The Commercial Mortgage Broker’s Role
Commercial mortgage brokers play an important role in the real estate marketplace. Professional commercial mortgage brokers are well placed to source the right financing, at competitive rates, upon terms best suited for you. And as we know, financing is key to commercial real estate ownership success. For additional insight, we are joined today by Ermanno Tasciotti Licensed Broker with Mortgage Centre Canada Commercial.
YPLP: Ermanno, how long have you been involved in commercial mortgage brokerage, and what got you into the profession?
ET: 3 years as a broker but commercial mortgages 9 years in all.
I was an independent broker just starting out on my own in 2006. I was busy raising a family at the same time so my focus on brokering was not full time. An opportunity came my way to go work for a big bank’s commercial mortgage division in the fall of 2007. I took the opportunity as I saw it as a chance to develop this skill and knowledge needed to do these deals competently. I was with them for 6 years and the experience was invaluable.
The Importance of Experience
YPLP: What value do you bring to prospective borrowers?
ET: I feel that my experience as a lender previously and now as broker brings a unique perspective to the deal which can help the client in many ways. I see the transaction from both sides and can present it to a lender in an optimal way. Now before I send the deal out I put my ‘lender’ hat on and ask, “Would I approve this deal as presented; if not, what’s missing or lacking in the transaction or presentation”?
When I worked for the bank, the client had limited options and only one lender – me. As a broker, I now have over 40 lenders across the spectrum of rate and risk to draw from. While on some of the tougher deals just securing financing at a reasonable rate and terms is the goal, there’s instances where several offers are presented that the client can then choose from.
And lastly, there’s the knowledge of the marketplace. I’ve seen and touched many deals over the years. From the database of real estate I’ve reviewed, I’ve gotten to know some of the nuances, the advantages and disadvantages of certain geographical areas, certain property types, etc. While I don’t make specific recommendations on buying or selling to a client, I share my thoughts, opinions and facts.
What are the misconceptions about Brokers?
YPLP: What are some of the misconceptions borrowers might have about Brokers or the brokerage industry?
ET: I can’t speak for the residential side but for commercial lending I find that it’s a bit of both extremes when it comes to the perception of the deal. Some people think that these deals can be incredibly difficult, take years and cost a fortune to finance. There’s also those that are just the opposite. They think that these deals are or should be simple, straightforward and a snap to do – “just like when I got my house mortgage…..and why is it SOOO expensive”.
While these points of view CAN be seen as accurate in some cases, the reality is that most deals fall somewhere in the middle……’it depends’. That’s a phrase that can be used on EVERY deal……it depends.
Is it about more than just Rates?
YPLP: Many borrowers focus on mortgage rates, but a competitive mortgage offering is more than just rate isn’t it?
ET: You would think that’s true – at least I find it to be so but I’m on this side of the deal. But further to my last point, a lot of clients don’t see this especially if they don’t know or understand what’s involved. I’ll give you a simple example. Someone looking at buying a commercial condo for say $600K could very well end up with a mortgage that’s less than what they have on their home at a higher rate AND costing them much more than what their home mortgage cost them in fees.
As a broker, sometimes and especially with the first time investor, there could be a lot of ‘starting from the basics’ and explaining what’s happening not only initially but throughout the process. It’s important to do this in a clear and concise way so that the client understands what’s happening.
Like most residential mortgages, it’s not just rate. There’s fees, terms and then there’s expertise and knowledge of the broker you’re dealing with and the service that the client is getting. It’s important to build that rapport and gain the client’s trust. I see part of my role as educating my client so they better understand the process not just for now but for potential future transactions.
Expertise is Critical
Let’s look at how expertise can be important. Most commercial deals can take months and in some cases even years to close as mentioned earlier. They can also fall apart at any time (again, it depends).
