CRE industry changes and evolves at an ever-increasing rate, the benefits of allowing an independent capital markets expert to arrange financing makes more sense now than ever before. That’s because borrowers can often secure the best financing terms and structure through an outside expert that brings an agnostic approach, and can tap into larger pool of capital sources, thus providing more options to consider.

The advantages and benefits an independent mortgage firm brings to the sales transaction makes it a compelling proposition. Structured finance experts (outside the investment sales team) who arrange the financing can deliver value to the buyer, as well as the seller because they can expedite the entire process. Borrowers who have access to finance experts that have built trusted relationships with capital sources tend to get deals done quicker and at the best terms because everyone knows their roles and what to expect. As the borrower continues to transact on other properties, the independent mortgage firm essentially acts as the client’s in-house capital markets team. Utilizing the same group of professionals to finance each transaction creates continuity for the client and streamlines the financing process from deal to deal.

Single-Source Deals

Finance experts advise that it is wise to steer clear of an investment sales team forcing a buyer to use their in-house capital markets group. These “single-source” deals allow the sell side to control all elements of a deal. While that may appear simpler, and less complicated, it is not always advantageous to the buyer. Cross-selling to internal capital markets team is good for the company that performs work internally in order to maintain a great amount of control over the transaction, but maybe not as advantageous for buyer or borrower, who is now at the mercy of the seller and their team.

There are also underwriting differences to factor in too, which an independent firm can share with borrowers. While an investment sales team might boast that their company is a direct agency lender and can thereby offer the most competitive terms, we have found that there is extensive variation in how aggressive different Fannie Mae DUS lenders and Freddie Mac Seller-Servicers underwrite, along with the experience level and effectiveness of their closing teams. It is also important to know how a lender views different markets across the U.S. For instance, some are aggressive in pursuing deals in specific markets based on their internal mandates or focuses. That can make it smart to know which markets they favor or what property types before seeking financing.

Competition Through Relationships

Those who have been in the commercial real estate financing industry for decades know shopping deals around to different lenders is smart, if done properly. Doing so can result in the borrower getting the best deal because checking with multiple lenders can expose a deal to a larger pool of lenders, which creates competition and ultimately delivers the best options for borrowers to consider. It makes sense to increase the number of options beyond what a single-source team may offer. Independent mortgage firms have developed long-term and often proprietary relationships with lenders, which are not easy to replicate or be accessed directly by borrowers. Savvy independent mortgage experts also understand there’s a right way to encourage competition, though. That means negotiating with an eye to create long-term lending relationships rather than just price shopping. This relationship-oriented approach an independent mortgage firm offers enables the borrower to overcome obstacles encountered during the process because it can lean on the strong bonds the independent firm has established with third-party lenders. Additionally, it can open access to the most competitive and sought-after capital sources who have the luxury of being selective with their time and focus. Ultimately, the diverse and trusted network of lender relationships an experienced and active independent firm can offer will provide the best results by opening access to the most aggressive capital sources and then creating competition to drive the best terms for the benefit of the borrower.

Speed & Efficiency

The process of buying or developing a CRE property can be lengthy and complex. Financing is one key component an investor or owner will require to move forward. That makes it important for all involved to be aligned and focused on executing a deal. There can be speed bumps when borrowers use the in-house capital markets team at the same company as their investment sales broker. That can happen because as the process rolls along there are often separate teams for closing, underwriting, and originating. Those people could disappear, and another team will take over, which can result in less consistency and cohesiveness. Borrowers today may also require assistance to solve problems or special circumstances like those brought about by COVID-19 or other unique market conditions. Having a well-oiled independent team working between lenders and borrowers can move deals along that hit snags. We’ve also ran across instances where there are varied perspectives of the same deal, and that incongruity has caused delays. An independent mortgage firm can oversee all parts, ensure alignment, and shepherd a deal through to closing since it is incentivized through final execution, not just one part.

Experience & Process

It is not just about getting a deal done quickly. In most cases it is about getting the right financing for a specific deal completed as rapidly as possible. An independent and experienced mortgage broker knows what to look at, brings the best analysts, communicates with everyone to work through issues and ultimately helps create a smoother process. Having a transaction management team in place that brings specialized expertise and has worked together can see and anticipate what others with less experience don’t. It goes beyond simply being able to check boxes and fill out forms. It’s about having a tried-and-true process that focuses on being proactive and communicating to negate any issues that may slip through the cracks and surface at closing. In addition to securing the best financing needed, a hands-on team can also result in a borrower receiving the best deal on insurance, surveys or other services involved in a transaction.

Proper Transparency

Perhaps one of the most compelling reasons a borrower should consider going with an independent mortgage firm is to keep everything separate until the right time. Too much transparency too soon may end up in a borrower losing leverage at the negotiating table. Conversely, waiting too long to share information could cause a deal to go south. Since an independent mortgage expert sits outside of the investment sales team it can provide what is required at exactly the right moment. Whereas in a single-source situation, if an issue arises it will be tough, if not impossible, for an in-house capital markets team to keep the borrower’s information from landing on the desk of the seller’s investment team, since they work for the same company. Additionally, they are likely expected to share information about the borrower. All the cards will then be out on the table, and the borrower has lost its ability to negotiate the best deal terms since the seller will know the buyer’s position, financials or other matters that could give the seller an unfair advantage during negotiations. Working with an independent mortgage firm can help ensure the confidentiality and reduce a borrower’s exposure.

For example, there are situations where the borrower may need more time to close the transaction. Perhaps one of their equity investors fell through, or their loan amount was reduced or even denied altogether. Disclosing any of these issues might encourage the seller to begin focusing on backup options, like in the example cited earlier. However, a tactical approach to this problem would be for the buyer to note an issue with the property – conceivably an item arose on the property condition report that needs more time to work through. By using an independent finance team, these reports are kept confidential from the owner, keeping them guessing and allowing the buyer to maintain some leverage to negotiate an extension of the closing. It’s hard to bluff when the same company selling the property is also in control of the third-party reports and has complete knowledge of the buyers’ complications.

The process of completing a commercial real estate investment transaction requires patience and skill to bring a transaction to fruition. The expertise of an independent mortgage firm can deliver precisely what a borrower or buyer requires, exactly when it needs it. That’s because a structured finance team brings extensive market knowledge and relationships, is skilled at underwriting, and applies a comprehensive understanding of capital markets, leases, legal documents, escrow, title, insurance, and many other considerations. In an evolving market, it is wise to consider involving a structured finance team with decades of experience closing billions in commercial real estate loans across a wide range of commercial real estate properties. Investors are better represented when adding the voice of an independent mortgage firm into the mix.