Brokers Find the Money
Credit consulting, one of commercial real estate’s consulting services, is recently coming to life in Russian under the name “credit brokerage” and is becoming evermore popular. The emergence of a new type of service is determined by the level of development of the financial and commercial real estate markets and, consequently, influences consulting services’ structure.
Credit brokerage has appeared on the Russian market only quite recently. “The appearance of any new service depends on the stage of the market’s development,” explains Alexander Artemiev, managing director of Creditconsulting. “In so far as the banking, investment and financial markets as a whole now in Russia are only just developing, corporate clients’ demand for credit brokerage is only now starting to appear.” When the market starts to develop, many project initiators (developers, investors) need consulting on how to present a project (preparation of relevant documentation) to financial institutions (banks, investment funds, private investors). A credit broker’s task as a professional market participant is to provide this service. The outcome of this service, says Alexander Artemiev, is to save clients’ time, money and efforts in obtaining financing for any industrial, commercial or residential real estate project.
“A credit broker is a type of intermediary, who chooses different credit programs on behalf of a client acquiring real estate,” underlines Elza Rozenthal, commercial manager of Torgovy Kvartal management company. “In other words, they work with all banks, choose the best option, prepare the documentation and as compensation receive a percentage of the deal”.
“A credit broker’s role involves helping to appraise developers’ possibilities, their creditworthiness, and to correctly prepare all necessary documentation, to choose creditor banks and the optimum financing program, and to obtain the most beneficial financing conditions for the client from the banks,” comments deputy head of Mirax Group’s financial department Andrei Kletsko.
Almost all large companies working in Moscow’s consulting sphere have financial markets and investment departments, which to varying extents are responsible for finding financing on behalf of their clients. Frank Ivan Vashurin, senior consultant of the Financial markets and investment division for Russia and the CIS at Knight Frank, says “this sphere of business is actively expanding and its future development prospects are not called into question.” He believes that to a great extent, the reason for this is that there is a gradual decrease in the potential risks associated with Russia’s real estate market in the country as a whole, with projects becoming more professional from the point of view of their realization.
Collaboration in stages
Collaboration between and a broker and project initiator starts from the time a developer realizes that in order to make their idea come to life they need resources. Sometimes a credit broker is approached through intermediaries.
“We do not use the services of credit brokers ourselves, because we are a fee based organization (working under contract),” clarifies SMT Development’s general manager Sergei Marinin. “But we collaborate with brokers and offer our services in collaboration with them.”
When an investor arrives without the full amount of financing for a conceived project, they will come for a separate service (for example, for concept design), or for help with organizing the project as a whole, and in the course of working with the investor, at some point or another the question of project financing will come up. At this stage, the consultant may take on the role of credit broker, by preparing a range of documentation on the client’s behalf: “This is the scheme under which consulting companies operate,” confirms Evgeny Borisov, senior consultant of the financial markets and investment department at Jones Lang LaSalle. “Credit brokers’ functions in this case are fulfilled by financial risks and investment departments.”
Specialists refer to different numbers of stages of collaboration between project initiators and credit brokers, although they can be grouped into three main stages: preliminary work, preparation of the investment (informative) memorandum and work with financial institutions.
After a developer approaches a credit broker, the latter will analyze the project and in the event of a positive outcome the sides will sign a confidentiality agreement (the broker’s commitment to maintain commercial secrecy). On the basis of this agreement, the broker will receive from the developer all the preliminary data on the project and all the information required to conduct a multifaceted expert analysis.
The study of the preliminary information includes a legal aspect, a technical aspect and a financial aspect. Following these analyses, the credit broker will decide on the project’s potential and the advisability of financing it. If the outcome of the analyses corresponds to internal corporate criteria, the broker will agree to participate in the project.
At this point the credit broker will prepare the contract project and technical program. The contract project is a civil deed between two corporate entities, and the technical program is an integral part of the contract, which specifies all of the essential conditions for the financing.
After the contract is signed, the credit broker will start working on the informative (investment) memorandum and credit dossier, which, in fact is the end product. “The difference between an informative and an investment memorandum is that the first is prepared for projects that intend to attract longterm financing to a particular extent,” explains Alexander Artemiev, “whereas the investment memorandum is for projects that are placed in financial markets through the issue of bonds, or shares or other types of financial instruments; in other words when all assets and rights are securitized.” The choice of a future project’s method of investment, he notes, depends on the developers’ degree of maturity. Large companies with stable turnovers sometimes place bonds and thus access the cheapest longterm resource. “However, it is not right to compare these instruments,” suggests Alexander Artemiev, “in so far as they are oriented at different markets, each of which is effective, and which can in fact, can be used in combination. For example, the credit market can be used for refinancing the financial market.” However, currently, investment financing is becoming more and more popular in Russia, he believes. “The investment memorandum is a business case for investment,” clarifies Evgeny Borisov. “In other words, it shows that the project is attractive for investment, can provide profit or generate cash flows to service the credit under the requested conditions”.
