In these days of bank failures and the current pull-back from the banking industry in CRE loans, just how does one move a deal forward if your bank is no longer lending? According to the Mortgage Banking Association, there is about $4.5 trillion of CRE debt that is currently outstanding, yet only about $1.7 trillion of that amount is held by banks. The remaining $2.8 trillion is owned by lenders. Those lenders include life insurance companies, Government Sponsored Enterprises (GSEs) --Freddie Mac or Fannie Mae-- mortgage REITs, and private debt funds. Additionally, some of these funds are held as securitized commercial debt such as Commercial Mortgage Backed Securities (CMBS) or Collateralized Loan Obligations (CLOs). In addition, nonbanks account for a greater share of lending for most asset classes, with the largest nonbank share at 70% coming from multifamily lending. This large nonbank lender share is due to the presence of the GSEs in residential real estate markets, as they regularly purchase and hold residential mortgages originated by other lenders, including mortgages for apartment buildings. And to get a fuller appreciation of the nonbank lender, office property loans comprise approximately 17%, or $750 billion of the $4.5 trillion in total CRE debt. About 45% of these office loans are held by banks, with the remaining 55% held by nonbanks.
Banks are not the only game in town
The banking industry has cut back on lending for commercial real estate over a variety of concerns such as economic uncertainty or rising interest rates. In addition, the ongoing growth of e-commerce has reduced the demand for physical retail space while the pandemic nearly gutted the hospitality sector. Such shifts have forced lenders to become more strategic and selective in their lending practices.
So, if banks aren’t lending in CRE, what are the options? One option is to look for alternative lenders such as private equity firms, hedge funds, or other nonbank lenders. Another option is to consider seller financing or joint ventures with other investors. You can also try to negotiate with the bank to see if they can offer more favorable terms or find a co-signer for the loan. It’s important to keep in mind that each situation is unique and requires careful consideration of all available options.
As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Program are actively involved in providing CRE loans. But remember, like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers.
Things to Consider
For lenders, the key ingredients when considering a loan include the nature of the collateral, the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans. CRE loans tend to be more expensive than residential loans. Down payments typically range from 20% to 30% of the purchase price. Interest rates also tend to be steeper: around 10% to 20% for most borrowers. Loans backed by the Small Business Administration (SBA), are linked to the prime, Treasury, or other base rate, with maximum rates set at a specific amount above that base. Depending on the loan program, interest rates may be fixed or variable, and rates may be negotiated by the lender and the borrower or set by the SBA. The SBA 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The interest rates for this program are 7% - 9.5% for variable rates and 9.75% - 12.75% for fixed rates.
And Finally Nonbank lenders make up a substantial portion of the CRE lending market. While the bank side of this market has attracted the most attention, more than half of all CRE mortgages outstanding are held by nonbank lenders. In the wake of the recent bank failures, many are expecting greater regulatory scrutiny for banks of all sizes. In today’s tight credit market, some nonbank lenders, especially those with higher risk tolerances, may be able to provide liquidity as traditional banks pull back from CRE lending. At Newport Capital we aren’t like the rest. With a primary focus on value-add and opportunistic projects, Newport Capital has the capacity to deliver funding solutions across the capital structure. We stand out from the pack in that we don’t require 3-5 years of financial statements or income tax returns. We loan up to 90% of cost or 70% of stabilized ARV and our rates are 9-15%. We are known for our quick closing and can close in less than 21 days. We welcome the hard to fund transactions that traditional banks won’t touch. See what we can do for you here: https://newportcapital.com/wp-content/uploads/2022/10/NC-TearSheet.pdf