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For a while now I’ve written about the latest “change” in commercial lending: “The Small Balance Commercial Lender.” These guys are re-writing the rules on commercial loans that are less than $3 Million. While this might not impact your business immediately if you are dealing with larger properties, it will eventually affect you because of something else they are doing:
Stated Income or EZ Document Loans
Commercial lending, with the exception of private money loans, has been strictly a “full document” underwriting proposition. This meant that the borrower had to show up with a mountain of paperwork including personal tax returns, business tax returns, and financial statements in addition to the documents related to the property such as the leases, rent roll, and income and expense history. And in the end, the lender would underwrite the loan based entirely on the property’s cash flow, ignoring the borrower’s income, anyway!
These new lenders are willing to take into account the borrower’s free cash flow on a stated basis, and make their underwriting decision using the borrower’s credit score, the property’s cash flow, and the borrower’s reserve liquidity. This is unprecedented in commercial lending and will most likely force conventional lenders to come up with competing programs in the near future or they will lose too much loan volume.
Another consideration is that the investors who buy these loans will most likely increase their loan amounts in the future if they have a good experience with the smaller loans. Why wouldn’t they? It costs as much to underwrite and fund a $5 Million loan as it does a $500K one, yet the return is 10 times as much. This will put even more pressure on conventional lenders to create some kind of competing program or sell the same programs from the same investors.
So my personal take on the situation is that there will be some significant changes in the loan marketplace if the Small Balance Commercial Lender has a winning formula. They are too new to have any real experience in a down market and I’m sure that the conventional lenders will be watching them closely.
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ?Craig Higdon, ?The Investment Property Insider,? works as a commercial mortgage broker. He publishes the weekly ?Investment Property Insider? e-zine and blog, www.InvestmentPropertyInsider.com. Visit the blog and get a complimentary report on commercial financing techniques.?
Many commercial lenders have effectively (if not actually) shut their doors. For the rest of us, the resulting volume is so great our appraisal and processing systems are stressed to the limit. Several of our competitors are not even taking any more loans just to get through the current overload in their systems. We have chosen to push through the current avalanche of loans, and will continuing to entertain your new loan requests – all while trying to keep our rates very competitive.
What has changed (at least for now, and especially on larger loans) is our desire to only look at solid apartment and commercial properties, with borrowers that add to the overall strength of the loan. To lessen our processing overload, we have temporarily “closed the tap” on hotels/motels, gas stations, owner/user properties, environmental issue properties, “poor-credit” borrowers, etc. This is intended to help “unclog” the backlog so that your more traditional loans will go through faster.
For loans $3,000,000 and above, we are going to be strictly looking for traditional properties, nothing exotic, no stories, issues, or moving parts. Policy DSCRs and LTVs will be strictly adhered to. Borrowers will need to have average credit scores of 680 or better, their adjusted net worth must be 150% or greater than the loan amount, personal debt ratios cannot exceed 40%, etc.
Loans under $3,000,000 have more flexibility in all these areas. The range of acceptable product types is greater, we will look at a wider range of borrower credit and issues, and we can look at offsetting strengths and weakness (where we will not in larger loans).
Debt Service Coverage Ratios are on the rise as we see the economy weaken… 1.20 ratios for residential and 1.25 (or higher) ratios for commercial for the time being…
Though I’m not sure for how much longer… we are still offering to lock your loan, for up to 90 days, at no cost to your borrower.
And yes, we still offer you 1/2% rebate pricing – up to $15,000.00 per transaction.
I have enclosed our latest rate sheet for your review, and I will be happy to discuss your next transaction. On loans over $3,000,000 I will want to see reliable borrower financial data along with your submission – but feel free to call to discuss the transaction even if you do not have “everything” in hand.
For the short term, loans can be expected to take 60-90 days to close. We cannot handle any “rush” transactions for at least the next 60 days. Please let your borrowers all know to structure sales with longer closing dates!! If you have a 1031 exchange, make sure all parties can live with the reality of these closing times. The shortage of quality lenders with good rates, and the uncertainty of the market, will pass and the market will settle. Until then, we will try hard to meet your financing needs. My best wishes to you for the New Year!
