Q&A with Mortgage Equicap’s Daniel Hilpert
Daniel Hilpert, managing director of Mortgage Equicap, talks to MHN about changes to the mortgage industry.
Mortgage Equicap is a boutique commercial mortgage broker and advisor that provides clients with asset positioning and capital structure strategies. According to Managing Director Daniel Hilpert, the unique value proposition of Mortgage Equicap is its ability to help clients maneuver through changing markets to realize the greatest possible value from their real estate interests. In fact, Mortgage Equicap was an MHN 2010 Excellence Awards winner in the Best Transaction category. At that time, Hilpert and his team had closed in excess of $200 million of construction financing since the beginning of the credit crisis.
The winning deal involved a prominent developer who engaged the firm to arrange construction financing for a boutique condominium development in the heart of New York’s Upper East Side. The loan request was approximately $16 million.
The immediate challenge in this transaction was to convince a lender that there was a market for large condominium units and that the loan amount should not be based on the project’s rental fallback. The loan submission was initially turned down by most lending sources, but the firm eventually succeeded in convincing two local banks to provide the requested financing. As the credit markets continued to deteriorate, both lenders grew increasingly concerned about the risk of participating with another lending institution. If one of the lenders were to be shut down by the FDIC, the developer would not be able to use the entire loan facility and complete the project.
When one of the lenders eventually decided to take a pass due to counterparty risk, Mortgage Equicap had to then convince a third lender whose lending limit was higher than those of previous lenders, but still not enough to provide the developer with the requested leverage. Because the new, third lender couldn’t provide the entire loan amount due to the institution’s lending limit, Mortgage Equicap had to arrange preferred equity on top of the first mortgage loan. After obtaining credit approval from both funding sources, the firm had to negotiate loan documents, the operating agreement and the inter-creditor agreement between the two capital providers. MHN’s Editor-in-Chief Diana Mosher recently sat down with Hilpert to talk about where the market is headed and changes to the mortgage brokerage industry as a result of the recession.
MHN: Congratulations on winning the 2010 Excellence Award. What transactions are you working on now?
Hilpert: We recently arranged a $13,500,000 five-year fixed-rate mortgage for a portfolio of apartment buildings in Brooklyn, NY. The challenge was that the owner wanted to consolidate several loans into one blanket mortgage at the most competitive rate and at the same time have the ability to draw additional proceeds (cash-out) on an as-needed basis. Our solution was to arrange a 4.50 percent fixed-rate, non-recourse mortgage with a 30-year amortization schedule. In order to give the borrower the requested flexibility, we negotiated a five-year A note to refinance the existing debt and a five-year B note structured as an interest-only line of credit. The B note (line of credit) can be drawn at the borrower’s discretion and paid off at any time without prepayment penalty. This is by far one of our most creative solutions. I’m very proud of this transaction because we packed everything you can imagine into one deal with a big bow around it.
The new facility will give the borrower the flexibility to draw additional funds over time, but also significantly improve cash flow due to the lower rate and the interest-only component of the B note.
MHN: How is a boutique service different?
Hilpert: When somebody comes to me and wants to refinance a building, the first thing we do is the full underwriting that a bank would do. We check violations, we check the CFO. Trust me, this may sound logical to you right now, but most brokers don’t do that. A guy in my office runs through all the violations—how many A, B, Ds. He looks at complaints at HBD. He looks at the CO. Then we have a meeting with the client. We ask very sharp questions. “I see tenant 5B has submitted 20 complaints about hot water. What’s going on? Tell me more about that. Do you have any deferred maintenance?” We run through a very detailed checklist. That’s number one. Number two is that we show our clients two underwritings. How we would like to present it and exactly how the bank does it.
If somebody comes to us and says the real estate taxes are $100,00 a year, we have to know exactly how to value the real estate taxes properly. Then we go back to the client and say, “Look, your real estate taxes are 10 percent of Effective Gross Income (EGI). There is something going on here. The city will most likely bump you up.” Why does this really matter? It matters because if the lender hires a smart appraiser, that appraiser will tell the bank that the real estate taxes are light, will double them up and he’ll lose one million dollars in valuation. And this could be a problem down the road. You think you can get 5 million when you refinance, but then the appraisal comes back with higher real estate taxes.
MHN: You’ve done a lot of work with broken condos. What’s the scope of your program?
Hilpert: It’s a national program, but we’ve been more successful in the New York area because the real estate market in New York has recovered… well, that depends on the asset class… but, it’s less problematic than other areas. The New York market is more over leveraged; but, the general supply and demand fundamentals are strong. In the rest of the country it’s a different picture. I’m making a bit of a generalization right now, but often in New York these fractured condos are easier to get done because you’re renting the units.
Let’s say, for example, that you have 30 units in Brooklyn. Ten condos got sold—just enough to make the condo plan effective. The developer is renting the remaining 20 and warehousing the loan. The rental market is very efficient, so the only risk a lender has now is that one day the control over the condo association may be questionable. That is the only remaining concern. The rest is just pure market. And the rental market is very strong. We’re more than two years into the downturn and we’ve seen fractured condos and lenders are getting comfortable with that product type. The rest of the country is a little more difficult. Also many of these deals tend to be smaller loans. Often below $5 million. And when you’re dealing in the space below $5 million you have to work with local lenders and coming out of New York it’s very difficult to service a tertiary market in Texas or anywhere else in the country. It’s easier to do the bigger loans—$10 million and up—and these are in the big gateway cities and that can be serviced out of a New York office where you talk to national lenders.
MHN: Does Mortgage Equicap get a lot of its business through word of mouth?
Hilpert: Yes, exactly. In fact, I don’t have any sales guys. Some of my competitors have an entire floor devoted to sales. I don’t believe in that. Of course, everybody thinks they have the best business model. I know everybody says that. I really believe in quality and that is, again, something everybody says, but for me the quality comes with not having these random sales calls. My clients communicate with me. On occasion I have one or two of my back office guys talk to clients directly. And it’s all invisible, so everything runs through me which means I have to decide which clients I take on. And if it’s a new client, they pay us pretty steep retainers up front.
MHN: How have things changed in your business since the downturn?
Hilpert: What has changed in the last two years is that nobody makes mistakes anymore. They’re all being very careful (since the downturn). Nothing slips through any more. Appraisers are checking everything. Why? Because of fiduciary responsibility. Everybody has bad loans. Most of these banks made mistakes. And their shareholders don’t want them to make mistakes anymore. There’s more accountability in the banking community. They have to be more thorough.
My job is just to understand how the system has changed and give them the best possible service. I tell a client, “Listen I’m not going to say anything to the bank, but your taxes are under valued. And if the loan officer doesn’t see it, the appraiser might.” Now we have done so many deals that we can even know, depending on the appraiser that’s involved, we can already tell our clients, “You’ve got this guy on the job. He’ll figure it out.” That’s a whole different level of service now.
The mortgage brokerage unfortunately has a very bad reputation. It has a very low level of entry. I think people should not just be licensed properly but that there should be higher licensing requirements. I’m 100 percent sure that if you increase the licensing requirements for my industry you would get better quality. Right now there are essentially no barriers to entry to do what I do. Most people aren’t even licensed and do it. Everybody can be a mortgage broker and that is a huge problem. It has produced a lot of bad quality. The media is talking about residential loans that went bad and everybody’s angry at residential mortgage brokers, but I think they should also start looking to what commercial mortgage brokers do. On top of that, some of these firms charge huge fees for really just making one phone call. Take your average broker. He takes the loan submission from the client and makes a phone call and the lender does all the work.