If you are looking for a business loan, commercial real estate loan, or looking to raise equity for a commercial project, you are likely going to work with a commercial loan broker to raise the capital. This article addresses the quandary known as the broker chain. If a broker chain is formed to find a source for funding a project, the process is likely to be impeded by weak links in the chain.
What is a Broker Chain
Broker chains are a common occurrence in commercial lending on large transactions. This happens when a mortgage broker contacts another mortgage broker, who contacts a third broker with access to the lender. Some projects may have as many as eight brokers in the chain. Many lenders will not work with broker chains because it becomes a communication nightmare. The deal is only as strong as the weakest link.
Why this Happens
The primary reason why this happens is because borrowers will work with anyone who approaches them to provide financing. Many brokers working on commercial loans are residential loan brokers who are looking for other sources of income. Other loan brokers out there are “Deal Consultants” with no real financial, banking, or business experience or even a college education. They troll the commercial MLS systems for properties and try to match them up with investors on LinkedIn, LoopNet, CREPIG, or some other network. They are no more than telemarketers with an executive summary.
There are many competent commercial loan brokers with deals that are outside of their geographic area or require alternative lending sources for unusual loan requests. This often results in a broker chain. Commercial loan brokers need access to many lenders to accommodate different loan scenarios in different cities.
Wolf in Sheep’s Clothing
Most “Direct Sources” have very conservative programs in a specific geographic area. Many times the “direct source” will tell you that they need to broker the deal because it does not meet their lending criteria. Look out for “Direct Lenders” that advertise programs that are too good to be true. These are brokers posing to be direct lenders.
Broker Chain Issues
Greed and corruption are common in any business where large amounts of money change hands. Excessive fees are the primary reason for failure. Hard money lenders charge excessive fees based on risk. The brokers involved see the high fees and think it’s a free-for-all.
So what are reasonable fees? It depends on the project, type of loan, whether it is short-term or long-term, and how bad the brokers want the loan to close. Some brokers think they are the borrower’s only option. Frankly, that’s nonsense. There is ALWAYS another lender willing to do the loan. Generally, fees for a broker chain should be no more than 2.5 points. Split the fee 8 ways, you begin to see the issue from a broker’s perspective.
The Whisper Chain
The world record for the longest whisper chain was a marriage proposal message through passed through 59 people. Communication is a huge problem with broker chains. Brokers working in different time zones may be 6 hours apart; even more for international deals. We use email to communicate negotiations and send documents back and forth. People may be out of their office or have gone home for the day when an email message is waiting for a reply or to be forwarded. This delay can often kill a deal. Lenders will usually ask to communicate directly with the borrower, once they have interest in the project. There has been some improvement to sharing documents recently by using “the cloud” to store documents in online folders.
People on the Internet
The anonymity provided by the internet can be a double-edged sword. Our privacy is important, but we can pretty much take on any identity. Let’s say you are contacted by someone who claims to be a commercial loan broker. You have no way of knowing whether or not this person has any business education, finance experience or mental stability. I recently was trying to help a “Deal Consultant” get financing for her client. After a few of my lenders rejected her projects she had a meltdown, attacking me personally. She left long insulting phone messages and sent huge emails with all sorts of personal attacks. This was especially disturbing because she is located in Honolulu, not far from where I live. When I blacklisted her email, she contacted my lending source directly.
Out of Control Brokers
We recently worked with a broker chain where a broker in the chain modified a Letter of Intent for an unrelated project by changing the borrower’s name and the project information, then passed this on to the CRE broker representing the borrower. He committed fraud and put us all in jeopardy. Once the CRE broker got the letter, he contacted the lender directly because he wanted to cut all the brokers out of the deal. You can imagine the poop-storm that followed.
Mega-deals are commercial deals over $100 million. Giga-deals are over $1 billion. One broker that contacts me periodically works full-time at a mortuary. His email correspondence is always ALL CAPITAL LETTERS. He only goes after Giga-deals with oil and gas companies and large, exotic projects. His partner, who drives a car rental shuttle bus, somehow has “the connection” to many of these large deals. Before they can discuss the details of any deal, they want a fee agreement for at least 4 points. These two guys talk like they are mafia wise guys in the 70s. This is a true story and great entertainment.
Do yourself a favor and stop chasing lottery tickets. It’s the smaller deals that pay the bills. If you hear the terms “Leased Instrument” or “Letter of Credit” or “Bond Program” or “Lending Platform” associated with a debt lending request, you can be certain that the project will not get funded. Do your homework. Call the Attorney General’s office in the state where the lender is located. Call the FBI.
I welcome any response where someone actually got paid through one of these programs.
Many of the deals we do involve another broker. In fact, we work with agents on a fee split agreement. A two or three broker deal is possible and sometimes necessary when the loan amount is over $10M. We can usually agree to ½ point commissions for each broker or agent keeping loan fees below 2.5 points. We protect each other with NCND agreements and co-broker agreements.
When projects are over $50M it becomes necessary to collaborate with brokers who are experienced and have connections directly with hedge fund managers, insurance funds, or other private sources. Difficult deals require expertise and patience. Just make sure you have a fee agreement with your borrower and a signed NCNDA.
I worked with a well-known hard money lender who told my client on a conference call that he negotiates $50 million deals every day. This pompous jerk killed a mega-deal with his ego. The borrower told me that he did not trust the lender. I stopped working with the lender from that point on.
Don’t Be Clueless
It becomes important to become aware of subtle clues, behavioral patterns, and the timing of responses to emails. This is particularly evident when sending out LOIs, fee agreements, NCNDAs, or intake forms. Watch out for lenders that never say no. Watch out for lenders that won’t protect you with a written agreement. You can usually tell when borrowers are stringing you along, shopping the loan, or hiding the truth about something. Watch out for borrowers who are in a rush to get the deal done. There is likely a foreclosure, bankruptcy, divorce, or something else going on that could change or kill the deal.
I’m not suggesting that you need to be a detective or spend endless hours doing due-diligence on every deal. Use common sense and learn to read people. Expect the unexpected and don’t get emotional. If the borrower or broker is playing games, just move on to the next deal.
I hope this opens your eyes to the potential issues surrounding broker chains. Not all broker chains are bad. If you have any questions or concerns, you can contact me directly. My contact list is huge – I work with many lenders and brokers. I will be happy to share my experiences with you personally.