One-Stop Shopping Spreads to Commercial Lending Arena
An increasingly common trend toward the offering of "one-stop shopping" for commercial real estate financing also has implications for servicers. This sort of arrangement has the potential to create servicing complications, with more than one servicer being associated with a deal that might ultimately be carved up into multiple pieces. Lenders have increasingly moved in this direction as interest rates have moved lower and lower in the last few years, in a bid to attract and retain borrowers, with the trend even spilling over into the smaller loan sector.
Mostly, this means the lender provides first mortgage and mezzanine financing, or does an A/B loan structure, and later sells off the higher risk portion of the loan. Bridge financing and preferred equity are sometimes available at the same place as well.
Richard Ortiz, managing director, Hudson Realty Capital, has seen an increasing trend toward the enablement of this sort of "one-stop shopping," even for smaller loan sizes, which he defines as those less than $10 million. He noted that traditionally it used to be more common for larger loan sizes, in the over $25 million category.
He observed, "What you're seeing is that because the structures are somewhat more accepted, they are easier to replicate on a smaller scale. You are able to say to a borrower, 'We will do all the financing for you. We will take away all the headache of you having to run out and get the mezzanine provider, the first mortgage, and coordinate the intercreditor agreements. That's the service we provide for you.' And to the extent that we're able to make it a seamless transaction, one-stop shopping, there is a value that is being provided to the borrower so that they can simply concentrate on their business as opposed to the financing aspects of the transaction." As a result of this, intercreditor agreements have to be understood.
Susan Merrick, managing director/co-head, commercial mortgage rating group, Fitch Ratings, agrees that with more parties to a loan trying to get "as many control rights as they possibly can," if there is a problem associated with the loan somewhere down the road, it will be more difficult to work out the loan since more people will have a say in the matter. To deal with these situations, Fitch asks for additional credit enhancement to the commercial mortgage-backed securities deals that they rate. Ms. Merrick said, "It is much more complicated to service loans - you've got different things that each party is entitled to and so the borrower needs to make sure that they report information to the servicer but also to the mezzanine lender or to whoever holds the 'B' note. The servicer also needs to make sure how many parts there are and how many people they need to provide information to."
Almost all loan originators are going down the route of providing various financing options, she said. "Most of the lenders are afraid of losing their borrowers to someone who can provide everything. And where it is a borrower's market, the lenders need to be able to offer a lot of varied services, otherwise the borrower will go to someone else who will." Jim Reichek, chief operating officer, Meridian Capital Group, is also seeing more lenders offering one-stop shopping "in the sense that they are effectively offering the first mortgage and mezzanine financing" together in a single package. He cited a deal he worked on two years ago, involving the acquisition of a regional mall, for which a conduit lender provided the initial financing that was "eventually supplied by three different parties." The first mortgage was broken up into an A/B note and a mezzanine class. And a real estate investment trust provided preferred equity and equity financing.
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