Once the memorandum has been prepared, the credit broker will start to work with the financial institutions, which should end in an official offer, stating the bank’s willingness to finance the submitted project under particular terms. When the broker receives this document, the conditions of the offer are discussed with the developer, and if they do not meet the requested terms, the broker will start to negotiate with the bank, in order to achieve more attractive conditions. To this effect, additional assets may be offered, or other arguments may be found that convince the financial institution, for example, to lower the interest rates on the loan. “Lowering interest rates by a fraction of a percentage can be decisive” emphasizes Sergei Marinin, “because projects are occasionally balanced “on the edge” and therefore, minor reductions can save a project’s life.”
How much does a broker cost?
The cost of a credit broker’s services, generally, can be divided into three parts. The first is a fixed sum, which cover the credit consultant’s expenses and the cost of the market product (memorandum) that the developer receives. Depending on the scale of the project, this cost could range between $10,000 and $100,000. At the same time, it may be paid in full or with a proportion in advance, depending on many factors and the agreement reached between the client and the broker. Secondly, an essential part of the broker’s compensation is the success fee. Generally, it is taken from the percentage of attracted financing and represents 1.52% in the case of longterm or project financing and 2.55% in the case of investment financing. Thirdly, another part of the broker’s compensation is what is called a “bonus,” which is linked to the broker’s motivation to reduce the financial institution’s interest rates. For example, if a developer and broker agreed to a 13% rate, but 12.75% was achieved, the 0.25% would be shared half and half between the client and the broker. This method is attractive for both parties.
The unknown and its credit history
One of the typical problems in the sphere of commercial real estate project financing is linked to the fact that there are many companies active in the market that are not sufficiently familiar with the business. “The lack of experience and ignorance of the business specifics is a problem,” asserts Sergei Marinin. “Moreover, we find that unsuitable evaluation by project initiators of the market’s financing mechanisms has meant that the attempt to search for longterm resources in the West has been unsuccessful because the requirements in the phase prior to construction are much higher than in Russia.” “An unprepared project initiator,” observes Alexander Artemiev, “will not always correctly structure a project and design an optimum financial model. This can become the reason for a project’s indicators to look worse in the eyes of the bank and consequently, for a developer to receive less money at higher interest rates.”
This is why attracting a credit broker is currently very profitable for developers. “Above all, the consultant’s services free up resources for the developer for the project’s direct realization,” notes Ivan Vashurin, “and enables them not to waste time on gathering information about the market, preparing and structuring documents and different agreements and negotiations with banks and so forth.” Moreover, he continues, companies that provide credit consulting have a higher number of contacts with foreign banks, and understanding the different business schemes simplifies the procedure and minimizes potential risks. We must also consider the fact that attracting Western banks to realize a project is very important for developers from the point of view of increasing their company’s reputation in the market. Their activity will immediately be considered by other market participants as reliable and transparent, enabling the company in question to attract a Western bank to finance a project that, in turn, may have been very conservatively viewed by the Russian market,” adds Ivan Vashurin.
“Our company operates worldwide, this gives us the opportunity to search for foreign investors when marketing a building,” says Evgeny Borisov. “On account of this fact, we have the possibility of attracting financial institutions that are not represented here in Russia. The consulting company’s reputation is very important in this line of work, because it gives investors confidence in the quality of the investment memorandum,” he says. Additionally, western banks today approach developers with the demand that they employ a professional credit consultant, operating in the sphere of real estate and with experience of the market and its specifics, which in turn will help the bank to analyze the potential project and find the most appropriate solutions.
Nonetheless, not all developers rush to credit consultants for help. “Large developers, including the Mirax Group,” asserts Andrei Kletsko, “do not find it necessary to use the services of credit brokers because we have direct relations with banks and know how to prepare all the required documentation”.
One of the main reasons for project initiators to approach credit consultants concerns the periods in which additional financing needs to be received. When developers prepare the investment memorandum independently, they may encounter difficulties in the time required to gather and collect the data to comply with financial institutions requirements. Developers with a lack of experience in working with particular instruments could spend up to half a year or more preparing documents before receiving the first tranche of financing.
“The optimum period for which a broker should work is one and a half months,” confirms Alexander Artemiev. “However, this depends on many factors, including the developer’s project’s preparation, the existence of legal documents, land rights and similar.”
“The terms can vary enormously and depend on many factors,” clarifies Sergei Marinin. “Ideally, it should be between one and four months. However, sometimes it is necessary to correct a project’s characteristics – its scale, number of tenants, the architectural project and similar, because the initial project is rejected by financial institutions”. In these cases, the search for financing can take up to 23 years.
Although the national financial market is not very developed, and the number of credit brokers is still relatively small, developers’ approach to realizing a project has changed, and they now prefer to give a large project to credit brokers to structure its financial component. Commercial real estate market experts forecast that in the next two to three years, the pool of financial instruments will grow noticeably, together with the number of credit consultants, financial institutions, financing schemes and the demands of different project initiators for the services of credit consultants.