You land a prime piece of investment property. It’s the headquarters you’ve been looking for, and after years of paying rent, your business is in the position to own a building. Better yet, extra offices within the space have long-term tenants with no intention of leaving. The situation seems like a win-win — but what about the market? The property is there, but is financing available to purchase it?
“The marketplace has creative, attractive terms for the prudent investor,” says Steve Olsavsky, commercial loan officer at Brentwood Bank. “There is still money to lend, there are still projects on the market to invest in — there is still opportunity in the commercial real estate market.”
Not all banks have pulled back on financing, says Olsavsky.
“There is a perception that there is no money available in the market,” he says. “Some smaller community banks can tailor financing needs for specific projects, and they are looking to partner with investors.”
Smart Business spoke with Olsavsky to learn how business owners should approach real estate financing today and what to bring to the banker’s table.
What is the lending environment like in Pittsburgh today?
What people are reading in the national news is not necessarily true in the Pittsburgh marketplace. For banks that did not waver on credit standards, the lending environment is cautious but hasn’t changed dramatically. Financial institutions that maintain conservative lending standards and focus more on relationship banking — partnering with business owners to supply not just one loan, but also an entire suite of services — still have money to lend. And they’re looking to back prudent investments.
Who is taking advantage of commercial real estate opportunities?
Investors who are positioned to meet 20 percent down requirements on traditional commercial real estate loans can take advantage of market opportunities, and the real estate stock is plentiful. The same goes for new construction projects. In this region, projects are still moving forward for investors who have the cash flow and credit history to back them. Additionally, investors who can find properties that will provide steady cash flow, so long as borrowers meet today’s standards, should not wait to ‘seal the deal.’ If you’ve been considering an investment property or preparing to purchase real estate, now is the time.
How does an investor decide if a property is a ‘good buy’ in this market?
Investors hold real estate for different reasons. Some want to realize an instant return: they want the property to ‘pay them’ on an ongoing basis through a rent cash stream. Others plan to hold the property for 10 to 15 years and use it as headquarters for their businesses. They treat the property like stock. What we are not seeing in today’s market is ‘flipping,’ or purchasing a property only to renovate it and sell it immediately. As for determining whether a property is a good buy, the bank will prompt investors to evaluate these two factors: revenue flow from the property versus expenses; and net operating income compared to debt service on the property. That cushion should be at least 1.2 times.
What should borrowers bring to the table to secure a loan for investment real estate?
Banks will evaluate the project, and the investor. Expect to infuse 20 percent equity into the project and adhere to conservative financing terms and conditions. Before going to the bank, ask the property owner for a list of expenses spent on the property. Get a list of revenue streams from rent versus expenses over a two- to three-year period. Will the property generate a favorable net operating income? Be prepared to provide the banker with three years of personal/business financial statements and tax returns. Banks will want to know that there is plenty of cash flow and collateral to back the loan.
Any final tips for business owners who are ready to buy now?
Do your homework. Get a strong sense of the property’s income potential, and define your investment strategy: how long do you plan to hold the property? What are your goals? Is this a ‘home’ for your business or a building you plan to lease? Involve your banker in this planning. He or she can advise you on creative lending solutions and offer benchmarks to help you determine whether the property is a wise investment. Finally, do not halt important business transactions, such as buying a property. If you are prepared to invest, and you have the equity to put down and means to operate a building successfully, the market is ripe with opportunities. Approach a bank that maintained conservative underwriting policies who will partner with you. Smaller, boutique banks often go out of their way to accommodate good business clients.
STEVE OLSAVSKY is a commercial loan officer at Brentwood Bank. Reach him at (412) 409-9000 or SOlsavsky@brentwoodbank.com.