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www.lendinguniverse.com Commercial Lending Loans in Mississippi All industries need lender combine with commercial real estate mortgages, private loans, together with commercial real estate lenders, commercial hard money lender, the hard money, commercial real estate loan. Fix and flip loans www.youtube.com flip that house also known as how to flip houses can be done with the help of flip housesResidential property or Commercial property. In case you need a fix and flip loans Contact private Investors for best results on flip houses. Hard money commercial loans www.lendinguniverse.com In a deed of trust, the borrower (trustor) transfers the Property, in trust, to an independent third party (trustee) who holds conditional title on behalf of the lender or note holder (beneficiary) for the purpose of exercising the following powers: (1) to reconvey the deed of trust once the borrower satisfies all obligations under the promissory note; or (2) to sell the Property if the borrower de faults (known as a foreclosure). Foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, acquiring title to the Property. The foreclosure sale, in most cases, satisfies the debt.
Fed’s Duke says bank lending dropping, may lag for years
U.S. bank lending continues to decline even though the banking sector is recovering, and it may be years before lending returns to pre-crisis levels, Federal Reserve Governor Elizabeth Duke said on Wednesday.
Read more on Reuters via Yahoo! News
West Coast Bank Expands Commercial Banking Team in Lane County
West Coast Bank has hired Shanna L. Reichenberger to lead their Lane County Commercial Banking team as Vice President â Team Leader. She will work with commercial banking clients to provide lending, depository and treasury management products and services from her office at the Eugene North branch, 1005 Green Acres Road.
Read more on PR Newswire via Yahoo! Finance
HSBC snaps up RBS banking assets in India
Asia-focused bank HSBC on Friday bought the Indian commercial and retail banking assets of British state-controlled Royal Bank of Scotland, expanding its footprint in the emerging market nation.
Read more on AFP via Yahoo! News
Bank of China to raise $8.9B as lenders replenish capital after lending boom
BEIJING, China – Bank of China Ltd. announced Friday it will raise up to 60 billion yuan (US$8.9 billion) in a new effort by a major Chinese state-owned lender to replenish capital following last year’s lending boom.
Read more on The Canadian Press via Yahoo! Canada News
Before a large number of applications were rejected due to strict criteria which catered more prime business. But now there are some more forward thinking lenders who have entered the market.
Commercial Loans
Lenders will lend on the following types of businesses or Small and Medium Enterprises, including retail, tourism, care sector, B&B’s, Shops, Pubs, Guest Houses, Farms, Land, Hotels, Industrial Units, Offices, Factories, livery, Restaurants and Take Away’s.
Business lending include services in raising commercial finance, invoice discounting, factoring and improving existing commercial lending deals. Commercial mortgage brokers work with lending underwriters and bank business development managers. The business development managers show advisors directly how to introduce business often resulting in lenders’ being more flexible in their lending discussions and criteria. This can mean previously rejected cases being passed with even a lower rate than first stated. Due to lending volumes.
There are dedicated specialist lenders meaning it possible to now get self certified, show limited paperwork, borrow up to 85% loan to value and have an impaired credit history. Mortgages will be taken on long leases and a short time of trading experience.
Business Advice – http://www.MortgageHome.co.uk/
Winning commercial
ECB lending boosts euro
A second day of lending by the European Central Bank to commercial banks helps to boost the euro.
Read more on BBC News
Commercial Mortgage-Backed Bonds Make a Comeback
Investors have returned to the mortgage-backed market, as commercial property prices are perceived to have hit bottom.
Read more on New York Times
New lending system to make CPs popular
Commercial papers, the money market instruments to raise funds of less than a year, are set to gain popularity with banks shifting to the new base rate regime.
Read more on Business Standard India
Fed’s Duke says bank lending dropping, may lag for years
U.S. bank lending continues to decline even though the banking sector is recovering, and it may be years before lending returns to pre-crisis levels, Federal Reserve Governor Elizabeth Duke said on Wednesday.
