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Commercial real estate loans get closer looks

The days of exuberant commercial real estate lending are over.

At least for now.

As bank and thrift failures continue to grip an industry already operating in a sluggish economy, bankers and developers said the bar has been raised for commercial real estate loans.

That means borrowers must be prepared to have a convincing plan of how their commercial project will succeed and be willing to put more cash into it if they hope to get a loan approved.

For bankers, participating in such deals means more paperwork, more frequent checks of the borrower's financial situation throughout the life of the loan, and pressure by regulators to make certain that the commercial real estate loans they make won't default.

"Real estate values were continuing to increase and there appeared to be potentially nothing but upside," said David Harris, CEO of RelianzBank. "We've fallen back to a much more disciplined environment."

Disciplined is a softer word for scrutinized.

For more than a year, federal bank regulators such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have been warning bankers to watch their concentrations in commercial loans, concerned that commercial real estate values could follow plummeting housing values in certain parts of the country.

The degree of regulatory scrutiny banks are receiving over commercial real estate varies among bankers.

Some bankers said such deals are harder to do because of regulatory pressure.

Others said they are not difficult to do as long as a bank is following the fundamentals of lending, such as requiring borrowers to put down as much as 25 percent in cash on the value of the loan as well as requiring a secondary and in some cases, a third source of repayment.

"The requirements for more equity is the norm," said Dan Unruh, a partner at InSite Real Estate Group. "The whole industry is now requiring skin in the game from the developer, the borrower.

Unruh said he thinks bankers are getting mixed messages from Washington and regulators. On one hand, he said, they're told to lend money to help spur the economy. On the other they're being told to be very careful about the loans they are making.

"That's the thing that's causing gridlock in commercial lending," Unruh said. "I think lenders would like to lend, but these new constraints... are making it difficult to get things done."

Frank Suellentrop, president of Legacy Bank, said he doesn't think the pressure by regulators is so great as to give his bank pause on whether to do a commercial real estate loan.

"I would say they expect us to follow the policy and make sure we are looking at the project and focusing on things just a little bit harder than we did in the past," Suellentrop said.

Regulators' take

Kansas bank commissioner Tom Thull said his examiners haven't changed the way they view a bank's commercial real estate portfolio.

"We don't go in there with some preconceived notion and an attitude that they are all bad," Thull said.

But, Thull said "commercial real estate values are on every regulator's radar screen. There's a heightened state of awareness."

He said, for the most part, "bankers know that commercial real estate is difficult and challenging and are doing their level best to make sure there is documentation available to support those credits."

Jim LaPierre, regional director of the FDIC's Kansas City region, said it is fair to say that his examiners are putting more scrutiny on commercial real estate portfolios.

That's because at the start of the economic decline, examiners began noticing that when a bank's asset quality began to deteriorate, loans to home builders were "a major cause of bank asset deterioration," he said.

And as the recession lingers, that has spilled out to other areas of commercial real estate lending such as for projects involving retail, office and industrial space.

"We're simply taking advantage of what we're learning and using that knowledge in (examining) other institutions," LaPierre said.

But he said his examiners don't make assumptions about a bank's health if it has a high concentration in commercial real estate lending.

"I don't want anyone to have the impression that if they have a high concentration of commercial real estate they are a problem bank," LaPierre said.

"There are some banks that have been more successful" in managing their high concentration commercial real estate portfolio, he said.

LaPierre understands why there is a perception that commercial real estate lending has tightened up.

"We are not discouraging banks from making new loans," LaPierre said.

A couple of years ago, when the economy was growing, it was not unusual for a borrower to get 100 percent financing on a commercial real estate loan. There were more lax standards on loan terms, rates and requirements by some lenders.

"I've been doing this job for 23 years and I've never said it would be good to do a 100 percent (loan)," he said. "I would argue the problem was they could do them."

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