Auctions have traditionally lent themselves to all-cash buyers limited to investors who can execute a speedy equity raise or write a check for the full purchase price in thirty days or less. Constrained by lenders' ability to meet the tight closing deadlines, auction finance has left little room for anyone but expensive and hard money lenders. Auctions bring with them an added level of complexity that can put strain on the most sophisticated investor. Very few mid-level investors have the ability to raise expensive equity in time to close all cash, exposing them to some rather onerous recourse terms with hard money lenders in lieu of leaving 10 percent earnest money behind should the deadline not be met. As leverage fundamentally increases buying power, the demand for competitively priced auction finance has been long overdue in this space.

GlobeSt.com: Why is now a good time for this type of an alternative funding platform and who is the best type of partner for this type of transaction?

Hill:Though banks have seen a small rise in commercial lending, many are still encumbered by toxic assets resulting in an existing constraint in commercial lending. An asset-based, value-add lender is a perfect partner for financing dispositions by special servicers because they have the ability to staple a pre-underwritten debt quote to the asset before it is marketed for sale. When a few days can make a crucial difference in completing the proper amount of due diligence on an asset, a 30-day or less close takes a lending team that is experienced in expedited closes. An asset-based lender may be the optimal choice for an auction finance endeavor, mainly because the asset means as much to the credit-worthiness of the transaction as the sponsor.

Free from regulatory burden, an asset-based lender had the flexibility to complete their due diligence within the required timeframe to determine market risk and understand the story associated with the asset being auctioned. Any issues in the deal are identified and addressed before bidding starts, making for a smoother process. Having a high level of lender due diligence completed prior to marketing ensures the right questions are being asked and has the added benefit of acting as an extension of the due diligence process.

GlobeSt.com: How can investors mitigate risk?

Hill:A recent development in the auction finance space is competitively priced, non-recourse funding from nonbank lenders like A10 Capital. A multitude of risks are involved in acquiring a commercial asset, particularly in a value-add transaction with minimal in-place cash flow. Mitigating and insuring against lease-up, roll risk and interest rate risk necessitates prudence and focus. Taking even more risk by personally signing on the loan does not make sense to most savvy value-add investors. In the event things don't go as planned, a first mortgage secured only by the asset limits the liability to the asset, not a sponsor's personal wealth. Signing recourse is a risk for which investors are not being compensated. Non-recourse leverage is a prudent way to increase buying power, truly leveling the playing field for non-institutional, high-quality investors.

GlobeSt.com: How should a lender be involved in the online auction process?

Hill:In this type of transaction a lender can run parallel through the process. This provides the borrower a valuable second layer of due diligence on the property before acquisition. The lender ordered appraisal can provide not only an as-is value of the real estate, but in the case of an un-stabilized property, would also include a stabilized valuation incorporating the borrower's vetted business plan. This is extremely important information for a buyer to have prior to closing the transaction so that it can fully understand whether or not future equity dollars in the project will result in an incremental lift in value. Without this value accretion buyers could have issues refinancing the project or may not be able to hit their target disposition values, both of which would be very helpful to know prior to closing.

Check back in the next day or so for part two of this exclusive Q&A, where Hill talks about what questions should an investor ask in evaluating a lender and what has been A10 Capital's experience with the auction marketplace.