E-commerce Goes Commercial.

Last year the Internet took hold in the commercial real estate finance sector. Several ambitious multilender Web sites are vying for loan business today. E-commerce promises to bring speed and efficiency to the far-flung and complex commercial mortgage lending field.

INNOVATION in the commercial real estate lending markets seems to lag residential real estate lending by a decade. Securitization, the last big strategic turn for commercial real estate, popped up on radar screens in the early to mid-1990s, a good 10 years plus after its counterparts in residential embraced the concept.

For the Internet, two years can be a lifetime--and that's about how long it's taken for commercial real estate lenders to carve out an e-commerce presence after the first residential lending companies began showing up on the World Wide Web.

Think of it this way: Dublin, California-based E-LOAN, Inc., for example, was founded in 1996. It took until 1999 for the first multilender, commercial Web sites and the first sites capable of taking loan applications to appear. Denver-based DataMerge, Inc., basically a software company, launched its cyberLoan site in February. Over the next 11 months, out tumbled C-LENDER.com, LoopLender, Redbricks.com and COMPSCapital.

"Innovation is always in the residential arena first," observes Joe Rubin, a partner with New York--based E&Y Kenneth Leventhal Real Estate Group who is helping clients develop e-commerce strategies. "Then it migrates over to the commercial side. Commercial trails residential because it is a far more complicated asset, [and] it is usually a larger and more complex transaction. In e-commerce, the lag time has been very short."

Despite the pioneering efforts of 1999, Rubin suspects the year 2000 will be the one in which commercial lending e-commerce comes into its own. "In 2000, all the major commercial mortgage lenders are going to be coming up with an e-commerce strategy, and most will be using Internet technology for some portion of their lending business," he says. "We are looking at e-commerce solutions for all the different processes--origination, underwriting, aggregation and other services.

Traditional commercial real estate lenders haven't quite discovered their place on the Internet yet. The first step for many of them has been simply to be listed as a capital source on the multilender sites. So you find LoopLender, for example, signing up about 30 leading lending institutions including such well-known names as ARCS Commercial Mortgage, Finova Realty Capital, GE Capital Real Estate, KeyBank, Bloomfield Acceptance Corporation and Morgan Stanley Dean Witter and ABN AMRO Bank.

Adjusting to the Internet

"We, like everyone else, have no idea what effect the Inter net will have on our specific business," says Shekar Narasimhan, chairman and chief executive of Vienna, Virginia--based The WMF Group Ltd. "It can either be viewed as a challenge, threat or opportunity."

The WMF Group decided to be proactive in regard to the Internet, and that has meant three avenues of approach. First, it chose to be visible on all the sites that it considers a good provider of products to the commercial real estate industry. As a result, it is now listed on numerous multilender sites including CyberLoan and C-LENDER.com. Second, it will have a small but dedicated group (with one full-time position) in-house that will focus on e-commerce strategies. Third, it has made a direct investment in an Internet startup, the multilender, e-loan company Redbricks.com. The WMF Group owns 15 percent of Redbricks.com.

"The latter accomplishes a couple of things for us," explains Narasimhan. "Instead of development cost, which is significant and expensed through the balance sheet, this is being expensed by someone else. We are a strategic partner, providing them with all the market information and industry knowledge. They operate the site and the content."

In 1998, $241 billion worth of commercial real estate loans were originated, says Lisa Max, chief executive officer of Bethesda, Maryland--based Redbricks.com. "Going forward, some analysts reported about 9.8 percent of commercial real estate loans will be originated on the Internet, so we're talking about $24 billion [considering 1998 numbers] if the volume of loans remains constant."

Today, a number of lenders--especially conduit lenders--have Web sites, but as Rubin notes, "almost none of them are functional." Instead, these Web sites serve primarily as brochures where one can get information but not conduct business online. Then there are the multilender Web sites, where a person can input the characteristics of the real estate and the site will match the property with a lender. "All of this is really just [a] portal," says Rubin. "None of it is actually making an application and having it analyzed, underwritten and approved online. It's sort of front end, and then it's a return to the old process of doing business. We are not being fully functional online," he says.

Still, Rubin is very optimistic about the potential of the Internet for commercial real estate lending. He predicts that by the year 2005, the vast majority of commercial mortgages will have some part of their origination and underwriting process done online. "There will be several major portals out there, and they will capture a significant market share," he says.

Considerable demand

Since multilender Web sites in commercial real estate lending went online only this year, not a great amount of deal making has been concluded. The interest, however, indicates a lot of pent-up demand. More than one of the new multilender Web sites report the volume of loan applications completely swamped initial estimates.

