This document discusses asset-based financing as an alternative to traditional commercial real estate financing. It provides the following key points: - Asset-based financing uses a borrower's existing assets as collateral rather than relying on appraisals or third-party reports, allowing loans to be approved more quickly, in as little as 3-5 days. - Terms are based on the amount and type of assets pledged as collateral. This provides more flexibility than traditional loans, with options like interest-only payments or deferred payments. - The greatest benefit is significantly higher loan-to-value ratios, up to 100% of the loan amount, reducing the borrower's upfront cash needs. - Examples are

1. C O M M E R C I A L I NVE STME NT
Real Estate
The Magazine of the CCIM Institute JUL.AUG.08
Mixed-Use
Sails On
New developments
chart a course in
secondary cities
Midyear Outlook:
Opportunities Still
Exist in Today’s Market
Rising Stars Find the
Fast Track to Success
www.ciremagazine.com

2. FINANCING F O C U S
Flexibility is another advantage of
asset-based financing. With terms
based on the amount and type of
Fast Funding financing, borrowers might ben-
efit from monthly compounded
interest, payments to simple inter-
est terms with deferred payments,
Asset-based financing provides quicker and no prepayment penalties. Flex-
ibility increases for LOCs greater
access to securing loans. than $100 million. Further, finan-
cial instruments are adaptable to
meet borrowers’ needs. Many LOCs
by James Essa and Karna Hoskote include an evergreen clause, which
means the LOCs are renewable,
allowing large projects to be drawn
T
raditional financing is suit- Terms and Requirements out over time if necessary due to
able for a multitude of com- In situations that involve com- internal or external factors.
mercial real estate trans- mercial real estate or other tangi- The greatest benefit to borrowers
actions, which often allow ble projects, asset-based financing is an increased loan-to-value ratio,
several months of lead time to can provide a fast, direct path to which can be significantly higher
secure funds. But what happens loan approval. Asset-based fund- than LTVs for traditional com-
when funding for a property trans- ing leverages a borrower’s existing mercial financing, escalating to as
action is required immediately or assets, eliminating appraisals, third- much as 100 percent of a borrow-
when borrowers are inexperienced? party reports, and loan committee er’s LOC face value. These higher
While borrowers have a few op- approvals in most cases. Further, LTVs reduce borrowers’ upfront
tions for quickly securing funds, this option provides more privacy cash requirements significantly.
asset-based financing can help them for borrowers and doesn’t require a
avoid the complexities involved minimum level of business experi- Borrower Characteristics
with traditional financing methods ence or equity partners. Also, loans Asset-based financing is perfectly
and ensure that transactions close on can be approved in as few as three suited for large business entities,
time. to five days, with funding expedited developers, and private-equity funds
Due to their strict guidelines, in 30 days to 60 days. principally in the real estate industry
many lenders are limited in the Many developers use asset-based and those primarily focused on tan-
types of large commercial real estate financing to avoid the hassles gible assets. Asset-based financing
projects they can finance. Loan involved with proving their projects also provides a convenient funding
agreements generally involve for- to traditional lenders. Because asset- environment for offshore develop-
mal appraisals, third-party reports, based financing is leveraged against ment projects. With the added pri-
and in some cases, approval from existing collateral, the collateral is all vacy these loans provide, developers
loan committees. In addition, many the support and leverage necessary can finance a diverse array of global
times borrowers must demonstrate to close the deal. projects that otherwise may not be
previous experience or secure equity To start the process, borrowers attainable.
partners to qualify for loans. As a must request a letter of credit from The ability to consolidate assets
result, the approval process can be an investment-rated bank. LOCs are with other borrowers to gain lever-
long, complicated, and uncertain. bank-issued financial instruments age for large projects is another ben-
Commercial loans also can involve that guarantee payments for a speci- efit of asset-based financing. For
last-minute surprises if the bank or fied duration if the instrument’s con- example, Great Midwest develops
financial institution changes its terms ditions are met. Sometimes referred midsize apartments and condomin-
— even with adequate assets, proj- to as standby letters of credit or irre- iums, Lakes Development builds
ects may not garner approval. Worse vocable letters of credit, LOCs must small to midsize houses, and T &
yet, some lenders can call their notes be unconditional. Borrowers also M Development constructs town
due at any time because their lend- must have adequate support assets. homes and mixed-use properties.
ing guidelines have changed or their Investment-rated banks issue LOCs All three developers had experience
investors or regulators are not sat- directly to borrowers, with rating with projects in the $20 million to
isfied with the lending institution’s requirements based on the type and $45 million range and wanted to
investment choices. amount of financing requested. work on much larger projects.
12 Commercial Investment Real Estate

3. However, each company ran lender who specialized in asset-
into the same challenges: not based lending. As an established
having enough assets or expe- company with large assets and
rience and not wanting to deal development experience, Para-
with equity partners taking a disio was able to get a financial
large portion of the profits. instrument valued at $500 mil-
The three developers com- lion. This was especially help-
bined their assets to form an ful, since it had planned multi-
entity called Tri-Universal. ple projects in various locations.
The group obtained an LOC Since most projects Paradisio
for $120 million with a two- worked on took one to three
year term and an option to years to complete, it obtained a
renew. It chose a fixed rate, as one-year LOC with a renewal
it was not comfortable with option. Paradisio also chose a
a variable payment method. fixed rate over a variable rate
In addition, the fixed-rate — even though the fees were
financing was more flexible higher — to save money on
in terms of payment options: the interest over a longer time
Tri-Universal could pay once period. Ultimately the project
every year with simple, not was funded in 30 days.
compounded, interest. Paradisio benefited from this
As a result, Tri-Universal financing by being able to work
was able to complete a 300-unit on multiple projects without
condo project in Florida cost- worrying about the usual com-
ing approximately $110 million. mercial lending process or the
The company didn’t have to loan being called due. When
worry about a traditional lend- the project took longer than
er’s criteria regarding previous expected, the company was
experience on large commercial able to renew its LOC. Lastly,
projects and wasn’t required Paradisio’s privacy was assured,
to find equity partners. It also allowing them to maintain a
didn’t have to worry about the competitive advantage in the
loan being called due when marketplace.
the project took longer than When traditional financing
expected to complete. sources don’t suit a commercial
In another example, Para- real estate borrower’s needs,
disio Development, a major asset-based financing can be a
resort developer, wanted to viable alternative. This financ-
build resorts in the Carib- ing structure allows many com-
bean, but faced several hurdles. mercial real estate borrowers to
The company had attempted fund projects quickly, with pri-
to work with several lending vacy, and without the cumber-
sources and was frustrated by some restrictions of traditional
the process, which included 90 financing methods.
days to 120 days to get expen-
sive third-party reports with James Essa is president
of Andorra Capital in
no guarantee the project would Chicago. Contact him at
be funded. Over time Para- (773) 216-6690 or jessa@
disio went through the process andorracapitalinc.com.
with several lenders and spent
$250,000 on third-party reports Karna Hoskote is president
— without obtaining funding of MBGM Capital in Chi-
cago. Contact him at (847)
approval. 929-4239 or khoskote@
In summer 2006, Paradisio commercialfinances.us.
initiated the process with a
JUL.AUG.08 13