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I work in debt and equity advisory for a large commercial real estate brokerage
for our peer competitors, 1, 2, 3 is "pretty standard" - aka starting points that get negotiated down
1% for senior debt 2% for any subordinate debt 3% for equity - including preferred equity
On a construction loan for $400 million, you will never be paid 1% unless you accomplished something astronomical like representing a 12 year-old whose experience in development has been via Legos.
You can expect 0.50% and as little as 0.25%
lol @ the Legos. This is accurate.
A haft a point would be a lot on a deal this size but if you are truly doing something amazing like finding the only deal that's out there for a project then you can rake in the fees. IE. If you were financing a supertall construction deal in NY and nobody wanted to finance the deal for over a year and you bring in a foreign lender I could see a 2% fee.
This is right. I'm on the development side, and I honestly can't stand debt brokers (no offense to those of you out there). Generally, what I see is that they take six or seven figure fees for putting together a useless pitch book. If the fundamentals of a deal are strong and there is good sponsorship, getting debt is easy. If those two aren't there, then 99% of brokers aren't going to get your favorable terms, in which case... again, why did you need them?
For the 1% who are actually putting together creative financing packages, they're earning their fee and kudos to them. But I think that is a vanishingly small percentage of the time.
I'm an analyst at a brokerage firm on the debt side. While I don't completely disagree with you, I would like to point out that a significant part of the value a debt broker offers is getting a deal out to a much broader market. We meet with various banks, life co's, funds, and agencies weekly and discuss what their appetite is and show them deals accordingly.
So when we get a deal and we know a lender's portfolio is under levered in that specific asset class, we know we can get that lender to quote competitive terms and get the best deal for our client.
Yeah sure, there are definitely slapdick debt brokers out there but they’re not the guys winning and retaining business (aka 6 and 7 figure fees) from sophisticated high quality sponsors. I think you're painting the picture of the debt and structured finance advisory landscape with an extremely broad brush.
The smartest guys in the room (who also have the biggest balance sheets and most extensive capital relationships) are continuing to retain and the align themselves with capital advisors to run a bid process to find the right capital for their deals. Financing real estate isn't just a slam dunk pricing exercise–there's much more to finding the right capital partners for your deals even if it’s a no brainer deal.
Go and look at the financing Singer & Bassuk arranged for TF Cornerstone on 387 Park Avenue. S&B took home REBNY’s most ingenious deal or the year for this transaction. S&B sold AXA on a complex master-lease structure which allowed TFC to get the deal done despite the asset not being stabilized–they were renovating/retenanting the building at the time but wanted to move on the low interest rate environment.
White glove service aside, I’m all about core competency. What is your business? Development? Great, go focus on being a developer. No need to be chasing around banks and equity players. Go find more deals.
The question (and this is addressed at all the above responses and not just brosephstalin) is whether that competency, whether those relationships and offers, are actually worth it for a client.
Of course there are deals where brokers provide immense value. There are also plenty of deals where their fees completely wipe out any value-add and then some. You say I paint with a broad brush - I admit it, I do. So are you all. I think, from experience and what common sense would say, that the vast majority of deals fall somewhere in the middle of "skimming fees" and "providing truly irreplaceable white glove service." And, of course, as some of you have said, at some point as a developer my time is more valuable being spent on developing, and not chasing around banks or equity partners.
But that sort of bears out my point. Yes, having a debt broker may give you some value, but you have to net out the cost of using them, as well. I've never heard a broker say "here are the terms you could have gotten pitching this to xyz, a well known accessible player, and here's what we got you, so we'll reduce our fee so you're net neutral". Unless a broker, or anyone at all, is telling me that they're not taking a profit at my expense, I feel justified in assuming the worst.
And none of that deals with the fact that middlemen tend to tell you what you want to hear to win business. I know, all of you will immediately begin insisting you give straight advice, but I'd be very interested to hear how that advice, and it's delivery, changes between the initial pitch for business and the "down to brass tacks" discussion once a signed agreement is in place, changes for your firms.
EDIT: Felt obligated to respond to the point about the pitch book as well. If your clients only think they're paying for a pitch book, it could mean one of two things: either you're not doing a good enough job selling what it is you actually do, or you don't actually do as much as you think. Every broker on here is saying the same thing in defense of their industry, which sort of implies there isn't a ton of differentiation - if everyone is providing the same value-add, white glove kind of service, then what actually distinguishes one brokerage from another?
I get your points, and trust me I've had some terrible experiences with brokers as well, but I feel like what you're describing is a worst case scenario that doesn't (or at least shouldn't) pan out that often. Most predatory (or even just bad) brokers get 'outed' pretty quickly in the market, and unless you have some type of agreement whereby you're obligated to do the debt deal with them, if you were able to do a deal with a widely accessible lender for better terms and didn't, the fault would be on you for not doing your due diligence and negotiating the fee down. On the principal side, in my mind this would be like saying 'hey mr. investor, you guys invested with us at a 50/50 promote, but since you could have just invested in Rich Uncles at a guaranteed x% year 1 return, we will slash our promote in year 1 so you're net neutral.'
Principals, and equity investors in general, take risk. Brokers don't. There is no situation in which a broker's attitudes/fees/compensation is even remotely comparable to that of someone taking real risk.
If we have clients that come to us with term sheets, we'll give them an honest answer if we can't do better. Sometimes they ask us to run the process anyway. We value our relationships and that's why we have so much repeat business. We also make a point to not overpromise and underdeliver because that directly impacts our reputation (and future business) which we protect diligently. We don't have those "brass tacks" conversations with our clients because we haven't had to. Guys like you clearly think we're just bottom feeders that will jump on top of any deal for fees. There are many brokers like that and as MonkeyWrench said, you are drawing from the worst examples of it. We actually turn down a large proportion of the deals we see, because if we believe we cannot execute on the client's ask, we won't take it on. I say this as someone that doesn't plan to be a broker forever, but as someone that will always recognize the value brokers can add to certain deals and will always be in favor of using a broker if I become an acquisitions or development guy in the future.
Well that is good to hear. My experience has been that this is not the case, and my experience (for both debt and equity raises) has been with reputable players - JLL and Cushman for the most part. What we were told in pitch meetings was not reflective of reality. In those cases, I knew going in that we were being fed a little bit of BS, but outsourcing the work was worth it. Turned out to be a lot of BS, of course, but my point is that while you personally may make perfectly accurate representations and always under-promise and overdeliver, this is NOT the norm and moreover, it is not the norm at highly reputable firms.
It really depends on the deal. Places like Meriden are getting 25 BPs because they aren't really adding value and they know it. That's why they have comped fees for some of there biggest clients on straightforward transactions. However, I have clients who would pay me 5% on a deal because it's almost unfinanceable. I just got 2.5% on my last deal because I found the only lender in the market who was willing to do the deal.
to get to the point and be straight forward...last deal we used a debt broker on come in around 1.5% (that doesn't include any of the closing costs/fees for the loan). Has been as high as 3% depending on the structure (Mezz, construction, insurance, etc)
http://quantumcp.com/wp-content/uploads/RealEstateCapital_SeptIssue.pdf
I recently read this article on the commercial observer about Lotus Capital, a small debt advisory shop that was founded last year and has already placed more than 1B in debt and have done deals in the US and the UK. It appears to me that their success is primarily because the founder emphasizes the advisory part of the relationship than the broker part. Also, the project that was mentioned in the article was a pretty intense project with four different product types with all in varying degrees of construction and it was a 4 month long capital sourcing process. So, for deals like this one, they definitely earned the fee.
Here is the article-https://commercialobserver.com/2017/11/flower-power-the-life-and-times-…
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