Are lenders really making loans again?

One critical element for a healthy and prosperous commercial
real estate market is readily available and affordable financing. In the
economic boom of the last decade, debt financing was easy to find, lending
standards were easy, borrowers could do no wrong, and everyone made money. That
trend, like all business cycles, was bound to end sometime. Unfortunately, the
commercial real estate market turned much harder and much faster than almost
anyone could have anticipated and debt financing nearly dried up.

So what happened? Prior to the bust, lenders relied on the
income generated by the property being pledged as collateral as the primary and
sometimes only source of loan repayment. If a borrower was unable to pay back
the loan the lender could foreclose, sell the property, and get its money back.
Two interrelated events occurred that revealed the flaws in this process.
First, rental rates fell. As the Great Recession hit, many businesses
experienced decreasing revenues and could no longer afford inflated rent or
loan payments. Second, property values began to decline because the income they
generated was decreasing. Many borrowers couldn’t make their payments and
lenders were not able to cover their losses by foreclosing and selling the
properties. Many lenders experienced huge losses and reacted by tightening
lending standards to the point where qualifying for new financing became nearly

The good news is that many of these problems have worked
their way through the system. The economy is expanding, albeit slowly, and most
lenders are back on solid financial footing. Debt isn’t as easy to obtain as it
was before the bust, but lenders are making more loans.

Insurance companies, pension funds, conduit lenders, and
government-sponsored enterprises like Fannie Mae and Freddie Mac all have money
available for large investment-type properties. Many commercial banks and
credit unions are flush with cash and are increasingly motivated to make loans
on both owner-occupied and income producing properties.

Other unconventional types of lending have also gained
popularity since the bust. Private money lending has seen resurgence because
private money lenders are willing to take on more risk than a conventional
lender. Also, owner financing has spiked in situations where a seller has
enough equity in a property to offer financing to a buyer who may not qualify
for conventional financing.

One current trend is that lenders are placing a much greater
emphasis on a borrower’s ability to repay a loan from sources other than the
property being pledged as collateral. Don’t be surprised if your lender asks
for more information from you than you think is necessary when applying for a
loan. They are being much more thorough in their evaluation of loan applications.
Be patient, as it is likely your lender will continue to ask for more
information from you as they build their understanding of your situation.

Now is a great time to buy commercial real estate. The
economy is in recovery, property values are increasing, interest rates are near
historic lows, and lenders are making new loans. Contact a CCIM designee today
for expert advice on acquiring and financing your next property.

Dave Winder, CCIM, is a Director of Office and Investment
with Cushman & Wakefield | Commerce in Boise, ID and can be reached at dave.winder@comre.com.

*Originally published in the Idaho CCIM Resource Guide and Member Directory 2013


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