Archive for December, 2009

Changes in Lending and Obtaining Commercial Financing | Commercial Real Estate | Wausau WI

filed under: Commercial Real Estate Market, Real Estate Investment Strategies posted on December 31st, 2009

Changes in Lending and Obtaining Commercial Financing:  The following are notes taken at a presentation by a regional bank to Grubb & Ellis | Pfefferle Commercial Brokers on December 8, 2009

Profile of Banking Past:

  •  Assumption that bank funding will be available
  • Little to no equity
  • Push for limit or no personal guarantee
  • High appraisal values
  • Many banks actively lending – - multiple bank competition for new projects
  • Lack of a strong dialogue and good communication between all parties
  • 2nd Mortgages as collateral to support projects
  • Mini perm loans with no principal payments for up to 3 years
  • Short lead times to obtain financing
  • Project only cash flow’s
  • Transactions done based on projections

 Profile of Banking Present:

  •  Need to plan, discuss, interview and strategize prior to seeking financing
  • Owner’s equity is a critical part of funding a project – equity needs to be cash
  • Personal guarantees are part of the banking terms.  Limited guarantee structures can be negotiated
  • Fewer banks active in lending
  • Capital costs are low – - historically low rates
  • Great opportunity for developers and bankers to collaborate
  • Many alternative low interest rate programs like the Midwest Disaster Act tax-exempt bonds for Winnebago County and 504 debenture bonds.  Both programs are designed for owner-occupied projects.
  • Global cash flow’s required
  • Debt service requirements of at least 1.15 on new projects
  • Very few, if any, loans are being done on projections
  • No more interest only loans

 What can be done:

  •  Early communication with lenders
  • Present deal to multiple financial institutions
  • Be realistic in your loan request
  • Foster good relationships with lenders of all types
  • Coach and educate both buyers and sellers as to the changing landscape
  • Become knowledgeable of government loan programs

The Commercial Environmet:

  • Regulatory crack down on commercial real estate lending.  Developer and investor loans can no longer exceed 300% of a bank’s capital position.
    • Community banks have historically obtained significant amount of their growth via CRE financing.  With new regulations, the ease of financing for some projects is expected to decline.
  • Commercial Mortgage Backed Securities markets and other alternative lenders are gone or have become less attractive.
    • $1.4 trillion in CMBS financing maturing over the next few years.  This could lead to significant sales activity.
    • Sellers’ expectations are still in excess of where the market is today. I would expect that over the next 6-12 months they will reset their expectations closer to market conditions.
  • Clients are now questioning their banks and their ability to continue to service their needs. 
  • Some banks’ capital position has deteriorated to where they must shrink their loan portfolios or significantly increase pricing at renewal to achieve new required return levels.
    • Expectations for some of the marginal/average deals to experience difficulty in renewal.  This may force an injection of capital to “right size the deal” or encourage sales.
    • At tenant renewal time, rent reductions are being negotiated due to the tenants seeing a reduction in their revenue, increase in CAM charges and overall deterioration in their business operations.  Landlords are more likely to accept lower rents versus a tenant loss.  Typical negotiation includes lower rent with a longer-term lease (or exercising of option).
  • Appraised values have seen approximately 30% decline in values compared to 2007 levels with an expectation for further decline.  5/10% additional drop in investment values; larger drops in industrial properties.
  • From 2007 to the end of 2010 will see in the area of a 50% drop in values of industrial buildings from the 2007 levels.
  • Speculative commercial financing, residential lot development and project redevelopment financing is essentially dead for now.
  • Banks are seeing 9-10% cap rates on 5-year lease terms.
  • Expectation of more stress in the commercial real estate industry.  New development will be minimal as vacancies are expected to increase.
    • Retail Sector should obtain some clarity upon completion of this Christmas time –Potential for additional shake out.
    • Industrial Sector should continue to see some contraction as company’s look to bring as much internally to reduce outside rental costs.
    • Office Market remains soft with tenants able to drive their rental rates.
  •  As we continue in this economic cycle, those with liquidity and/or low leverage will be able to capitalize on opportunities within the marketplace.
  •  Assessed valuations are not indications of values.

To view commercial properties listed by Ark Rhowmine , Commercial Real Estate Broker click here.
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Ark Rhowmine | Commercial Real Estate Agent | Broker
Grubb & Ellis | Pfefferle
P.O. Box 865 | Wausau | WI | 54402-0865
C: 715.297.1953 | O: 715.355.6060 | F: 715.355.6044

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