Despite all the chatter about “alternative” and “non-bank” lending, banks still control 41% of commercial mortgage loans and financed 43% of new loan production in 2016, according to MBA. And these are good times to be in commercial real estate lending – just 0.59% of commercial mortgages held on bank balance sheets are more than 90 days delinquent, the lowest rate in more than a decade. This explains why there are so many new entrants to the field.
Much has been written about innovation in commercial real estate investment and finance. Companies like Realty Mogul, Fundrise and RealtyShares get most of the press since they are positioned as venture-backed “fintech” companies. However, on a much quieter basis, many banks have developed commercial real estate lending programs that satisfy the needs of smaller developers and investors, all under the watchful eye of bank regulators and other stakeholders.
Clearly, in today’s hyper-competitive lending environment, banks must be doing something right to maintain their leadership position in this $3 trillion market. And they are. In fact, almost every tenet of traditional bank CRE lending is now open to negotiation. Many banks are now willing to be flexible with:
• Interest-only periods
• Prepayment terms
• Cash-out refinance
• Maturity up to 30-years
• Recourse (non-recourse is still unlikely, but may be available on low leverage deals)
* Note, required documentation and leverage are still not negotiable. Don’t expect a bank to lend beyond 75% loan-to-value or take shortcuts on their underwriting or due diligence requirements.
Let’s drill down on some specific areas of bank innovation:
Banks finance about a third of all multifamily loans each year. A number of banks have created streamlined apartment lending programs starting as low as $300,000 that appeal to real estate entrepreneurs who may be foreign nationals, self-employed or just getting started. Other housing-related property types including student housing and mobile home parks are now readily financeable through the banking industry – these property types used to be the domain of securitized lenders or specialty finance companies.
Commercial Real Estate Lines of Credit
Some banks are willing to extend short-term credit (12–36 months) to borrowers who have specific needs related to preparing a commercial property for sale or extracting equity from one property to invest in another. These programs start at interest rates as low as 6% and provide the flexibility of no prepayment penalties.
Unique Properties / Owner-Occupied / “Story” Credits
The best kept secret in the commercial real estate financing industry is the emergence of “entrepreneurial banks”. This select group of lenders participates in the space between traditional bank lending and private lending. These banks typically focus on a particular niche or two. They are laser-focused on the value of the collateral property, its ability to generate cash flow, and the sponsor’s ability to manage and execute against a business plan. Borrower credit weakness can be mitigated provided that the borrower can demonstrate that their problems are in the past – essentially that they are no longer weighed down by a mountain of debt.
These lenders tend to thrive on:
• Specialized property types including golf courses, mobile home parks and marinas, among others
• Owner-occupied properties (whether SBA-eligible or not)
• Transactions that require quick closing
• Borrowers with damaged credit
Banks Embracing Partnerships with Fintech Platforms
The crowdfunding and marketplace lending platforms deserve plenty of credit for pushing the commercial real estate investment industry forward. Banks are also forging partnerships with online lending platforms for other asset classes such as personal, student, and small business loans.
Through their efforts to democratize real estate investing, the platforms are making commercial real estate investing open to a broader class of investors. As these smaller investors learn the business and build a portfolio of successful investments, they can easily transition to traditional bank credit products. As a result, a new generation of investors will be ready to replace the existing ownership class comprised largely of baby-boomers.
In short, banks are becoming more flexible than many commercial real estate investors realize. While banks will always have a cost of funds advantage, they must continue to innovate in order to maintain their leadership position in the commercial real estate lending industry. Commercial real estate investors and their advisors should know where to find these banks and which deal points are negotiable.