Precept Corp. combines face-to-face interaction and an Internet-based delivery system to facilitate the commercial lending process for lenders, brokers and borrowers. The Oakland, Calif.-based firm recently announced a major alliance with one of the nation's leading real estate finance organizations, Chicago-based Cohen Financial. Theis expected to lead to the underwriting and closing of more than $5 billion in commercial mortgage loans in the next five-and-a-half years. Following is a Q&A with Precept co-founder and CEO Frank Scavone.
Cohen Financial is recognized as one of the leading finance players in the shopping center industry. Do you think Precept's alliance with Cohen will lead to a greater number of retail deals for both companies?
Yes, in two ways. First, mortgage bankers in general should experience a number of deal-processing efficiencies when using the Precept system. Our expectation is that Cohen will be fast to benefit from these efficiencies, thus affording their sales force more time to focus on marketing to the shopping center industry. Retail property owners themselves will quickly see how powerful the Precept Auction system is in forcing highly transparent competition. As an early adopter of Precept, Cohen will continue to dominate the sector. We anticipated a significant portion of the loans would be on retail properties and as a result spent a great deal of time and money developing our systems, processes and methodologies to accommodate this asset class.
Precept recently completed its third round of financing, raising its total capitalization to more than $24 million. That financing came from a group of investors led by Precept Chairman Michael Klein, who is also Chairman of CoStarGroup. What's the relationship between Precept and CoStar?
Mike Klein is the only real connection, although Mike has the same vision for Precept as he did for CoStar — namely, to develop a broker-centric information and process tool that will allow(be they leasing or mortgage brokers) to do more business.
After a financing request is submitted, how long, in general, does it take for that request to go through the analysis process, including the review by Standard and Poors', and reach the desks of prospective lenders?
The entire pre-auction process takes about three weeks, including S&Ps analysis, so that's in no way a limiting factor. The Precept process delivers better information much faster than the conventional lending process, but things happen in a slightly different order. At the end of those three weeks the borrower gets loan commitments rather than soft quotes. So the real key question is: What is better, a half-dozen quotes in two weeks or a half-dozen binding commitments in three weeks? I say the latter. Following such commitment, the closing process generally takes three to four more weeks.
The conventional process, following acceptance of a quote, requires a subsequent three- to four-week pre-commitment underwriting process followed by a three- to four-week closing process.
What percentage of this process takes place online? Is there any face-to-face or voice-to-voice interaction?
The entire underwriting process takes place face-to-face, voice-to-voice between our underwriting staff and the borrower. We use our system primarily in performing two functions: one, distribution of the underwriting information for review by lenders, and two, to conduct the auction. That's it. Everything else is person-to-person by individuals who have literally underwritten and closed billions in commercial mortgages.
Precept notes that lenders often waste time and expense evaluating loans that never occur. How does Precept help lenders avoid this?
Dead deal costs are probably the biggest waste of money for lenders. Experience tells us that hit ratios for a lender are probably less than five or ten percent. This is a problem when a lender needs to staff its origination platform with individuals who can accurately assess and screen loan inquiry and otherwise professionally represent the firm.
Aside from the time it takes to review the loans that you do not put into application, it take about 30 or 40 staff-hours to be in the position to issue a commitment on a deal. A lender in our system can be in this same position in less than an hour and a half, and, what's more, that is all the time needed to spend on a loan until the borrower renders a commitment fee.
Jack Cohen of Cohen Financial describes Precept as “the future of this industry.” Given the beating that technology companies have taken of late, does Precept have a tough time selling the idea of online finance and lending?
Everything in this environment is tough, but we have and continue to be well insulated from the volatility of the technology sector by the practical business nature of our partners. The industry needs this application, and yield on investment will be found in business efficiencies, not some ridiculous Internet multiple.
Precept is the future because it offers great value propositions to both sides of the transaction. The success of the company will ride on the adoption rate by the mortgage bankers. Mortgage banking controls the majority of the business in our sweet spot and they are our targeted customers. Our message to the borrowing community is that it will be best accommodated by mortgage bankers who use the Precept system. As for the lenders, it is a no-brainer. Any lender who is still processing its own transactions five years from now will no longer be a competitive capital source.