How to negotiate with lenders, part two
Do you know who gets the absolute, best possible loan for any given property?
They literally own hundreds of billions of dollars of real estate.
It’s kind of like a bulk purchasing discount. If a lender wants to play ball with Blackstone, they are going to put together the absolute best terms they can in an offer to lend. That includes the interest rate, the loan proceeds, and the structure.
There’s nothing magical about this — a strong relationship with this single borrower can lead to more potential lending opportunities than working with hundreds of small borrowers.
So if you’re a small to mid sized commercial real estate investor, how can you possibly hope to get the type of loan deal that these real estate mammoths can command? And if you can’t get competitive debt, why will your equity investors give you money, rather than throw it into a big private equity fund where the lenders provide cheaper money to boost equity returns?
There are three strategies to employ.
You need to get in front of the right lenders. This was the point of the first blog in the series, so go back and read that if you missed it:
Try to find an overlap between the right lenders for your particular transaction, and the right lenders for your entire portfolio. If a lender smells the opportunity to not only lend this once, but to grow a larger relationship that leads to more opportunities, it can help lead to more interest.
If you are a brand new real estate investor, or your portfolio is small or spread out, this will be a less effective strategy. Which is why you’ll want to…
The term “OPM”, which stands for Other People’s Money, has become a popular one in real estate investing circles, and for good reason. Syndication has vaulted many real estate investors to higher heights.
But I’d like to put forth a new acronym to consider:
OPR — Other People’s Relationships.
Fact: Relationships are extremely powerful.
Fact: Relationships take time and attention to build.
You can’t constantly be in communication with everyone. Not at a deep level anyway. And even where you’ve taken time to cultivate a relationship, you won’t usually have the advantage of promising many more transactions if they treat you well. So leveraging Other People’s Relationships can often be helpful, and may sometimes be completely necessary, to accomplish your business goals, particularly when we talk about financing.
There are two ways OPR can open the right doors:
So finding the right people that already have these relationships in place can open the right doors.
Once you have your foot in the door, you still have the problem of getting the most favorable terms in a transaction. This is where leveraging a larger stream of deal-flow comes in. If the lender thinks they will win a lot more business from a particular transaction, they’ll put their best foot forward (remember the Blackstone example).
But what if you weren’t just leveraging your own deal flow to negotiate? What if wooing you with favorable terms actually helped that lender close more transactions? That’s where leveraging someone else with more deal flow for that lender comes in.
Making friends with a larger investor may score you some relationships you can leverage. But still, that’s going to be limited to that other investor’s network, and it doesn’t give you leverage in a negotiation.
That’s where a Capital Advisor comes in. By design, Capital Advisors focus on financing full-time, as a service to many different real estate investors. That way, they can maintain and strengthen relationships with many different lenders and other capital sources, and have enough deals going on at any one time that lenders know they are a larger source of business than working with a single borrower.
Working through a Capital Advisor puts a lender on notice that they need to address the lending opportunity seriously. They need to treat that borrower as if they are larger, since the Capital Advisor has the discretion about whether to give them access to many more opportunities.
The effect is compounded if the Capital Advisor is part of a larger team, where their timeliness, flexibility, and execution will determine how much dealflow they can access to a much larger degree.
Of course, it’s not just the size of the Capital Advisor’s team that matters. It’s the quality of the relationship. Lenders work with Borrowers and Capital Advisors they trust, so the quality of deals and making it easy on these lenders also plays a large role in getting business done.
TL;DR: To get the most out of a negotiation with a lender, leverage other deal flow they want, either on your own or with the help of a Capital Advisor.