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Exploring E-finance

Online lending was little more than a concept just a year ago. But the proliferation of finance dot.coms in recent months has opened a new avenue to debt and equity capital.

"Right now, only a small percentage of commercial mortgages originate online. But I think that number is going to grow significantly over the next two to three years," says John Gough, a managing director at San Francisco-based LoopNet.

LoopNet, which operates the largest online commercial property listing service, also operates a finance component with its LoopLender product. LoopLender is experiencing a surge of repeat business. "Some brokers have submitted smaller deals to test us out," Gough says, "and now they're coming back with larger deals."

About a dozen commercial real estate finance websites have popped up in the last year ranging from firms such as CapitalThinking.com to MortgageSelector.com. The new crop of companies provides access to debt and equity capital sources, and offers a variety of perks to borrowers and lenders alike.

Efficiency boost The most significant advantage to borrowers is the lure of time and money savings. Commercial mortgages obtained through traditional channels require 90 to 120 days to close. The online services boast that they can cut up to three weeks off that process through increased efficiencies. Borrowers also have the opportunity to save money by competitively shopping their loans among a pool of lenders, or by finding a website that offers discounted broker fees.

"The borrowers are extremely excited because for the first time they are looking at a brokerage system where someone is actually selling a product that helps them raise capital," says Ben Milde, CEO of New York-based CapitalEngine Inc. Lenders also have been receptive to the online resources. "If you can control transactions and provide lenders with high quality deal flow, which is going to be sorted to fit their profile, you stand to make them more efficient as well," Milde says.

Dot.competition The dot.coms are continuing to test the boundaries in an emerging marketplace. Realistically, the market will be able to sustain three or four sites vs. the 12 to 15 currently in operation, notes BJ Singh, vice president of sales and marketing at Bethesda, Md.-based Redbricks.com.

The total U.S. commercial mortgage market encompasses about $240 billion, and only a small fraction of those approximately 33,000 deals will be conducted online. It is likely that there will be a shake-out and consolidation in the next 24 to 36 months, Singh says.

"Those sites that will survive are those that really increase efficiencies or added services in addition to just lending," he says.

The successful dot.coms are going to be those that offer both execution and quality service, as well as combining good software with experienced people, Milde says.

"This is not a business where first-mover advantage means everything. Companies that prevail are going to be the ones that provide the best service to their clients and the best service to the lenders they work with," he says.

Following is an overview of some of the major players in this emerging market.

CapitalEngine CapitalEngine is an online real estate investment bank aimed at helping property owners source different pools of capital. CapitalEngine was founded in December 1999 by the partners of the Greenwich Group International; the website, www.capitalengine.com, was launched March 1.

The company's goal was to create a more direct, efficient and organized process for commercial real estate owners, institutional lenders and equity investors to connect. CapitalEngine is building a team of highly skilled individuals to create a more efficient process. "We're very focused on making sure the market understands that our system is not there to replace the human interaction in these transactions," Milde says.

CapitalEngine has set up a system that absorbs information from investors to create and maintain investor profiles. "Essentially, what you are capturing is real-time information about the market," Milde says. "It's a more intelligent and efficient distribution system, and we believe that it will lead to a lower cost of capital to the borrower."

Savings are passed back to the property owner in the form of discounted fees. CapitalEngine charges 50 basis points for loans of $3 million and greater, and 60 basis points for loans of less than $3 million. CapitalEngine's process also expedites closings, trimming up to 10 days off the process. "The efficient system that CapitalEngine has developed allows for cost savings throughout all aspects of the loan process," Milde says.

Cyberloan.com CyberLoan.com is a leader in online lending automation technologies, and it was one of the first finance websites to hit the Internet when it launched www.cyberloan.com in February 1999. Cyberloan.com started with over 500 lenders online. "We opened the flood gates of the Internet on inquiries," admits Brian Nuernberger, director of marketing at Cyberloan.com. Lenders were inundated with requests for information by borrowers that were in the preliminary stages of seeking financing.

