I have always found that the Marcus & Millichap (NYSE: MMI) quarterly and annual SEC reports are very informative and, in my opinion, present the purest form of data about the investment sales brokerage business. Reading these reports helps me understand information like average deal size, transactions per broker, expense ratios and similar data that is especially useful to me in my role as President of Progressive Real Estate Partners.
In the 4th quarter and year end 2023 earnings call that came out on February 16, 2024, one sentence in particular struck me, “The company’s financing experts at MMCC and IPA Capital Markets closed nearly 1,100 financing transactions with 350 separate lenders.” The fact that there were 350 different lenders for only 1,100 transactions demonstrates the diverse group of lenders out in the market and as our team has seen from our own experience, lenders are very, very different.
To be clear Progressive Real Estate Partners is NOT in the business of brokering loans. I am writing this blog because I don’t think most property owners realize how different lenders are within the market. I also don’t think that most borrowers know how many lenders exist in the market that they would never have the opportunity to encounter without the expertise provided by a financing expert.
The variables a lender considers include, but are not limited to, the property type (retail, office, industrial, multi-family, etc.), the leverage (dictated by loan to value or debt service coverage ratio), loan size, property location, occupancy, tenant mix, and borrower experience.
The variables a borrower considers include, but are not limited to, the interest rate, the amortization of the loan, loan amount, if loan is fixed vs. variable, how long the loan is fixed, personal guaranty requirements, pre-payment penalties and loan fees.
When you look at all the permutations and combinations that can exist, it is easy to see that the loan options can be substantial and a key reason why employing a “mortgage broker” or “mortgage banker” to help secure a loan is recommended.
Furthermore, when you engage a mortgage broker or mortgage banker to assist you in the loan process, the lenders know that they are in a competitive environment and are more likely to provide better terms. You also have someone who can guide you through the pitfalls of working with different lenders and most importantly, improve the probability that the lender will perform and not try to re-trade the deal at the 11th hour.
As a quick aside, a commercial mortgage broker is purely a middleman who facilitates the loan process. A mortgage banker will sometimes only be a facilitator, but there are also times that their company will continue to service the loan. This is especially true of mortgage bankers who are correspondents for life insurance lenders.
To test the theory regarding the diversity of lenders, I looked up all the retail sale transactions that included debt from the last 90 days in California. No lender had more than 3% market share. There were some of the typical names such as US Bank, Bank of America, and JP Morgan Chase. But then there were 48 others with names such as Grasshopper Bank, Poppy Bank, Technology Credit Union, Golden Bank, CalPrivate Bank, Axos Bank, Artes Capital, Celtic Bank, and obviously many others.
When our team is selling a property, if the buyer doesn’t already have a strong lending relationship, we always encourage them to work with a mortgage broker/banker and will provide a list of professionals that we have successfully worked with in the past. Based upon the diversity of lenders in the marketplace, it is highly likely that if a buyer is shopping a property on their own without the help of a mortgage broker/banker, they are going to find a lot of lenders won’t make a loan and therefore may get scared away from the property.
At Progressive Real Estate Partners, we have developed good mortgage broker and mortgage banker relationships and if you need an introduction to one of them reach out to us and we would welcome making the introduction.