Have you ever run across a situation as a commercial loan officer where you’re looking at an owner/user commercial real estate deal that makes perfect sense to you—but your loan committee doesn’t want to do the deal for one reason or another?
There are many reasons a loan committee may say no to a deal you believe in. Let’s explore my top 10:
1. The lender's belief that it must do 65% to 75% loan-to-value transactions for owner/users.
Solution: Educate the loan committee about the Small Business Administration’s (SBA) 504 loan program, where the institution lends on only 50% of the transaction, a certified development company (CDC) lends on 40% of the deal with a guaranty from the SBA, and the borrower comes up with 10% equity cash.
2. The belief that it's too much trouble to deal with the SBA.
Solution: The local CDC takes care of the SBA side of things, and the lender does its commercial real estate transaction as it normally would.
3. Lack of comfort with the 504 loan program’s 90% loan-to-value requirement during the bridge period until the CDC/SBA buys them out.
Solution: While the 90% loan to value occurs in the interim period, the risk is minimal because the CDC/SBA provides the takeout portion of the deal. If there’s no construction, the interim period lasts for only 60 to 90 days.
Even so, some lenders aren’t convinced. That’s ok. There are nationwide lenders that will do the bridge loan for a fee to complete the transaction. So the originating lender only has to be concerned with the first mortgage.
4. Some deals are too big and the institution has capital restrictions.
Solution: The SBA 504 Secondary Market. There are now a variety of players nationwide that will purchase or even direct fund a 504 first mortgage for the lender. Some will even take care of the interim loan.
A lender can book a loan to close escrow and then sell the loan to the secondary market. Or, a lender can simply have the secondary market lender “direct fund” the loan.
This way, the loan never touches the originating lender’s balance sheet. But the originating lender can sell the loan and earn a premium. Thus, it can solve a need for the borrower, retain the relationship, and earn premium income.
5. Some lenders won’t lend on certain industry classifications.
Solution: Once again, the lender can allow the secondary market lender to place the loan on its balance sheet, not the “selling lender’s” balance sheet.
6. The loan doesn’t match the lender's internal credit criteria.
Solution: Lenders can now sell loans for most credit criteria using one of the options available in the secondary market, assuming there’s CDC and SBA approval of the corresponding debenture.
7. The lender decides to sell a loan to a secondary market player and gets declined. This can happen because each secondary market lender has its own criteria. Some look only for higher credit quality deals or certain asset types.
Solution: Try another secondary market player. Or take the deal somewhere that offers a variety of options all at once.
8. The lender can’t offer rates that meet or beat its local competition.
Solution: Through the secondary market, lenders can offer fixed rates—for up to 25 years—using the balance of the secondary market, not the local selling lender.
9. The lender can’t match the competition’s terms.
Solution: Again, the secondary market offers 25-year, fully amortizing loans, which the local competition may not be able to do.
10. The lender only does 7(a) loans because the premiums are better than for other loans.
Solution: Determine what’s better for the borrower—a variable-rate 7(a) or a fixed-rate 504 with roughly the same rate?
We know what’s better for the borrower—and that’s our mission. We want borrowers to succeed so they can flourish, create jobs, and stimulate the economy, right?
So now you know what to do if your loan committee doesn’t want to do an owner/user commercial real estate deal. Many options exist to help you get past “no.”
WASHINGTON (5/4/15, UPDATED 1:45 p.m. ET)--Building on the success credit union advocates are having in getting data breach legislation introduced in the U.S. Congress, today CUNA launches a new call to action to garner support for the recently introduced House Data Security Act of 2015 (H.R. 2205).