C-LENDER.com, which unveiled its Web site in July, reported doing $200 million a month in loan applications by October. "I thought it would take a lot longer to ramp up, says Dean Walker, a vice president with the company.

Spencer Kluesner, chief executive officer of DataMerge, notes that his company anticipated about $200 million in loan applications a month. After the first six weeks, it boasted $665 million. In July, the company's CyberLoan Network announced online loan applications had topped $1 billion--a volume that exceeded company expectations by 82 percent.

"If you think about residential, you are really doing a lot of scoring of the credit of the individual buying a house," says Redbricks.com's Max, "and in commercial there is much more reliance on due diligence and risk analysis of the asset, so there is a more involved underwriting process. But over time, a lot of these processes will be automated, and for a tier of commercial real estate, we will be automating and streamlining."

CYBERLOAN NETWORK

The old DataMerge company and its Web site, once known as FinancingSources.com, are now called CyberLoan.com. Its product name is still called CyberLoan Network, which was launched in February, giving it a jump-start over everyone else. The company now does about $1 billion a month in loan applications and is on track, says Kluesner, to do $12 billion this year. The volume of originations (loans closed) runs $160 million per month, according to Kluesner.

CyberLoan receives input from potential clients and matches that to the underwriting criteria of lenders. According to Kluesner, 500 lenders accept loan applications through CyberLoan, but by the time the input goes through the screening process, the project may be down to three to 10 lenders. Among the many lenders involved with CyberLoan are The WMF Group, Deutsche Bank, GMAC, AMRESCO, Transamerica Corporation, Bank of America, Heller Financial, Morgan Stanley and Allied Capital.

"If you are a potential borrower, your input on a long application will be sent to a lender and then transmitted electronically within the lending institution," explains Kluesner. "It will be routed to the right person. We have a routing technology that nobody else has."

"From a philosophical point of view," he adds, "we don't see ourselves as brokers standing in the middle trying to get a piece of what comes through--we are a technology company. Our focus is on the lending process and enhancing that--not pulling deals through and making points on it."

If a deal closes, CyberLoan does make a percentage on it. As Kluesner notes, "We are the only ones that charge for access to our system, and that ensures quality."

In September, DataMerge announced it began licensing technology from the CyberLoan Network to individual lenders for use on their own Web sites, through a new product called CyberLoan Virtual Lender (CVL). CVL works much like the CyberLoan Network, except that it runs on an individual lender's Web site and transmits loan applications exclusively to that lender. The first installation was licensed by San Francisco--based United Commercial Bank, the largest lender to the Chinese-American community.

By using CVL, lenders save on the cost and time to develop their own online technology, says Kluesner. This also means DataMerge is not relying solely on its Web site to bring in the dollars. "This is where the money is," says Kluesner. "I don't know what the others are doing. It's a big industry, but I don't know how they all will survive."

LOOPLENDER

San Francisco--based LoopNet, Inc., was founded in 1995 as a multiple listing service for commercial real estate, attracting 90 of the top 100 commercial real estate brokerage organizations to list their properties. From that point, it just made sense to migrate to the creation of LoopLender, says John Gough, managing director for LoopLender. "We are one of the few multilender platforms out there that has a database of property listings behind us," he says. "It gives our lenders access to the investor property market."

LoopLender matches borrowers and lenders online. The service, which is free for borrowers and brokers, offers a single platform to obtain relevant loan information from all of its lending institutions. Potential clients can review lender information tailored to their specific loan criteria and submit a loan request.

In what is becoming a crowded marketplace, LoopLender hopes to differentiate itself from the competition not only with property listings, but with what it calls the human element. "We are the only site out there that has a dedicated analyst and production team that goes through each loan request; sizes the deal; collects additional borrower information, operating statements and constructions budgets; and finally, puts the full loan package together and e-mails it to the lender," says Gough.

LoopLender gets about $500 million a month in loan requests into the system, but it filters out about 40 percent of that--so what is passed on is $300 million a month, according to Gough. After five months in business, LoopLender has begun closing its first deals. "We are starting to see a large chunk of loans in the commitment phase," says Gough. "When I look at the deals that have closed, it has been with a good mix of lenders--including commercial banks, savings and loans and Wall Street conduits."

As noted earlier, LoopLender has a relationship with close to 30 lenders, including Column Financial, GE Capital and Southern Pacific Bank.

LoopNet has already introduced LoopLender 2.0, which integrates five additional financing programs--including construction loans, bridge/short-term loans, mezzanine/second loans, equity loans and SBA loans--and five more property types--including mobile-home parks, seniors' housing, self-storage, convenience stores and mixed-use properties.

"Some of the other Web sites are solely relying on technology, and they hope just the matching of borrowers and lenders is going to work without a human element," says Gough. "As we came up the learning curve, we found you really do need the human element in order to make the deals work."

