Equity Funding: Innovative Financing When It Counts!
This article first appeared in the August, 2001edition of Scotsman Guide, and has since enjoyed wide circulation. Equity Funding is a division of Centrum Financial Services, Inc. of Seattle, WA. Scotsman interviewed Bruce Berreth, President of Centrum Financial Services, Inc. to help subscribers get to know how Equity Funding might serve them.
Scotsman: There are many equity lenders throughout the U.S.A. What makes Equity Funding different?
Berreth: Equity Funding is a true direct lender, and as such, does not use investor funding. Consequently, we are able to act faster than other lenders, since our decision is not subject to 3rd party approvals. When we approve a loan, it’s done.
Scotsman: Is that the only difference?
Berreth: Absolutely not. There are several other big differences:
First of all, because we are a direct lender and do not use investors, our funding process is more confidential than many of our competitors. We do not need to pass loan information on to existing investors or to the general public while looking for investors.
Secondly, our goal has always been to be responsive and provide a high level of service for our clients, so we’ve virtually eliminated the red tape required by traditional lenders.
Thirdly, we have extensive experience in the valuation of real estate. As a result we are able to make rapid decisions regarding the viability of a loan with or without an appraisal. Even if an appraisal is required, Equity Funding is often able to fund before the appraisal can be finished. So we prevent delays often attributable to this cause.
Scotsman: You mentioned speed at the outset. Could you give me an example?
Berreth: Sure. I could give you lots of examples, because it happens routinely. At about 9:00 in the morning a borrower contacted us about an opportunity that required a little over $1,000,000 that day. We were able to review the property, prepare loan documents and fund the loan by 3:30 that afternoon. In that case, the property was local and a title report was immediately available; however, the speed at which we reacted is evidence of our commitment to service. If there is a way to get the deal done, we’ll find it.
Scotsman: Will you consider joining with other lenders when requested?
Berreth: Of course, we are happy to participate in loans with lenders who use investors. Helping to get good deals done is what we do. Often times, these borrowings are better for our clients than money in the bank.
Scotsman: Why do you say that?
Berreth: Have you ever tried to get a million dollars out of a bank in a hurry? That’s one reason. We can have several million in their hands in hours! In real estate cash talks. The problem is that returns are very low on cash maintained in banks, while investments in real estate are historically much better. By being able to access the equity in real estate in the form of cash, our clients are able to enjoy the best of both worlds. We convert equity in real estate back to cash without disturbing the underlying investment. Money in the bank is good collateral, but sometimes it makes sense to invest, and do business with us.
Scotsman: How long has Equity Funding been in business?
Berreth: Since 1987, Equity Funding has been making real estate secured “bridge” loans to clients who needed to use their equity in real estate to obtain funding for any number of business, commercial and investment objectives.
Scotsman: You mentioned a one-day, million dollar deal. Is that typical?
Berreth: No, most of the time we have a bit more time. But our forte is being flexible and responsive to the needs of our clients. While our minimum loan amount in the State of Washington is $50,000, and out of the State of Washington is $250,000, we specialize in loans in the $1,000,000 to $10,000,000 range. The bottom line is, that we’ll do everything we can to make the deal happen.
Scotsman: Are you willing to be in a subordinate lien position?
Berreth: Yes! If there is sufficient collateral available, we can be quite innovative. For instance, a client of ours had spent many months working on a deal, which involved the purchase of a large apartment complex. The client only needed about $800,000 to complete the transaction, but our security position would have to be subordinate to more than $17,000,000 of existing debt. That wasn’t enviable position, but we felt that our client was getting an excellent property that would support the loan, as well as any problems that might occur. We funded that loan, and the client has since sold the project at a substantial profit.
Scotsman: Describe one of your more complicated transactions.
Berreth: No two deals are the same. When a transaction requires the ability to be flexible and innovative, we can provide both. In one case, we were asked to buy a purchase money note secured by a second lien deed of trust. The note had a negative amortization, a fairly long cash out, and a terrible loan to value ratio. As a result, a reasonable yield resulted in a substantial discount. Even with the discount, our client wanted to proceed because no one else that had been contacted would buy it. We know this because after we bought it, we called – out of curiosity – several other companies to see what they would pay. No one wanted to touch it. In any event, we went ahead with the purchase. We then contacted the purchaser and offered to lower the principal balance of the note in return for a change in the terms of the note. The result was a positive amortizing loan, with a shorter cash out, a much improved loan to value ratio and about the same yield for which we had originally bargained. While we were perfectly satisfied with this result, we then offered the purchaser an additional reduction in the principal balance of the note in return for payment in full within a year. The purchaser took advantage of this offer, and our yield actually improved.
Scotsman: What is your typical loan term?
Berreth: Our loans are generally short termed in nature, maturing in 3 months to 3 years, and 5 years in some cases. It is not uncommon, particularly with shorter term loans, to provide options to extend the due dates. Monthly payments are usually based on interest only.
Scotsman: What kinds of property do you accept for collateral?
Berreth: We accept apartment buildings, condominiums, office buildings, commercial buildings, retail and shopping malls, marinas, single family dwellings, and land (particularly with entitlements). Equity Funding will also consider notes and receivables, as long as they are secured by the types of collateral I’ve already mentioned. We are also willing to purchase these receivables.
