A Prime Finance exec says the best brokers ask the tough questions before the deal goes out, not after
While residential mortgage brokers have dealt with macroeconomic headwinds that have slowed mortgage applications in recent weeks, commercial brokers have their own set of challenges to deal with.
CRE brokers spend a lot of time assembling deals before presenting them to lenders or investors. While the challenges in the commercial space are different from those in the residential space, that doesn’t mean things have been easy.
The current market has made deal preparation more difficult. Comps are harder to find, capital structures are more unique, and what worked in 2019 is not a useful guide for what the market will accept today.
According to one capital provider, one of the biggest differences between brokers who are winning in this market and the ones who might be struggling comes down to thorough preparation.
Seth Fisher (pictured top), principal and head of special situations at Prime Finance, said the most effective brokers he works with have typically done the hard interrogation before a deal ever reaches a capital provider.
"By and large, brokers are doing a great job of looking ahead, analyzing their own transactions, asking the tough questions of sponsors and transactions, learning what capital providers are going to be asking, and sort of anticipating some of those issues and poking holes before it goes out to the capital community," Fisher told Mortgage Professional America. "I do find that some of the more effective brokers have already asked a lot of those questions."
What has changed for brokers
The challenge for brokers is that the information they have traditionally relied on is less reliable than it used to be, Fisher said. Comparable transactions are thinner, pricing has shifted, and the solutions that capital structures need are increasingly customized.
"I feel for them in some cases because they traffic in information and data and a lot of times a big part of that is comparable transactions," he said. "And a lot of that stuff has been turned inside out and upside down over the last few years. So I think it's harder for brokers in the role that they play sometimes to guide counterparties toward what's market when there isn't a market sometimes, or the market is so transitional."
The brokers navigating this most effectively are the ones who have recognized that the rules have changed and stopped applying outdated benchmarks to current deals, Fisher said.
"The good ones are able to recognize that, be cooperative with both sides, and sort of think about what's logical and fair as opposed to just saying, well, this is how it used to be," he said.
What capital providers are looking for
Fisher said understanding how capital providers think about deal assessment helps brokers identify which deals are worth bringing forward.
"We see distress more as a capital structure issue," he said. "We're looking for good companies with bad balance sheets, not bad companies with bad balance sheets. There are really good commercial real estate properties that just don't have the right capital structure."
For brokers in the current market, Fisher noted that most deals have problems, and what matters is whether the underlying asset and sponsorship are sound and whether the broker is honest about the distinction.
For brokers with sponsor relationships navigating capital structure problems, Fisher said there is an opportunity set in transitional capital. Uncertainty in the rate outlook is pushing more sponsors toward flexible capital rather than locking into fixed-rate structures, creating demand that brokers who do the preparation work are best positioned to capture.
"In some cases where they haven't asked those questions, or for whatever reason don't know the answer, being transparent and open about that and not trying to make something up or deflect the issue in a way that makes us say, 'I don't know if we're really talking about the same thing here,'" Fisher said.
He said doing the work beforehand solves most of those problems before they start. It allows for a process where everyone is prepared to have the discussions needed to get a deal across the finish line.
"The transparency, the openness, putting in the work ahead of time, that always makes for a better process for everyone involved," he said. "And everybody feels like they're dealing on the same wavelength and can have an open dialogue about what issues we need to talk about."
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