Smaller banks lend support in tight credit environment

While the credit crisis continues to challenge lenders on a national scale, regional, local and community banks continue to be active in commercial real estate lending, say sources close to the industry.

The tradeoff is stringent underwriting and lower loan sizes, but the money is there for the right projects and the right borrowers, they say.

“Probably some of your regional banks may be having a few more issues than some of your community banks, but if they’re not having serious issues that are primarily the result of A&D and single-family development loans, they’re in the market now,” said TJ Ownby, a principal at Tavernier Capital Partners in Tampa.

“They have lowered their horizons on the size they want to do. Ninety to 120 days ago, they were doing $35 million to $40 million deals. That limit today is probably about $10 million.”

Ownby said the smaller banks want to make sure they keep their liquidity. He added that pricing has gone up, and borrowers are being held accountable for their loans.

“The difference between the regional and community banks and the life companies we represent is almost all of them are looking for recourse - not lower than 50% and up to 100%,” he said.

“It isn’t like it was a year ago. They’re looking hard at liquidity and net worth and contingent liabilities. It’s not just a matter of getting a warm body to sign.”

Ownby said competition for funds has become fierce, with many investment options now rivaling commercial real estate for potential return.

“At the UF real estate conference, I told people that once again - at least on the permanent side - we’re seriously competing with the bond market. When 10-year issues of IBM are getting 8%, it’s tough to convince a chief investment officer to be lending on real estate at 7%,” he said.

And when loans are being made, terms are usually no longer than five years, Ownby said.

“Frankly, today I don’t think many developers want to go longer than five years. They believe there will be an opportunity to go back into the permanent market when it settles down,” he said.

Deal sizes at local and community banks tend to be limited, depending on the capitalization of the institution, but Thomas D. Wood and Company has been successful brokering transactions in the $2 million to $3 million range.

“We’ve closed probably 10 deals with community banks in 2008. They seem to be focused more on owner-occupied deals - something that doesn’t have much, if any, lease-up risk or sales risk,” said Doug Rozzell, principal in the Orlando office.

“We’ve been focusing on hitting a lot of singles.”

Rozzell said local and community banks are underwriting more like the big banks these days, requiring substantial equity, high liquidity, few contingent liabilities and full recourse. The active banks are either new banks that weren’t caught up in the subprime lending debacle or established institutions that have been prudent in their lending all along.

Lending ratios can be as high as 75% or 80% loan to value or loan to cost, whichever is lower, he said. But the typical deal is much lower. Rozzell said he’s working on a Family Dollar build-to-suit deal that’s coming in at no better than 70%. Interest rates are about 6% to 6.5%.

“They’re lending - but lending conservatively,” he said.

Rozzell said he expects local and community banks to remain active for the foreseeable future, provided they don’t experience any downturns in their own portfolios.

“From a community bank perspective, I agree that community banks are being much more selective on the transactions they want to finance, but they are looking to put additional money out in good loans,” said Clay Wilson, executive vice president of commercial real estate for Coral Gables-based BankUnited.

“Most of the community banks are looking for established, cash-flowing, income-producing properties.”

But even these are receiving increased scrutiny as lenders take a close look at the tenants and the health of their respective industries, Wilson said.

“My feeling is that office will get softer, and in retail most institutions are looking to make sure the properties are in primary locations. Industrial seems to be holding up well,” he said.

Charles Foschini, vice chairman of South Florida markets for CBRE/Melody in Miami, cautioned that smaller banks are not a long-term answer to the national credit retrenchment.

“In most cases, local and community banks - by their very nature - have a smaller loan limit. They are looking for a depository relationship with the operator or an offsetting balance to make the loan,” he said.

“If you’re a real estate investor, however, your net worth is in the buildings, not in CDs. The bank can’t pick up the relationship and still provide the financing he needs.

“Also, most of the loans originating on income-producing properties and value-add properties have been non-recourse. Almost all of these local and community banks are full recourse in nature. Most real estate investors are not willing to do that. It’s an absolutely different way of doing business.”