Read more on Reuters via Yahoo! News
By exploring what went wrong with commercial lenders and small business financing, business owners will be better prepared to avoid serious future problems with their working capital financing and commercial real estate financing. This is not a hypothetical issue for most commercial borrowers, particularly if they need help with determining practical small business finance choices that are available to them. Business owners should be prepared for the banks and bankers who caused the recent financial chaos to say that nothing has gone wrong with commercial lending and even if it did everything is back to normal. It is hard to imagine how anything could be further from the truth. Commercial lenders made serious mistakes, and according to a popular phrase, if business lenders and business owners forget these mistakes, they are doomed to repeat them in the future.
Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. Unsurprising negative results were produced by the attempt to produce quick profits and higher-than-normal returns. The bankers themselves seem to be the only ones surprised by the devastating losses that they produced. After two years of trying unsuccessfully to get someone else to pay for their errors, the largest small business lender in the United States (CIT Group) recently declared bankruptcy. We are already seeing a record level of bank failures, and by most accounts many of the largest banks should have been allowed to fail but were instead supported by artificial government funding.
When making loans or buying securities such as those now referred to as toxic assets, there were many instances in which banks failed to look at cash flow. For some small business finance programs, a stated income commercial loan underwriting process was used in which commercial borrower tax returns were not even requested or reviewed. One of the most prominent business lenders aggressively using this approach was Lehman Brothers (which filed for bankruptcy due to a number of questionable financial dealings).
Bankers obsessed with generating quick profits frequently lost sight of a basic investment principle that asset valuations can decrease quickly and do not always increase. Many business loans were finalized in which the commercial borrower had little or no equity at risk. When buying the future toxic assets, banks themselves invested as little as three cents on the dollar. The apparent assumption was that if any downward fluctuation in value occurred, it would be a token three to five percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. For banks which made the original commercial mortgage loans on such business properties, commercial real estate is proving to be the next toxic asset on their balance sheets. In contrast to the government bailouts to banks having toxic assets based on non-performing residential loans, it is unlikely that banks will receive similar financial assistance to cover commercial mortgage problems. As a result, a realistic expectation is that such commercial finance losses could produce serious problems for many banks and other lenders over the next several years. Much to the dismay of all business owners and as mentioned in the next paragraph, many commercial lending programs have already been dramatically reduced.
An ongoing problem is illustrated by misleading lender statements about their small business financing activities. While many banks have routinely indicated that they are providing business financing on a normal basis, the actual results by almost any standard indicate otherwise. It is obvious that lenders would rather not admit publicly that they are not lending normally because of the negative public relations impact this would cause. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone.
There are practical and realistic small business finance solutions available to business owners in spite of the inappropriate commercial lending practices just described. Due to the lingering impression by some that there are not significant commercial lending difficulties currently, the intentional emphasis here has been a focus on the problems rather than the solutions . Despite contrary views from bankers and politicians, collectively most observers would agree that the multiple mistakes made by banks and other commercial lenders were serious and are likely to have long-lasting effects for commercial borrowers.
Stephen Bush and AEX Commercial Financing Group provide small business financing options for working capital loans, merchant cash advances and commercial real estate loans throughout the United States.
DATELINE: TAUNTON, MA…
Bristol County Savings Bank recently announced the appointment of Robert Skurka as a Vice President of Commercial Lending, based out of the bank’s Pawtucket, RI office. Bristol County Savings Bank is a $1.1 billion mutual savings bank founded in 1846 and headquartered in Taunton, MA, with 10 offices in Eastern Massachusetts and Rhode Island.
In his new position at Bristol County Savings Bank, Skurka will serve the banking and financing needs of businesses in Rhode Island and Southeastern Massachusetts. Skurka has over 25 years of commercial lending and real estate lending experience and was previously a Senior Vice President and Relationship Manager at Webster Bank and Director of Business Banking at First Federal Savings Bank of America (FIRSTFED).
A graduate of the University of Rhode Island with a B.A. in Economics, Skurka received his MBA in Management from Bryant University. Skurka is also a Retired Captain of the U.S. Army Reserve, where he served as Finance and Personnel Officer in the 443rd Civil Affairs Company in Warwick, RI.
In addition, Skurka, is a member of the Turnaround Management Association and Past President and Board Member of the Risk Management Association.
Skurka, a native of Coventry, RI, currently resides in Seekonk, MA.
