CCIM Feature CCIM Education

Lending Decisions

CCIM Institute’s courses add value for bankers in commercial real estate.

During the past three decades, community banks have substantially increased their presence in commercial real estate lending, according to a 2012 FDIC Community Banking Study. Between 1984 and 2011, commercial real estate lending doubled from 13.2 percent of community banks’ portfolios to 26.6 percent. And the percentage of community banks specializing in commercial real estate has grown from 2 percent to 24 percent.

The increased presence in commercial real estate signals a need for increased education for bankers who deal with commercial assets. Many in the lending field have found that CCIM’s course concepts meet that growing need. In particular, CCIM’s cash flow model, which is a key component of CI 101 - Financial Analysis for Commercial Real Estate, has been useful in providing documentation for commercial real estate lending, says James R. Purgerson Jr., CCIM, senior vice president of Citizens Bank & Trust in Baton Rouge, La. “With increased regulation, it’s more important than ever for community bankers to document their commercial real estate lending decisions,” he says. “Bank examiners really like the CCIM product and analytical tools. They like the supporting documentation it provides.”

Purgerson says that the cash flow model is so helpful that he requires his new lenders to learn it. “When we underwrite a loan, we plug numbers into the cash flow model and use it as an addendum to our credit analysis. It’s useful backup if the deal is audited by the FDIC, external/internal auditors, or state regulators.”

Below Purgerson explains how the CCIM education can help community bankers make solid lending decisions.

CIRE : As the commercial real estate market recovers,many lenders want to increase their commercial real estate loan volumes. What challenges do community banks face in vying for commercial real estate loans?

Purgerson: Commercial real estate is attractive to community banks, but national and regional banks’ interest rates are more competitive, so a lot of times we’re up against larger institutions offering better rates. At the same time, bank regulators scrutinize commercial real estate lending portfolios because most bank failures are caused by poor underwriting and aggressive commercial real estate lending.

CIRE : How does the CCIM designation help to differentiate your bank?

Purgerson: Lending is a commodity. To be competitive, you want to provide extra value. With the CCIM skills, you can provide perspectives that your clients may not have considered.

CIRE: How can community bankers utilize CCIM’s cash flow model?

Purgerson: Community bank lenders can use the model to make more-effective lending decisions and explain those decisions to their boards. In the current regulatory environment, it is more common to have a commercial real estate loan audited, especially among community banks. An FDIC examiner from Florida told me the CCIM approach for analyzing investment and rental property is valuable when trying to ensure quality lending practices in this area. The cash flow model asks for a lot of inputs; the output gives you a true picture of the current financial viability of a project.

CIRE: How do you use the cash flow model in your day-to-day business?

Purgerson: I use the model to project cash flows in one to five years. The model takes into account factors such as vacancy rate and debt coverage ratio. I also use it to test different assumptions. Even if a property isn’t leased, the bank wants to see what cash flows would look like if the property was 80 percent leased.

CIRE: What are the intangible benefits to using the cash flow model?

Purgerson: The other day a broker told me, “You get it.” After completing the CI 101 course, bankers understand the commercial brokerage perspective. Also, when a developer walks into your office looking for financing you know you’ve run the same numbers. Bankers who’ve completed CI 101 have the skills to decide if they should lend on a project.