Most commercial lender are terrified of commercial loans right now. Below are practical tips on finding the right commercial lender at a time when most commercial lenders would have have a root canal than actually fund a commercial loan.
Commercial Lending Tightest it’s been in 25 Years
Commercial real estate has already tumbled by 40%. Bank economists are secretly telling their executives that a double dip recession is a serious possibility.
Commercial real estate could potentially fall another 40% from here. The banks are scared.
As a result, conventional commercial mortgage lending is down by more than 70% compared to 2006. The entire conduit industry has completely used up. Investors will no longer want to buy bonds backed by commercial mortgage loans.
The conduit industry used to make over 50% of the total dollar volume of commercial mortgage loans. Imagine that – an industry that used to make around 53% of all of the commercial mortgage loans in the country – has been effectively nuked off the planet.
companies still make commercial loans – if the commercial property is almost brand new, if the loan amount is larger than $5 million, and if the borrower can be satisfied with a loan amount that is just 55% loan-to-value.
The savings and loan industry has contracted almost out of existence. There are only two surviving mortgage REIT’s in the entire country that are still making commercial loans today, and both of them charge hard money rates.
This leaves only the banks and a handful of hard money lenders still making commercial mortgage loans.
Banks will make you a conventional commercial mortgage loan today, but they will do so willing only if the borrower is a big catch. If the person who is borrowing is not a good bank customer, your commercial loan will probably be cut back from 75% loan-to-value to just 55% to 63% LTV. The borrower’s credit will have to be close to perfect, and his commercial property has to be worth more than just nickels and dimes. And, of course, it will have to be fully-leased.
Where Should You Start?
What happened when the borrower applied to his own bank? You need to find this out because the borrower’s bank could have an offer on the table that you will never be able to defeat. The borrower’s lender doesn’t want to lose his deposits, so the bank can often be pressured into making a loan.
If the borrower’s own bank wouldn’t help him, try another small bank located in the town where the borrower resides. Be sure to sit down with the branch manager and offer to move all of your borrower’s bank accounts to this new commercial lender, if he accommodates the client’s loan needs. Bankers are always looking for new deposits.
What if your borrower doesn’t maintain large enough cash balances to attract a bank? You may want to refinance his personal residence and just store the cash proceeds in his checking account until after you find a bank willing to make him a commercial loan. Don’t forget, commercial lenders will only make a loan when the borrower is sitting on a pile of cash.
Commercial Lenders Prefer to lend locally
If your borrower doesn’t maintain large enough cash balances to attract a bank, you should submit his commercial loan application to some banks located close to the subject commercial property. A commercial lender is greatly prefer to make loans in their own backyard.
Size of the Loan Vs. Size of Bank
Small banks make small loans. Large banks make large banks. Don’t try to submit a $200,000 commercial loan to Bank of America or a $20 million loan to the tiny 1st National Bank of Tinyland.
What Should Your Loan Package Include?
Keep your initial loan package short! It should not have more than four pages total. All you really need at this point is an Executive Loan Summary and a Pro Forma Operating Statement. Be sure to include at least one color photograph of the property. Make sure it’s a very flattering picture of your property.