As a broker, I don’t have control of the timing from beginning to end. Most of the time I’m waiting for more information to be presented like an appraisal which can take 4 weeks or more to get done. Or I’m waiting for someone like the client or the lender or lawyer to get back to me. Like some residential deals, there’s only so much we can affect. When I do have control and the ball is in my court, I can speed things up. I take full advantage and move things along – why add to the time when you don’t have to?
For example, getting the deal packaged and marketed to lenders. Someone that doesn’t know how to package and send the deal out could take weeks to do this (which would include trying to find a lender) whereas a more experienced broker can do this in a day or two depending on how much info they have initially. That’s another thing: knowing what questions to ask and what documents to ask for and in order to get a file off the ground.
The Importance of Relationships
YPLP: Brokerage is about relationships. What is your personal approach?
ET: Just like residential brokering; this is all about relationships. We all need to have good relationships with our lenders, BDMs, clients, etc. How and when we keep in contact with everyone is a personal thing and we do basically whatever works best for us.
The difference is that as a commercial broker, the referral sources are somewhat different and actually include other mortgage brokers and agents. A lot of these agents would like to do the deal themselves. I’m all for that but given the challenges, learning curve and time involved, it may make more sense to just team up with a commercial broker like me and share the deal. Once they make the referral they can spend more time on their residential business or getting more commercial referrals. Leave the details to me. Also, once the deal is done, I can go through the deal from start to finish to explain what I did – this being a ‘value add’ to the referral source working with me.
As for my approach, I’ve always been a fan of building one’s brand and have become a huge fan of Social Media. I’m active in this arena and plan to stay that way – the one thing I KNOW is that consistency is critical or you become irrelevant.
And then there’s the traditional phone calls and face to face meetings. Again, it’s all about building relationships.
How do you Assist Clients?
YPLP: Investors often finance their first acquisition with a mortgage from their local bank. The challenge often comes when they need financing for their 2nd or 3rd acquisition. I’m sure you had clients in this situation? How can you assist them?
ET: When a client is looking to add to their portfolio by acquiring more properties, we do look at the overall cash flow and client’s overall net worth but we always start with looking at the subject property. How does that property stand on its own and how can/does it service the mortgage being requested? From there we look at their overall picture. Again, it depends on the deal. Commercial lenders relay on additional security vs. personal income more so than on a residential deal. Net worth and other assets weigh more heavily in commercial lending than what the person or kep principal earns as income outside the subject property.
YPLP: There is more and more regulatory oversight on the activities both of lending institutions and the brokerage community. What are your thoughts about this, and what other changes are you seeing?
ET: This really doesn’t affect me on the commercial side. We still have to abide by FSCO guidelines, prepare and provide the same documents such as Disclosure Form, etc. The changes announced recently around the stress testing at a higher rate and the risk sharing by the lenders, etc., could have indirect impacts to the commercial market. Time will tell. This could increase or decrease the demand for commercial real estate as an investment if investors are finding it harder to get into residential rentals. It could lead to two or three clients that traditionally invested in residential properties to get together and invest in commercial.
Also, if the changes negatively impact the earning power of residential agents and brokers, they may start focusing on commercial opportunities as well and begin referring these types of deals to people like me where they maybe wouldn’t have before. They could look at making this a part of their business plan to make up for the “lost income” due to the changes. It’s too early to tell at this point.
How can a Client Help you to Help Them?
YPLP: How can a prospective borrower/client help you to help them? In other words, what would make your life easier, when you are starting out with a new client or new file?
ET: I have a Letter of Engagement/Exclusivity Agreement that I use sometimes (not always for various reasons…). This form is a great way to start out once I’ve had a chance to discuss the deal with the client. This agreement allows me to spell out what I can do, what they can expect from me and also what I expect from them. For example, getting me the documents and info in a timely fashion and engaging me as the sole broker on the deal so more than one of us isn’t going to the same lender with the same file.
It’s always important to start off on the right foot!
YPLP: Thank you for sharing your thoughts with us today Ermanno.