Scotsman: The premise of equity lending requires low loan-to-value ratios. What are your requirements?
Berreth: Yes, but that depends on the type of collateral. Generally, Equity Funding will loan 50% of value on the land and, 70% to 75% of value on improved property. Those ratios can fluctuate, depending on things like location, the nature and condition of improvements, and the net operating income generated on a rental basis from the property. Like I said, it depends. We tailor the deal to fit the situation.
Scotsman: Do you restrict the use of the proceeds of your loans?
Berreth: Yes, but we’re no “nosier” than we have to be under government regulations, and prudent business practice. Loan proceeds may be used for any number of business, investment, and commercial purposes. Quick funds aid the borrower in taking advantage of pending opportunities. The ability to rapidly transform existing real estate equity to cash is often the difference between being able to take advantage of an opportunity, or having to let it pass.
Scotsman: You spoke earlier about “bridge loans.” Please illustrate.
Berreth: There are a variety of ways in which bridge financing can help someone acquire real estate. Using other collateral, we can finance all or a portion of the down payment, or provide temporary first lien financing after the down payment. In other situations funds may be needed to extend a closing date or due diligence period or to provide soft costs in connection with obtaining a building or other permit prior to closing. Purpose and circumstances determine whether the loan is an acceptable business use.
Scotsman: Give me an example of an instance where your speed saved the day.
Berreth: Our client acquired the right to buy a parcel of downtown property suitable for office development from a party who was the purchaser under a Purchase and Sale contract. The purchaser under the Purchase and Sale contract had failed to close on time and had filed bankruptcy. The seller sought to void the sale for nonperformance…possibly because a better deal was “in the wings”. Our client wanted to purchase the property, but was literally between a rock and a very hard place. He needed to be able to tell the court that financing was available for an immediate closing, if approval was going to be granted. The hearing was 10 days away and the amount required exceeded $6,000,000. The court granted approval to go ahead, provided closing occurred in a matter of days. We were able to fund the entire purchase price and closed on time, utilizing the property being purchased and some additional collateral.
Scotsman: Could proceeds be used for investment purposes?
Berreth: Sure. Loan proceeds can be used to start a business, help finance an existing business, purchase partnerships, or other interests, or buy out a partner or associate. In one case, our client had entered into an agreement to purchase a particular property, and, also entered another agreement to sell the same property at a substantial profit. You can well imagine how uncooperative the seller became when he found out about the second sale. The problem was that our client’s buyer was not in a position to close by the date required under the first agreement – huge problem! The borrower needed over $2,000,000 in less than a week. Since the owner of the property was aware of the second sale, there was no way the deadline would be extended. Equity Funding made the loan, and a few months later our borrower sold the property.
Scotsman: In your business you must encounter unique financial dilemmas. Describe some of them.
Berreth: In some cases a due date that the parties believe will be extended is not, and there is insufficient time to acquire conventional financing. In other cases, the holder of a mortgage has offered, or previously agreed to, a discount for early payment. If we can find an asset we can use for collateral, we will generally do the deal.
Sometimes transactions, particularly large transactions, proceed right up to closing before parties realize that the monies available will not be sufficient to allow completion. This circumstance occurred to a borrower of ours who was funding a $30,000,000 plus loan. A last minute reserve requirement made closing impossible. We were called and by the next day approved collateral and funded a loan sufficient to cover the difference. This was not a large loan but it solved a very large problem.
Scotsman: Obtaining start up expenses can be a real stumbling block for many good business ideas. Will you fund such start up expenses?
Berreth: Equity Funding is not only the name of our business, it’s what we do. If they have equity in real estate, and a business purpose need, we can usually help them. While we have had many such requests, in some cases, parents wanted to help their children start their own businesses. The parents, in these cases, had substantial equities in their homes or other properties, so we were able to make the business loans for the start-up expenses. The parents were able to provide a helping hand, and so were we. These same principles apply, of course, to anyone with real estate equity who wishes to start their own enterprise.
Scotsman: Do you fund many construction loans?
Berreth: Not in the traditional sense; however, Equity Funding can, and will provide construction loans as long as there is sufficient existing equity available in the underlying land, or other acceptable collateral…or both. This type of loan can help fund the project from inception, or help with cost overruns as construction is being completed.
In one case, a party had more than sufficient equity to justify a $2,000,000 plus loan for various improvements to the property. While we were willing to fund the loan on the date of closing, our borrower, in order to keep interest costs down, wanted to draw the loan down over time. We set up a procedure to accomplish his objective and made the loan. We have many happy construction loan clients.
Scotsman: In conclusion, please summarize your corporate culture with respect to your commitment to your clients.
Berreth: Equity Funding is not only competent, but willing to take risks. Our commitment to our clients speaks volumes about our integrity. We value our reputation. We’ve earned it one deal at a time, as evidenced by the number of repeat clients and brokers. That doesn’t mean we will fund every request. If the loan doesn’t make sense to us, we tell our clients. As often as not, they appreciate our candor. And sometimes that keeps them from doing something foolish. We’re always glad to talk things over. At the “end of the day,” our clients know they’ll get our very best, all the time, because that’s the way we’ve always done it.