If you are a commercial property owner today looking for loan, good luck! Put lightly, today’s commercial lending environment would be described as difficult. There are several challenges landlords face in underwriting. One primary challenge has to do with their ability to repay the debt. Simply having a tenant, or evidence of income in owner occupied properties, is no longer enough. Lenders are skittish, and they have good reason to be — very few deals these days are all cash, and the vast majority of transactions require financing. Loans are underwritten today in a vastly different way than they have been in the past. Larger down payments, pristine credit, significant cash reserves, and an impressive track record of loan payment are examples of the highly scrutinized underwriting changes in the market place. Equally important as the repayment of debt is the secured amount of assets a borrower pledges in the event of default. As one lender told me recently, “In a loan committee we ask not if, but when, a loan will have problems.” To hedge their risk, banks are requiring huge amounts of security and reserve funds so the lender can be reassured when the tenant or owner struggles, they can still make payments to the bank for a certain period of time.
Most banks prefer to lend to owner-occupied properties versus investment properties. As a result, loan terms and underwriting can be more favorable for the owner occupants. Another area of financing that has become increasingly scrutinized is credit. Banks want tenants and borrowers with sterling credit. A borrower or tenant with less-than-excellent credit is problematic. And the rules on this have changed for everyone. The companies in the past who were considered to have high credit, low default risk and reputations for paying rent on time are looked at and underwritten more diligently today. Gone are the days of showing a lender a lease with a tenant like American Eagle, Gap, Pottery Barn or Ralph Lauren and being guaranteed a loan. The once impeccable reputation and credit of traditionally stable tenants has diminished. Same goes for the owners and borrowers themselves. As the market has worsened, so have many of the relationships between lenders and their clientele. The concept of relationship banking seems to be a thing of the past.
Recently, I assisted a client with refinancing their commercial property and we approached their current lender with what we believed were favorable borrowing terms, i.e. good credit, decent income, and plenty of equity in the property. My client’s lender refused to even entertain the borrower after an almost 20-year relationship. Compounding things for borrowers is the fact there are fewer banks lending today. Many banks have either closed, been absorbed or bogged down with government regulators due to their participation in TARP. Lenders are distracted either cleaning up their toxic commercial loans or auditing their books to ensure their next visit from the Feds runs smoother than the last. This added layer of scrutiny requires tremendous resources from the banks — resources that would be better served originating, facilitating and closing of loans in their systems. Perhaps the most onerous change put on borrowers today in underwriting has been the loan-to-value (LTV) amount. This is the figure that represents the percentage of a property’s value a bank is willing to lend a borrower. Historically, LTV values for commercial real estate properties have been in 80 to 90 percent range. Today the maximum is generally 75 percent for owner-occupied properties (unless you qualify for an SBA loan) and perhaps only 60 to 70 percent for investment properties. This is a particularly tough change if the borrower’s money for the down payment had been in the stock market, or even worse, equity in another piece of real estate. It is likely the values of those stocks, real estate, or other equities have decreased.
Undoubtedly, the rules of the game have changed and navigating through the process, at lease in the short term, appear to be getting not any easier.
O’Neill Realty Advisors, LLC is a full service commercial real estate brokerage and advisory company focusing on Georgetown and upper Northwest D.C. Contact Andrew O’Neill at 202-741-9405 or firstname.lastname@example.org.