Bristol County Savings Bank
Bristol County Savings Bank is a full service financial institution offering commercial lending, personal and business banking, and mortgage services. The key words at Bristol County Savings Bank are: “Commitment, Stability, and Community,” values that are combined with state-of-the-art technology to meet the needs of its customers. A dedicated local community bank for over
160 years, Bristol County Savings Bank is actively involved in giving back to all the communities it serves both through financial support and the volunteerism of its people.
Founded in 1846, Bristol County Savings has $1.1 billion in assets, with 244 employees in Southeastern MA and RI. The Bank has 10 full service banking offices located in: Taunton, MA (2); Raynham, MA (2); Rehoboth, MA; Attleboro, MA; North Attleborough, MA; Franklin, MA; Dartmouth, MA; and Pawtucket, RI; two loan production offices located in Taunton and Fall River, MA; and two Educational Branch Offices located at Taunton High School and Attleboro High School.
The Main Office and Corporate headquarters of Bristol County Savings Bank are located on Broadway in Taunton, MA. For additional information please call 508-824-6626, or visit www.bristolcountysavings.com.
Recent commercial lender changes are likely to impact most small business owners. If a commercial borrower wants to continue their present banking relationship, they will find (in most cases) that the business lending changes are permanent and cannot be avoided. A few new and more flexible commercial lending sources represent a welcome exception to this trend.
One of the biggest commercial lending changes involves new guidelines for working capital financing. Most banks appear to be quietly eliminating business lines of credit or severely reducing the amount they are willing to finance to a level which is not helpful to an average business. Very few businesses can survive without a reliable source of working capital, so this change promises to receive the highest priority from most small businesses. To replace the disappearing commercial lines of credit, the most practical options for business borrowers include working capital loans and merchant financing from one of the alternative commercial finance sources still active in small business financing programs.
The difficulty of locating investment property financing illustrates another business lender change. If the commercial property is considered to be owner-occupied (the owner occupies a substantial portion of the building), more banks will be interested in making commercial real estate loans. Investors that do not occupy the property often own business properties like shopping centers and apartments. For many banks, it appears that they are currently restricting their commercial lending activities to those which qualify for SBA loans (Small Business Administration) which generally exclude investor-owned situations.
A third significant business lending change is demonstrated by revised guidelines for refinancing commercial real estate loans. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. In some areas and for specific types of businesses, many banks will no longer lend over half of the appraised value. While this causes difficulties when attempting to buy a business, the problems for a commercial borrower reach a crisis magnitude when refinancing an existing commercial loan. In many cases the original business loan was based on a much higher percentage of business value than the bank is currently willing to provide. The lending problem is further compounded when a current appraisal reveals a decrease in value since the original loan was made. Due to a distressed economy which frequently results in decreased business income that then leads to lower commercial property values, such an outcome is especially common.
In a fourth example of commercial lending changes, for virtually all small business finance programs many small business owners have already discovered an inflated fee structure from most banks. Perhaps the bank perspective for some of the commercial financing fee increases is that they need to find a revenue source to replace the diminishing income from small business loans which has resulted from bank decisions to decrease commercial loan activity. When they encounter suddenly increased business financing fees levied by their current bank, business borrowers should seek different commercial funding sources except in unavoidable and unusual circumstances.
A final example of commercial lender changes is depicted by banks changing their overall guidelines for small business financing. Many banks have effectively stopped making any new commercial loans to small businesses regardless of business income or creditworthiness. Unfortunately these banks are not announcing publicly that they have discontinued small business finance activities. This means that while they might accept business loan applications, they do not intend to actually finalize commercial financing in most cases. Whenever it becomes obvious that the bank has no real intentions of making a requested working capital loan or commercial mortgage, this approach has clearly frustrated and enraged business borrowers.
The five commercial lending changes described above are unfortunately the proverbial tip of the iceberg. As they approach business lenders to obtain commercial real estate financing, working capital loans and small business financing, business owners will need to be especially skeptical and diligent.
Stephen Bush has provided candid advice to business owners for more than 25 years and is a small business loans expert. AEX Working Capital Financing and Small Business Financing