C-LENDER.COM

The story of the development of C-LENDER.com is a bit convoluted. The parent company, Pleasant Hill, California-based Property Sciences, Inc., is one of the largest appraisal companies in the United States. It eventually began publishing a magazine called Commercial Lender. When that was up and running, the company decided to hang it on the Web. Since it began to develop as an Internet resource for mortgage brokers, the next step was to develop the site for e-commerce.

C-LENDER.com was launched in July, using 140 databases but only eight dedicated lenders. That number will grow fairly quickly, says C-LENDER.com's Walker. As of October, the company's run rate for loan applications climbed to $200 million a month. "After talking with our lenders, we discovered the percentage of closings from online applications is close to the rate from more traditional channels, which I believe is about 10 percent," Walker says.

The structure at the C-LENDER.com Web site is simple. A potential client fills out a two-page questionnaire that asks such things as specific property type, location, size, occupancies, income, etc. From there, the site allows the potential client to search the database to find out which lender is interested in that type of property, based on the parameters entered. Then the person can submit to several lenders, which then quote a rate.

C-LENDER.com gives visitors to the site the ability to search for loans by type, interest rate preference, loan-to-value and other key factors. Or certain lenders can be directly targeted. Visitors can also find the on-site version of Commercial Lender.

While the primary focus of most other commercial real estate--lending Web sites is property owners, C-LENDER.com emphasizes mortgage brokers. Although property owners and developers are not excluded from the site, most of the traffic to C-LENDER.com is coming from mortgage brokers.

"In the commercial market, we think the mortgage broker is still going to be a vital component in securing funding for commercial transactions," says Walker. "The residential market is changing pretty quickly, and people are now going onto these Web sites and submitting their loan request. The commercial market is so much more complex. For a partially completed mall in central California, it is much more difficult for the property owners to figure out which type of lender is going to want to do that deal, and to package that information correctly. So, we think brokers are still going to be heavily involved in the transaction."

REDBRICKS.COM

Redbricks.com was launched in November, billing itself as "the next generation of e-commerce for the commercial real estate industry." From its site, property owners can access multiple lenders that will originate and process real estate loans online. Borrowers can visit the site 24 hours a day, seven days a week, to see exactly where they are in the process.

Visitors to Redbricks.com can receive real-time, instant preliminary quotes and current pricing, submit loan applications electronically and manage loan applications from origination to closing. The site also offers ancillary services such as news (it has links to a news feed), employment listings, market data (14 current interest rates that are published on site) and links with many major trade associations. It can produce property-specific market reports and location maps.

For the lending activity, Redbricks.com was able to initially bring on board 21 lenders, including L.J. Melody & Co., as well as players such as Fannie Mae and Freddie Mac.

"We decided early on that the transaction system would also link all the ancillary service providers that are involved in the due diligence process--so that bids, request for quotes, etc., could all be tracked and managed on the site," says RedBricks.com's Max. "Borrowers and lenders don't have to call each other up and ask, 'Is the appraisal done?,' "Did the title insurance get issued?' or 'Where is the environmental report?' Everybody is now linked on this system."

Eighteen of the largest service providers are on the site.

Redbricks.com is nothing if not ambitious, planning a whole slew of new services and products. "At the end of the day, we hope the building owners will be our customers--so part of our strategy is to take those properties that come through our site for financing and then to maintain those properties as our customer base by offering new services," says Max. "We also plan to streamline more the due diligence, underwriting and securitization process, and link the information we are providing closer to the time that the properties are put up for sale."

In addition to being the starting point for all commercial real estate business, Max envisions constructing an online sector community. "Real estate is all about relationships and the ability to share information. Imagine reading what other borrowers have to say about a specific lender before submitting an application," she says. "At Redbricks, you can."

COMPSCAPITAL

As of mid-November, the COMPSCapital Web site was up, but the e-commerce platform wasn't yet functioning. "We will roll it out before the end of the year," says Herb Steele, a vice president with San Diego--based COMPS.COM, Inc., the parent company of COMPSCapital.

COMPS.COM got its start 17 years ago identifying and distributing information (price, condition of sale, comps, etc.) on residential properties after a transaction. About a year ago, COMPS.COM moved to full Internet delivery, and now it will offer three Internet strategies. The first is still the listing service, which now totals almost 8 million properties across the United States. Second, the company acquired RealBid LLC, which is what Steele calls a "broadcast" service where brokers can post properties for sale so the information can be sent to about 500 investors on any given broadcast. The third strategy involves financing and the development of COMPSCapital.

