Online Financing Companies Find a Niche in Commercial Real Estate.
The dot-com massacre that ravaged the e-commerce landscape has left only a handful of survivors in the online commercial real estate financing sector. But those companies that still are breathing have developed business models and strategic partnerships that they believe will result in success — although not nearly as quickly as they originally anticipated.
Using 20-20 hindsight, the demise of online financing seems almost obvious. “A lot of people felt that all they needed to do was develop a Web site and cut deals with lenders, working on some form of fee/commission basis,” says Steven Moreira, CCIM, president of Magic Financial Services in Longwood, Fla.
That just didn't work, as the story of Cashblazer.com illustrates. “Our premise was ‘Wouldn't it be great if a person could go on the Internet and fill out essentially one application and our site would match them up with lenders,'” says Gary Wyner, JD, CPA, president and chief operating officer of the now-defunct company.
After lining up financing and a network of lenders, Cashblazer decided to focus on the $500,000 to $3 million niche. “We received many hits, but we quickly discovered that those who came to our site were just not qualified for anybody,” Wyner says. “They were the rejects — people who had already been turned down everywhere else. Even those who might have qualified never came back to us when we asked for additional information.”
The bottom line? Cashblazer was up and running for more than six months and never did a single deal.
Despite the demise of many highly publicized financing Web sites, four major national players have weathered the storm so far: LoopNet's financing subsidiary LoopLender (http://www. loopnet.com/looplender/), based in San Francisco; Precept Corp. (http://www.preceptmortgage.com/), in Oakland, Calif.; MortgageRamp (http:// www.mortgageramp.com/), headquartered in Charlotte, N.C.; and CapitalThinking (http:// www.capitalthinking.com/), a New York-based company. In addition to these four companies, small, regionally oriented lenders also offer their services over the Internet.
LoopLender was established in March 1999, and it is operating at a profit. It attributes its reason for survival to the synergies it obtains from LoopNet, which feeds a continuous stream of financing opportunities to LoopLender. Precept was formed in July 1999, has not become profitable, and is not ready to predict when it will get into the black. It attributes its survival to its ability to stay within its budgets and its ability to attract strategic partners. MortgageRamp moved into the black on September 1. It also attributes its success to its strategic partners, including GMAC and Fannie Mae.
LoopLender has a solid niche at the front end of transactions that begin on LoopNet, the largest online commercial property matching service. Recently merged with Los Angeles-based PropertyFirst.com, LoopNet has a national network of 199,000 users, including 87,000 brokers and 50,000 buyer-investors. It carries more than 150,000 property listings in its system: more than $98 billion of for-sale properties and 1.7 billion square feet of office, industrial, multifamily, and retail space for lease.
LoopLender functions as the mortgage origination arm of LoopNet. It has contractual relationships with 40 different lenders, including Morgan Stanley, Wells Fargo, and First Union. It provides construction, equity, and Small Business Administration loans, as well as other types of capital.
“Commercial brokers listing their properties for sale can choose to add LoopLender to their online listing packages,” says John Gough, LoopLender's managing director. “This includes real-time loan rate information and detailed term sheets from the participating lenders.”
It expedites the process for buyers as well. “Perhaps you have 30 properties that meet your criteria. We give you the ability to find preliminary financing terms,” Gough says.
When a loan closes, LoopLender gets a 30 to 60 basis points commission from the lender. The company also receives a major revenue and profit stream from other consulting work it performs for both lenders and borrowers.
Following a different model, Precept caters to the mortgage banking community. “What we have done is reversed the transaction sequence. Lenders come to our site and bid to originate the loan,” says Frank Scavone, Precept co-founder and chief executive officer.
Registered brokers send borrowers to Precept. “The debt structures we look at assume the capital is there, the loan can be sized to what exists today as opposed to what will happen in the future, and the borrower signs an underwriting and auction agreement with us,” he says.
Before the bidding begins, Precept underwrites the loans and puts the information — including due diligence, risk analysis, and on-site inspection data — on its Web site, so interested lenders can make quick decisions.
Precept holds sealed and open bidding periods, during which borrowers can monitor auction activity and negotiate with lenders either by telephone or via Precept's online discussion forum. Once the bid is accepted, the auction ends, and Precept proceeds to coordinate closing. If no bids are made, two of Precept's backers, Morgan Stanley and Salomon, are committed to making offers.
Precept gets a 10 basis points commission from the buyer and a 40 basis points commission from the lender. “We also earn major revenue on underwriting fees and other income streams,” Scavone says.
“We provide a win-win situation for all parties in the transaction,” he continues. “The borrower goes through a single application process that works for all the lenders in our system. In evaluating lenders, borrower and broker are looking at the exact economic terms the lender will deliver. The lenders, in turn, are working with much better information. The time savings are enormous.”
