Commercial mortgages – money is available if you are willing to pay the price
| Date | 26 August 2014 |
| DOI | https://doi.org/10.1108/JPIF-06-2014-0042 |
| Pages | 589-609 |
| Published date | 26 August 2014 |
| Author | Stephen E. Roulac |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Commercial mortgages – money
is available if you are willing
to pay the price
Stephen E. Roulac
Roulac Global LLC, Tiburon, California, USA and
University of Ulster, Belfast, Northern Ireland
Abstract
Purpose – The questions of loan availability and pricing were considered from the perspectives of
financial economic theory and practice as well as a survey of lenders capable of financing a one-year
bridge loan to determine the market’s willingness to make such a loan and what rate of interest would
be charged. Utilizing the sources above, in conjunction with professional knowledge and industry
contacts, 101 lenders were selected as representative of the universe of lenders who had the capacity to
make directly or otherwise to arrange, a $192 million bridge loan. The survey of lenders involved
interviews with 67 of the 86 selected lenders from 59 firms. The paper aims to discuss these issues.
Design/methodology/approach – Loan availability and pricing were considered from perspectives
of financial economic theory and practice plus a survey to determine market’s willingness to make
a loan at what price. Utilizing professional knowledge and industry contacts, 101 lenders were selected
as representative of those which had the capacity to make a $192 million bridge loan. W hen lenders
were evaluated against criteria of size, product type, geographic territor y, and willingness/capability
to provide nonstandard loans, list selected for telephone interviews was narrowed, then subsequently
expanded with referrals that led to identification of new potential lenders to be contacted.
Findings – Nine lenders offered conceptualized deal structures to provide the required financing.
Though the price may be expensive, especially relative to what bor rowersmay wish to pay, financing
is available. Developers’ and deal-makers’ protestations that “it’s impossible,” should be discounted
and rejected. Because the subject property is characterized by high-risk, it is logical conclusion that the
lenders expressing a desire to provide the bridge loan would expect to earn a high return, meaning that
the interest rate would approach, if not exceed, 20 percent.
Research limitations/implications – Because the nature of the research required that the specific
identities of the building and the parties were not revealed, some lenders might decline to consider this
financing opportunity. And, real world negotiation offinancing terms could result in higher rates than
quoted and/or disinclination of lenders to proceed. Because of very specialized circumstances
surrounding this proprietary research, conducted subject to nondisclosure agreement, publication had
to be deferred until those constraints no longer applied. Though the data are more than a decade old,
this consideration does not compromise the relevance, validity, or generalizability of the findings.
Practical implications – Markets can accommodate transactions that might be perceived as
improbable. Investors which approach opportunities with creativity and open mind, can make deals
that would not be possible, were strict, rigid, unbending eligible deal preference parameters to be
employed. Strategists establishing policies for real estate enterprises should insist on progressive,
expansive thinking in turning the scope of their potential venture involvements. Real estate education
and training should address more attention to financial economic theory, strategic initiative, and
creative deal making, which priority topics are too seldom prioritized, with the consequence that too
many in real estate think narrowly rather than expansively.
Social implications – This research substantiates a fundamental theory of financial economics and
refutes conventional appliedwisdom. Seldom do researchers and investors have the opportunityto “get
inside” the lending decision process for a largescale commercial property, especially one characterized
by daunting circumstances and considerable complexity, such as studiedhere. A unique real world date
set – not normally accessible to property scholars – enables study of the proposition that every
commodity has a price , no matter how severe or difficult the circum stances, in a manner fully congr uent
with the new AACSB Business School Deans policy emphasis on relevance in addition to rigor.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received June 2014
Accepted June 2014
Journal of Property Investment &
Finance
Vol.32 No. 6, 2014
pp. 589-609
rEmeraldGroup Publishing Limited
1463-578X
DOI 10.1108/JPIF-06-2014-0042
589
Commercial
mortgages
Originality/value – As commercial mortgages much less studied than residential mortgages, this
paper is significant addition to undeveloped segment of literature. As the majority of mortgage finance
research, estimated to be in the range of 90 percent, has been limited to single family residential
financing, the study of commercial mo rtgage financing is relatively under-researched. Further, the
studies of commercial mortgage finance tend to be illustrative case studies with stylized facts rather
than explorations of empiricism-based investigations. As most researchers engaged in exploring real
estate topics limit themselves to public information, research that provides access to real world private
transactions is especially important.
Keywords Mortgages, Loans, Lenders, Commercial, Financial economic theory,
Financial economic practice
Paper type Research pap er
A well-worn financing adage is that bankers willingly willlend money when a borrower
neither desires nor needs to borrow. But when a particular borrower needs capital,
perhaps desperately so, lenders are unreceptive and the desired loan is not available.
A second well-worn adage, is that “money is not available” for certain ventures,
especially in times of crisis, for financing with above average risk.Although there is no
small amount of truth to perceptions concerning the unwillingness of lenders to make
loans to those who desperately need them and that money might not be available in
times of crisis, neither of these two statements are universally applicable truisms.
The statement that “money is not available” is most often merely a matter of
a borrowers’ disinclination to accept pricing perceived as unappealing. In some
instances, borrowers may have a preconceived notion about what terms they are
willing to accept, and if those terms are not available to them, then the bor rower may
conclude that “money is not available.” But financing transactions, especially those
involving real property, are not binary events. While manyle nders generally seek loans
that conform to predetermined criteria, some lenders will consid er nonconforming
loans. Indeed, a certain segment of the lending market specializes in making loans that
would not conform to oth er lenders’ requirements.
This study concerns nontraditional real estate financing, specifically the prospe ct of
arranging financing for a particular proper ty, whose attributes and circumstances
were most daunting. This study provides a singular heretofore unresearched window
into commercial mortgage financing. Exploring the question of whether the desired
loan would be made provides a case study, a window into how prospective lenders
valuate nonconforming loan opportunity.
Presenting a real world application that confirms financial economic theory, this
study examines the prospect of arranging financing for a particular proper ty, whose
scale, profile, attributes, and circumstances combined to make securing financing
most daunting. This paper provides a singular, heretofore unresearched, window into
commercial mortgage financing of large-scale properties, especially the process of how
prospective lenders evaluate a troubled nonconforming lending situa tion.
In the research reported here, some 86 lenders were surveyed to determine whether
a one-year bridge loan could be available and, if it could be available,what the required
interest rate would be. Sufficient positive response from the surveys of lenders led to
a high degree of confidence conc lusion that a loan – while ver y challenging, difficult,
and expensive to structure – could, be arranged.
The financing studied in this research is unconventional and nontraditional. To
provide a context for appreciating the distinctive attributes of nontraditional real
estate financing; it is important to review traditional real estate financing. In this
590
JPIF
32,6
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