The COMPSCapital site provides borrowers or their agents with an e-commerce platform for access to a comprehensive database of commercial real estate lenders. Potential clients can search for loan programs that match their loan requirements, then select the best available program and submit a loan request. Lenders can specify current program guidelines and pricing to ensure that loan requests meet their current lending criteria, easily qualify loan requests as they are submitted and process a borrower's request without undue delay.

COMPSCapital has initially signed up about a dozen lenders to be part of its service base, according to Steele. "There are a good number of lenders out there that are much more ready to adopt the Internet than we first expected would be the case," says Steele.

A lot of those lenders have already created relationships with other e-commerce mortgage companies. How does COMPSCapital hope to compete?

"In contrast to the other e-commerce companies in this field, we have a listing service--and probably between it and RealBid, we have better than $10 billion in properties that are available for sale," says Steele. "So we are able to supply lenders in the marketplace with information that others are not able to supply."

Given the market's size, there is room for all the current online mortgage companies, says Steele. "We are all operating a little different model, and there is room for all of us to grow." At this point, there's uncertainty about the degree to which the industry will adopt the Internet. So Steele expects business volume will be small for all the online competitors at the start--"but we have exceptional opportunities to grow," he says.

Going forward

The Internet will eventually cause dislocations in the commercial real estate industry, and undoubtedly, many of today's players won't survive the turmoil.

"Intermediaries who are able to adapt to the technology and leverage the capabilities of the technology successfully will be able to do more volume and work more efficiently," says Max. "Others will have to figure [out] a role where they can add value, and over time some of the smaller players in the market will have a harder time competing as these new distribution channels open up."

The future of commercial real estate lending on the Internet? "It's going to become more interactive. And it's going to have to be much more than just a matching service," says LoopLender's Gough. "As to the level of activity, 20 percent to 25 percent of mortgage originations will happen online."

Steve Bergsman is a freelance writer based in Mesa, Arizona.

CENTRAL PARK CAPITAL

Like other commercial real estate lenders, Central Park Capital LP, Atlanta, wrestled with the Internet conundrum. Is it a threat or an opportunity? And what sort of presence does the Internet require, if it requires one at all?

The commercial real estate lending industry really just joined the Internet world in 1999, as the first of the multi-lender Web sites were unveiled over the course of the year. Individual lenders, including commercial banks and mortgage bankers, also have a presence; however, some Web sites are merely billboards.

Central Park Capital, a wholly owned subsidiary of Univest Financial Group Inc., Atlanta, decided to offer non-recourse, long-term, fixed-rate commercial real estate loans through its Web site, www.cenprkcap.com.

"We began to think about the Internet and have discussions concerning it beginning in the fall of 1998, but we didn't make a real serious effort to do online lending until early spring 1999. The Web site went up in August," says Joe Mosley, chief executive officer of Central Park Capital. "It is such a new area with commercial real estate, we don't have any real goals established as yet."

The most common approach taken by commercial real estate lenders continues to be a presence on one of the various multilender sites, but Central Park Capital wanted to create its own Internet identity and felt that on the multilender site the firm would be "blended in with others."

Since closing its first loan in March 1997, Central Park Capital has originated and closed more than 185 loans with an aggregate balance of more than $1 billion. In 1999, its loan volume was only about $300 million for the year. Admittedly, Mosley says, "it wasn't our best year." The move to the Internet wasn't coincidental to performance, neither will it simply be a better marketing approach. Central Park Capital intends to make it a profit source. "We are out to originate loans and make money on the Internet," Mosley says.

Www.cenprkcap.com focuses on what the company calls small loans in the $250,000 to $2 million range. The rationale for the Joan balance limitation was that smaller products are simpler and therefore better suited to the Internet. Generally, there are fewer moving parts, less tenants and the real estate is the primary asset of the borrower. There was also another key reason for the decision: By keeping the loans under $2 million, Central Park Capital wouldn't cannibalize its relationships with mortgage bankers. "We didn't want the mortgage bankers to think we were competing with them," says Mosley.

Prospective borrowers have to supply a good deal of information on www.cenprkcap.com, but once they do, they can get a very realistic sizing of the loan, including a good indicative spread. Once the application is sent along electronically, a designated underwriter who reviews the Internet on a daily basis takes a look at the information. After going through a checklist, the underwriter sends an e-mail to the prospective borrower explaining what additional information may be needed, including supporting information. Once the underwriter is satisfied in the pre-due diligence period, the application is sent back to the borrower so it can be signed and returned with a deposit. After that, most of the back-end work is done in the traditional way, but the borrower is kept up-to-date on the status of the loan via the Internet.

Through November 1999, Central Park Capital hadn't yet closed on an Internet-originated loan, although Mosley says several were in process.