MortgageRamp's business model is similar to Precept's. The company was created with $25 million in seed money from GMAC Commercial Mortgage in 1999.
“We don't accept financing inquiries directly from the borrower,” says Jack Toliver, executive managing director of MortgageRamp. “Our point of entry is the real estate professional, either the mortgage banker or broker, and we forge a relationship with the commercial broker handling the deal. We then bring in somebody from GMAC or one of our other strategic partners and we then put together a loan submission product.”
The necessary information includes “operating history, what kind of leverage the borrower seeks, and other important factors that we present to perhaps 12 lenders. Working with the broker, we narrow the field down to three lenders,” he says. “Each gets the deal at the same time, and they are invited to make a quote on the deal. The broker gets these quotes, analyzes them, and presents them to the borrower.”
The commission, similar to the others, is 50 basis points. MortgageRamp also offers a variety of profit centers that contribute to its revenue stream and profitability and enable it to become more of a full-service Web site. Such services include appraisals, property inspections, 10-day closings for simple multifamily loans, and Web-based software for transaction management.
Originally an online lender, CapitalThinking now provides a Web-based software program that automates, manages, and tracks the commercial financing process.
“We were a player in the online lending business for about five months but shifted our focus to become a technology supplier,” says Heather Shively, co-founder and CEO of CapitalThinking. “In fact, we were marketing the back-office solutions at the same time we were in the lending marketplace.”
CapitalThinking shut down its financing Web site for two reasons, she says. “We could see that it would not become a profitable business soon enough for us, so we decided to focus our efforts on our core competencies. Secondly, we didn't want to compete with our clients such as J.P. Morgan Chase, PNC Financial, and Cohen Financial.”
She reports closing $78 million in transactions during CapitalThinking's five months as an online lender. “I believe there is indeed a business in online commercial real estate lending and using the Web to transact business. We decided a better business model for us was to support the brand names rather than compete with them.”
Benefits of Online Financing
While some commercial real estate professionals are quick to point out the limitations of doing business over the Internet, others see the tangible benefits.
“What I have done online are generally smaller deals by smaller borrowers,” says Len Deering, CCIM, vice president of ARCS Commercial Mortgage Co. in Oak Brook, Ill.
“I see the Internet working for two types of deals,” says Ed Craine, CCIM, a principal in Smith-Craine Finance in San Francisco. “There are some deals that everyone wants, like a 100-unit apartment building, and you can go online and get a long list of people to contact. On the other hand, the Internet also works well for a niche deal.”
Craine says that Blackburne & Brown Mortgage Co. of Sacramento, Calif., is an excellent online source for the unusual deals. “I like them best for deals like a local mini-storage facility or a construction loan. These are not the kinds of things a large lender is interested in,” he says.
John Pagliosotti, a broker/owner/consultant in Orange County, Calif., financed an unusual deal through LoopLender. “I did a loan for a 36,000-sf industrial building in Huntington Beach. The problem was the building had water table contamination,” he says. “It was not an easy deal to go to market with, but through the Internet we got hooked up with Jackson Federal of Burbank, Calif., and they did it. This was such an unusual deal, I wouldn't have known where to start.”
The Internet also speeds Section 1031 tax-deferred exchanges, which have a 45-day window from the sale of one property to the purchase of another. LoopLender recently added qualified 1031 intermediaries as affiliates, creating its own 1031 information center to serve clients. “We believe [LoopLender] can eliminate as much as three weeks time on the identification process,” Gough says.
MortgageRamp also facilitates exchanges. “[MortgageRamp] puts together tight and concise packages that contain all the important information for a credit decision. Such a decision can be made in as little as an hour or two,” Toliver says. “Of the deals we submit, 80 to 85 percent are quoted — oftentimes in between four to eight business days.”
However, the amount of time that can be saved using the Internet is subject to debate. “It's certainly a big timesaver on the front end,” Deering says. “It works better on the sales side in getting information quickly, but doesn't work as well on the financing side.”
Craine agrees that a lot of time can be saved on the front end, but as far as the financing, “You can save maybe 5 percent of the time doing it online,” he says.
Will the Internet ever replace human beings in the commercial lending process? Moreira doesn't believe so. “The Internet is an enhancement tool. You want to deal with a person and not a machine — somebody with responsibility,” he says.
During the high times when venture capitalists were lining up to give their money to the newest dot-com concepts and business models, industry prognosticators were talking of the day when 5 percent or 10 percent of transactions would be done online. The survivors have become far more conservative.
“When we talk commercial real estate financing, we are talking about a $200 billion a year business,” Gough says. “As we speak, the Internet is involved in less than 1 percent of all transactions. In five years, maybe this will grow to 3 percent and in 10 years, maybe 5 percent. That's a lot of money,” he says. “The industry Internet experts had been predicting 5 percent in five years. It's simply not moving anywhere near that quickly.”