How to Find a Commercial Lender During the Great Commercial Lending Drought
First I’m going to depress you, and then I’m going to give you some terrific, practical tips.
The Tightest Commercial Mortgage Lending Market in 25 Years
Therefore, if you absolutely must obtain a commercial mortgage loan today, well … there is no way to sugarcoat it … your timing sucks.
Conventional commercial mortgage lending is down by more than 70% compared to 2006. The entire conduit industry has completely evaporated. Investors no longer want to buy bonds backed by commercial mortgage loans (commercial mortgage-backed securities).
The conduit industry used to make over 50% of the total dollar volume of commercial mortgage loans. Imagine that – an industry that used to make around 53% of all of the commercial mortgage loans in the country has been effectively nuked off the planet.
The savings and loan industry has contracted almost out of existence. There are only two surviving mortgage REIT’s in the entire country that are still making commercial mortgage loans today, and both of them charge hard money rates.
This leaves only the commercial banks and a handful of hard money lenders still making commercial mortgage loans.
Banks will make you a conventional commercial mortgage loan today, but only if you are a big depositor. If you are not a “good bank customer” (someone who maintains huge cash deposits with the bank), your commercial loan will probably be cut back from 75% loan-to-value (LTV) to just 55% to 63% LTV. Your credit will have to be absolutely perfect, and your commercial property had better be pretty snazzy-looking. And, of course, it will have to be fully-leased.
What if your deal has a small black hair? You may have to pay hard money rates. Ouch.
So What Should You Do?
If your own bank won’t help you, try another small bank in the town where you live. Be sure to sit down with the bank president (branch manager) and offer to move all of your bank accounts to his bank if he accommodates your commercial loan needs. Bankers are always looking for new deposits.
What if you don’t maintain large enough cash balances to attract a bank? You may want to refinance your personal residence and just store the cash proceeds in your checking account until after you find a bank willing to make you a commercial loan. Remember, banks will only make you a loan when you are sitting on a pile of cash.
Commercial Lenders Like to Make Local Loans
Match the Size of Your Loan to the Size of the Bank
Be Prepared to Submit Your Commercial Loan Application to 50 to 150 Lenders
Therefore, you will want to convert your commercial loan application into a PDF format that will be easy to submit to scores of different banks using email. Microsoft Word and Corel Wordperfect both have the ability to take a normal document and make it into a PDF.
If you don’t know how to create a PDF, you can submit your four-minute mini-app to hundreds of different commercial lenders using C-Loans.com. It’s a very efficient system. You can also convert your C-Loans app into a PDF that you can download to your PC.
What Should Your Loan Package Include?
If your PDF is larger than four pages, it will not fit through the size filters of most commercial banks, so keep your initial package tiny.
Be sure to include at least one color photograph of the property. Make sure it’s a very flattering picture of your property.
You Should Name Your Property
But be careful of the name. The City of East Palo Alto, California is a low-income, high-crime area that competes annually for the title of Murder Capital of the United States. If I were submitting a commercial loan request located in East Palo Alto, I wouldn’t call the deal, the “East Palo Alto Apartments.” Such a name only conjures up an image of some gang-banger leaning out a car window and spraying a playground with machine gun bullets. Instead, I might name the property, the “Shady Oak Apartments.”
Look for Government Commercial Loan Programs
But there is another government loan program about which you may not have heard - U.S. Department of Agriculture’s (USDA’s) Business and Industries (B&I) loan program. This is a government guaranteed loan program for commercial and industrial properties located in rural areas.
The USDA B&I program is modeled after the SBA loan program. The Federal government will guarantee up to 90% of an eligible loan, in exchange for a guarantee fee. The loan must still be made by a bank, but since a bank only has 10% of the loan at risk, the bank will often make a commercial or industrial real estate loan up to 90% loan-to-value.
A rural area, for this program, is a rural city or town with fewer than 50,000 residents. The city or town cannot just be a small city located in a highly populated area, where one city runs into another. It has to be an area with a low population density. The USDA’s site has a map of every town in America, and you can plot your property on the map and see if it falls into an eligible area.
Now the really cool thing about a USDA B&I loan is that the property does not have to be an owner-user building. It can be a rental property.
Since banks are making few conventional commercial real estate loans, you should try hard to fit your loan request into the parameters of some government loan program – such as SBA loans, USDA loans, Fannie Mae or Freddie Mac apartment loans, or one of HUD’s apartment construction loan programs.
Where to Find Commercial Lenders
Since just about every bank will make a commercial real estate loan, if the borrower promises to be a big depositor or if the loan is located close to the bank and it is very, very secure, we could even shorten the question to, “Where can I find banks?”
Unfortunately 20 to 40 banks may not be enough. During the Great Commercial Lending Drought, you may have to submit your deal to 50 to 150 different banks.
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