By Neill Fox, CCIM
Before I discuss the above topic let me provide a little background information on me, so one can better understand where I am coming from regarding commercial real estate financing in the current market.
In September 2008, I completed a 37-year career in commercial banking, with most of that time spent in commercial real estate lending. In September of 2012, I completed a 39-month term employment with the FDIC. During that time I reviewed commercial loans, mostly commercial real estate loans and foreclosed properties, in dozens of banks in Alabama, Florida, South Carolina and Georgia. I think I observed just about every conceivable mistake both a borrower and a banker could possibly make in underwriting, closing and servicing commercial real estate loans.
Most of the problems are now behind us, especially in Alabama. Those that are still on the books of some Alabama banks are well-recognized, proper loss reserves are established and usually work out plans or foreclosure plans are in place. Southpace Properties is working with a number of Alabama banks in both managing and selling foreclosed properties.
Now, let’s return to the question of how a local developer can get his or her small to medium sized project, be it retail, office, multi-family, or industrial project financed today. The big project loans, say $15 million to several hundred million, are being handled by the major regional and national banks and insurance companies who are working with large corporate developers. The best source of financing for local developers working on projects, say from two to ten or twelve million dollars, are local community banks.
These banks emphasize long-term personal relationships with their commercial customers. Community banks are generally not very interested in purely transactional business. They do not want to “bid” on your next development loan and get the business based on the cheapest rate and most liberal terms (that’s what got so many community banks in trouble in the first place).
A good community bank will want your personal banking business, as well as your development loan business. Rather than bidding for business, they will want to sit down and negotiate a mutually beneficial loan for your next project, one that is fair and profitable for both parties, and is conservatively underwritten.
This is very different than dealing with the Atlanta regional office of JP Morgan Chase Bank and beginning the long process of arranging a development loan of $250 million for a high rise office tower. That loan will be participated among three to five major banks, with several consultants involved, probably four or five law firms, a national appraisal firm and any number of other related parties.
Community banks, or most of them, have weathered the financial storms of the past several years, having made their share of mistakes. The ones that made too many mistakes are simply not here anymore. The survivors are starting to lend again, on a conservative and reasonable basis.
So what does this mean? It means that the banks that have survived the turmoil of the past several years now well understand the mistakes made by themselves and other community banks, and they are not about to repeat them.
They are all about getting back to the basics of sound commercial real estate lending to people they know well, and people that they know are deeply knowledgeable about their own business. If you are a developer, you are not new to the business. You have good development experience, you have leasing and property management capabilities and strong tenant contacts. You know what you are doing and have a track record to back that up. This is true for developers in all aspects of commercial real estate. Pioneers get arrows in their back and today getting development financing is hard for pioneers.
Bankers are returning to the well-known five “C’s” of credit, which leads to sound underwriting on every customer and every deal. The regulators are carefully reviewing banker’s underwriting policies and procedures and are insisting on conservative and realistic project loan underwriting, which the five C’s represent.
The five C’s of credit are: Character, Capacity, Capital, Conditions and Collateral.
For the complete original article, please reference our 2012 newsletter here.
Southpace Properties, Inc. is Alabama’s largest independent commercial real estate firm. At Southpace, we add value to the use and ownership of commercial real estate through services such as office, retail, land, warehouse and industrial sales and leasing, tenant and landlord representation, development, consulting, investment sales, property management and construction management. With 12 CCIM designees, Southpace has the state’s highest number of CCIM accredited brokers under one roof.