To correct that problem, Cyberloan.com recently launched its second version that includes filters that eliminate unqualified deals from being passed on to lenders. Cyberloan.com now collects more information, and then filters that information to meet lender profiles based on factors such as geographic location, loan amounts and property type, "We have more due diligence done up front," Nuernberger says. "If certain things don't match, those projects aren't passed down."

Cyberloan.com, aka Denver-based DataMerge Inc., is a privately held firm that was founded in 1989. The company licenses its technologies to lenders to generate revenues, and also generates revenues based on the amount of loans closed through its systems. Cyberloan.com's long-term strategy is to obtain dominance in targeted online lending submarkets by levering its automation technology and deal flow with a select number of strategic partners and lenders.

EquityCity.com Founded in August 1999, Denver-based EquityCity.com Inc. specializes in matching individual and institutional equity investors with those interested in developing and acquiring all types of properties. The website at www.equitycity.com provides a network of more than 3,000 investor members representing about $57 billion in equity capital.

EquityCity.com focuses on equity capital, which is traditionally the most difficult and inefficient component of real estate transactions. "It is a very specific industry. You can't go to the Yellow Pages to find those investors. It's a very fragmented group," says Mark Quam, president and founder of EquityCity.com.

The approximately $800 billion equity market is composed of a diverse group of private and institutional investors. "For 80% of the real estate deals of less than $20 million, there is no broker or agent that is involved just because the investor pool is so diverse. No one goes after that part of the market," Quam says.

EquityCity.com matches qualified institutional and individual investors with real estate entrepreneurs who are seeking equity capital. Only pre-screened, qualified investment opportunities are presented on EquityCity.com. These opportunities are presented in a consistent format that helps investors evaluate deals quickly and easily.

LoopNet Inc. LoopLender provides direct access to lending institutions online and accelerates the loan process. "We consider ourselves a full-service end-to-end mortgage banker," Gough says. Currently, LoopLender has 43 commercial lenders on its website with more than 100 competitive loan programs.

To locate a lending institution, the user fills out a no-cost online loan request form, and LoopLender finds the lenders and loan programs that meet the financing criteria. LoopLender loan originators package the loan and track its progress until it is closed. Lending institutions participating in LoopLender include Morgan Stanley Dean Witter, GMAC, ARCS Commercial Mortgage and GE Capital Real Estate, among others. "Unlike some sites that are merely referral sites, we have a dedicated production team, and experienced real estate people," Gough says.

LoopLender also analyzes and qualifies individual deals before they are sent on to lenders. LoopLender sees about $400 million each month in loan requests, and about 50% of those requests are turned back through online filters as well as staff review.

"One of our major competitive advantages is the integration with our property listing services," Gough says. The LoopNet Property Listing Service is the Internet's largest commercial real estate service. Currently, LoopNet has listings on about $70 billion in commercial properties for sale. Investors can log-on to www.loopnet.com to find a property, as well as obtain financing, Gough notes.

Redbricks.com Redbricks.com is a web-based provider of mortgage loan origination, ancillary services, industry news and market information for the commercial real estate industry. Based in Bethesda, Md., Redbricks.com was founded in 1999 with the mission of using the Internet to transform the commercial loan origination process. Through its website at www.redbricks.com, the company provides direct access to 27 direct lenders, as well as all services needed to close a commercial loan. Since its launch in Nov. 1999, Redbricks has received over $2 billion in loan pricing requests.

"The biggest differentiating factors for our company is that we have tried to provide technology to shorten the time frame and create efficiencies vs. just using the Internet as a lead generation tool," Singh says.

A property owner can log-on, fill out basic property information, and get specific pre-quote information in just a few minutes. Redbricks.com uses the property ZIP code and net operating income (NOI) to calculate a pre-quote based on fair market value. The next step is to provide additional information via term sheets which are used to produce firm quotes within 48 hours.

The actual loan process occurs off-line between the borrower and its selected lender. However, Redbricks.com provides an online tracking system that the borrower can use to follow the entire progress of the loan until it closes. Other service firms such as title companies, appraisers and engineering firms also are hooked into the online network, so the borrower can get bids and track the progress of the loan on Redbricks.com's online system. "What we try to do is offer information and tracking so the borrower is under control and knows where the loan is going," Singh says.

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