Financing Focus
Follow the Money
What are today’s most financeable deals?
By Jeff Rauth |
If
you are like many commercial real estate brokers these days, 85 percent of your
transactions are lease deals and only 15 percent are sales. Purchase
transactions are often a frustrating secondary source of income, as closings are harder to predict, due to the additional
components involved, such as value, environmental, title, and, of course, financing.
However, this situation may soon
change. The next 12 to 18 months will likely be one of the most active periods
for owner-occupied sales transactions since the post-recovery period following
the savings and loan crisis of the late 1980s. That’s good news for commercial
real estate practitioners, especially those who frequently handle deals under
$5 million.
Why the Uptick?
Several market forces currently at work foretell a stronger lending environment in the
next 12 to 18 months. The secondary market where commercial mortgages and Small
Business Administration loans are sold should remain strong. The commercial
mortgage-backed securities market will continue to experience rocky but brisk
growth. Nearly $41.1 billion in CMBS was issued in the first half of 2013,
according to Commercial Real Estate Direct, 2.5 times the amount during 1H12.
Despite a midyear slowdown, experts forecast around $65 billion in CMBS by
yearend, almost twice last year’s total. It is widely assumed that CMBS
issuance will eventually match prerecession levels of $400 billion annually.
Increasing
activity in the secondary market means easier credit for borrowers, and more
liquidity for banks and the overall market. Banks can free up loans on their
balance sheets, enabling them to re-lend capital that was previously locked up.
Credit parameters will continue to become more flexible and loan terms will get
better for borrowers. Lenders will compete harder to win deals: This is good
for brokers and borrowers.
Small
businesses — the lifeblood of the U.S. economy — are becoming more bankable
from a traditional underwriting perspective. They have paid down debt and have
more liquidity to use as the equity injection on property purchases. Increasing
revenues make them more attractive to lenders. Many companies have spent the
last five years cutting costs so their level of profit may even be higher than
in the past.
Currently,
90 percent financing is widely available with SBA loan programs. Borrowers that
have profitable businesses won’t have to tie up as much capital in their
commercial real estate, while still putting themselves in a position to build
equity and long-term wealth. Often, these loans do not take much more time than
a conventional loan and they are fully amortizing (up to 25 years), with no
balloons or call features. These loans may also include money for improvements
and equipment, as well as working capital, so borrowers can satisfy more than
just the real estate need of the business.
While
interest rates are ticking up, they will likely stay at relatively lower levels
as compared with prerecession rates. However, this should motivate
small-business owners to act soon since rates will eventually increase to more
normal, higher levels.
With
the general economy continuing to recover, small-business owners’ confidence
should grow with their sales levels.
Investing in hard assets such as commercial real estate will assist them in gaining
control of their business’s occupancy costs. Since we are at some of the lowest
real estate value levels in years, there’s a window of opportunity to purchase
real estate at this time, as these values will start to rise as the economy
continues to improve. In addition, inflation may be around the corner, so
having control of their real estate expense gives small-business owners much
greater control over expenses going forward.
Targeting Ready Buyers
Small-business
owners fit the profile for one of the most financeable deal types today:
owner-occupied, general-purpose properties in office, retail, or industrial;
with loan amounts from $500,000 to $3 million. This target is the most
attractive asset class for lenders. Banks are eager to lend in this asset class
and within these targeted loan amounts. Commercial brokers and sales agents who
focus on this target market should increase their sales commissions.
What
not to focus on are commercial investment property loans with no national
tenants, shorter term leases, loan amounts less than $3 million, in areas with
populations less than 50,000. This continues to be the no man’s land in
commercial real estate financing. Many of these loan requests have sat dormant
since 2007. It’s unfortunate for the owners, but the market reality dictates
lending options. You may find a local bank or two that will be interested in a
stronger version of the investment loan that is described above, but you are
not going to have a robust pool of lenders to work with to ensure a successful
closing.
Focusing
on what is easy to finance puts commercial practitioners in the position to
make a higher percentage of overall commission income for the foreseeable
future and earn a piece of the recovery.
Jeff Rauth
is vice president and business development officer for Titan Bank, a national
PLP, SBA lender. Contact him at jrauth@titanbank.com.