NEW YORK CITY—Dealmaking is tough enough in the best of times. But in a period of high competition and a recovering lending environment, brokers—particularly mortgage brokers—have their hands full, trying to orchestrate the best deals for their clients. Just ask Simon Ziff, president of Ackman-Ziff Real Estate Group, a locally based boutique real estate capital advisory firm specializing in a variety of financing solutions.
Since joining the company in 1989, he’s personally negotiated more than $20 billion of debt, mezzanine and equity financings for some of the nation’s leading real estate developers and owners, working with key capital sources. He took some time recently to chat with GlobeSt.com about the intricacies of closing transactions today. Here, in his words, are some of the finer points behind the art of mortgage brokerage today.
GLOBEST: When it comes to financing transactions, the mortgage broker is often not in the spotlight. Yet oftentimes without them, borrowers would have a difficult time connecting with lenders. Just how important is a mortgage broker today?
SIMON ZIFF: A good capital advisor will add value a number of different ways, first and foremost by acting as more than just a mortgage broker. The mortgage brokerage fee is often how the capital advisor gets paid but structuring the entire capital stack is often much more complicated than “placing” a loan with a lender. We view our value-add components to range from structuring the capital, identifying the “hottest” capital at any particular moment, negotiating the best terms available and often times identifying a maintaining a backup as the first lender selected is sometimes not the ultimate lender. Overseeing the syndication of the loan is and has always been an important function on our larger deals. Most people don’t think about the role of managing multiple lenders on a deal as integral but it is a big part of the art of the deal.
GLOBEST: What are the main characteristics or attributes a mortgage broker must have to complete a deal today?
ZIFF: Capital advisors must understand the bigger picture. The relationship between the entire stack from debt to equity is critical. The advisor must also understand when to be really aggressive in a negotiation and when to allow “the play to develop” before intervening.
GLOBEST: You’ve stated that although a broker must understand the needs of both parties in a transaction, a broker who represents both the owner and capital provider “is not serving his client.” Yet this is often the case in the market. Can you explain your sentiments?
ZIFF: It comes down to alignment. A better result will always be achieved when there is alignment. You can’t have alignment with both parties in a transaction.
GLOBEST: What are the differences between brokers who get exclusive assignments and those who don’t? What are the benefits and drawbacks of each?
ZIFF: Every broker wants an exclusive, but only those who have strong enough reputations and enough quality business are able to say no when asked to work without an exclusive. The end result is a market of the “haves and the have nots.” The haves, or those that get exclusives, are generally rewarded with better sponsors, better deals and receive better treatment from capital sources. Those brokers are able to spend more time making sure their information is correct and will have fewer retrades. Certain capital sources won’t even deal with intermediaries without exclusives.
Owners using brokers without exclusives face a number of issues including brokers often utilizing their “go-to” lender, which becomes necessary due to the number of capital sources who won’t give as much attention to the non-exclusive broker. This often results in what is, in effect, a lender’s rep and creates a misalignment. The misalignment is further exacerbated when there are multiple brokers on a deal who are incented to undermine all proposals in the market other than theirs.
These are a few of the many issues. We’ve interviewed brokers over the years who’ve worked without exclusives, but transitioning them to our model has been challenging because of the added discipline.
GLOBEST: The lack of good opportunities in core/primary assets and markets has sent investors seeking yield in secondary or tertiary markets as well as non-core product. Have capital sources followed suit?
ZIFF: They have. In general, when CMBS is functioning well, lenders will focus more on cash flow than location or credit quality. Right now, CMBS is functioning well.
GLOBEST: What impact has the return of CMBS had so far?
ZIFF: I have always argued that CMBS drives cash-flowing commercial real estate values more than any single factor, perhaps even more than interest rates within a fairly broad range of rates. This has been the case since the early ’90s, when the CMBS market developed. Prior to CMBS, one could either borrow from an insurance company or a bank on a high-quality asset at modest leverage, or borrower recourse from a commercial bank on just about everything else. The return of CMBS has had a huge impact on values.
GLOBEST: You have mentioned that part of the “art of the business” is “how wide” the broker should go. Going too broad in marketing can backfire long term for the deal, the broker and the client.” What do you mean by that? One would think that creating a bidding process among potential lenders would yield great results for the borrower.
ZIFF: It’s really simple. We all have limited time, and our lender friends are no different. If a lender is spending too much time on an account and it doesn’t result in closed loans, they lose interest. There are a number of brokers and owners that like to see a lot of quotes but this has a long-term detrimental impact on their ability to utilize key lenders when those lenders are appropriate. A strategic advisor or owner recognizes this and is sure not to exercise sources. Over time, borrowers that grant exclusives will get better executions.