The residential market’s “mortgage
meltdown” has resulted in more cautious underwriting practices across the board. Banks can offer creative lending
opportunities with many different loan
products, including loans for owner-occupied properties that are backed by the
Small Business Administration (SBA).
“We are seeing a fair amount of activity in
this region with out-of-market investors
coming in and buying commercial real
estate,” says Craig Johnson, president and
CEO, Franklin Bank, Southfield, Mich.
“That’s good news for local owners of commercial real estate. This activity also confirms the value and return on investment
you can realize if you are prepared to purchase either investment or owner-occupied real estate.”
Here, Johnson provides insight on how to
navigate the commercial real estate loan
process with ease.
How has the mortgage crisis in the residential market affected the commercial market?
Up until the mortgage meltdown, there
was an active secondary market in commercial real estate loans. Large conduit
lenders take a pool of loans, securitize
them and sell them with terms that are typically a 10-year fixed rate with 25- to 30-year amortizations. However, over the past
few months the conduit market became
less active. As a result, banks are offering
more opportunities for commercial loans
that might have previously gone through
this secondary market. In some cases,
banks are providing shorter term loans
because investors want to eventually transfer their loan to a long-term financing
source. Keep in mind, however, that those
long-term sources have heavy prepayment
penalties you should consider before taking your financing to a secondary market.
What precautions do banks take with commercial construction loans to reduce risk?
Depending on the size and scope of the
construction project, banks will typically
send out their own inspectors to review
architectural plans and bids. Inspectors then provide the bank with the assurance
that bids and plans are appropriate, and
that the building can be constructed with
the budget being proposed. During the
building process, inspectors will review
the ongoing construction and provide the
bank with periodic reports to ensure that
the project is moving along as proposed.
If you are seeking a loan for residential
land development, generally speaking,
banks are steering away from that business
now because of the slow market and mortgage crisis. In general, banks are gun shy
and more conservative on the financing
Are there creative loan structures that enable
business owners to pursue commercial real
While middle-market businesses do not
always qualify for SBA-backed loans, it’s a
good idea to review criteria on
www.sba.gov to see whether your company may take advantage of these opportunities. The SBA 7(a) program allows borrowers to put as little as 10 percent down and
secure up to a 25-year term loan with no
balloons. These loans are for less than $2
million and available to finance working capital, including real estate. The CDC/504
program requires a 10 percent contribution
from the borrower, the bank finances 50
percent and the remaining 40 percent is
financed by a certified development company (CDC) that is 100 percent backed by
the SBA. The CDC/504 program provides
growing businesses with long-term, fixed-rate financing for assets like land and
buildings. For both loans, there are limitations and qualification requirements. It’s
best to discuss these options with your
bank to determine whether your company
is a fit.
What should a borrower come to the table
with in this lending environment to ensure a
smooth underwriting process?
First, you should expect to enter the
process with 20 to 25 percent of capital to
invest. Do your due diligence before
approaching the bank, and be prepared to
provide as much detail on the property as
possible. Provide cash returns and cash
flow statements on the property. If it is a
redevelopment project, prepare information that describes your plans for the project and how you will reposition the property for success. Be sure the purchase contract includes appropriate inspection
clauses; banks generally will require roof
and mechanical inspections to ensure that
water, electrical, gas and the structure of
the building are satisfactory. Additional
inspections will be required before closing,
including an EPA Phase I environmental
If you already own real estate, prepare a
detailed schedule of these properties as
part of your personal financial statement.
This should include details like original
purchase price, current value, current
debt, monthly debt service requirements
and percentage ownership. This schedule
gives the bank a complete picture of the
type of assets you own, and whether those
are diversified, wise investments.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at [email protected] or (248) 386-9860.