Commercial Magazine

Banks Are Still Lending

Traditional lenders remain in business, but borrowing standards are constricting

By Garry Barnes

During these times of un-certainty, it is often said that banks are not lending. But the fact is, banks are always lending — for two main reasons. First, a loan portfolio generates a sizable share of a bank’s overall revenue and an institution cannot afford to allow its loan portfolio to shrink. Second, lending is part of its legal obligation.

The Community Reinvestment Act (CRA) was enacted in 1977 to prevent redlining while persuading banks and savings associations to meet the credit needs of their respective business communities. CRA regulations require federal regulators to evaluate the record of each institution’s progress, and to analyze that record in evaluating applications for charters, mergers, sales and new branch requests. Furthermore, the Federal Reserve and other regulators encouraged banks, credit unions and other institutions in March 2020 to offer responsible loans to consumers and small businesses affected by COVID-19.

As in any economic downturn, banks have become more restrictive by tightening lending standards and demanding higher minimum credit scores. According to CBRE, the average debt-service-coverage ratio in third-quarter 2020 was 1.59, up from 1.38 year over year. The average loan-to-value (LTV) ratio at that time was 61.5%, down from 67.2% a year earlier. These factors do not mean that banks are not lending. They simply mean that commercial mortgage brokers need to work harder with their clients to get banks to say “yes.”

Just because the borrower loves the subject property does not mean the bank will share the same vision.

Working smarter

From the very first conversation with their client, the broker’s objective must be to obtain all the needed loan documentation required by the bank. It is an exhaustive list. So, start as early in the process as possible.

The broker’s objective is to collect the required information in an attempt to confirm the viability of the project. The broker should confirm the exact purpose and use of the loan proceeds. This also will be the bank’s first question. For example, does the borrower intend to buy an office building, build a new multifamily property or remodel an existing building?

Simultaneously, the broker must determine if a specific building has been located. If so, they must determine the status of the negotiations, whether an offer and letter of intent is in play, or whether the property is already under contract. All parties must have a clear vision for what the project entails, including a step-by-step action plan and a timeline to achieve the desired results. This process should be broker-driven.

More specifically, all banks will want detailed information about the property as early in the process as possible. This includes the property type, location, price, the requested loan amount, the net operating income (if applicable) and the LTV.

Just because the borrower loves the subject property does not mean the bank will share the same vision. The best way to overcome the bank’s concerns is to complete a thorough investigation and due diligence on the property. The more that is known about the subject property, the greater the probability of quickly dispelling the bank’s worries.

Banks also will require so-called “organizational documents” early on. These documents — which include a certificate of incorporation, an operating agreement, a good-standing certificate of partnership agreement and resolutions — provide evidence of the borrower’s organizational structure.

The broker should make it clear to the borrower that the lender will likely ask for additional documentation during the application and approval processes. In fact, this back-and-forth phase can often be one of the lengthiest parts of obtaining a commercial mortgage. Keep in mind that the faster the documentation is provided, the faster the loan can be approved. Be patient and responsive. You also should have a thorough understanding of the bank’s lending practices and processes, as well as the strengths of the bank staff. If the bank loan officer is experienced, the entire process may be streamlined.

Only by having a clear knowledge of the borrower’s financial picture can the broker make an intelligent decision about the creditworthiness of the transaction. Once you have a clear understanding of how much money is required to complete the project and how the loan proceeds will be employed, then it is time to start the search for a suitable lender.

A successful commercial mortgage broker must be more than an order taker. It is essential to build relationships that are more than transactional.

Building relationships

Identifying the best bank is often more art than science. This is where the broker’s market knowledge comes into play. The broker should have insight regarding the lender’s policies, practices and current portfolio needs. If the broker can select a bank that has the capacity and appetite for the loan proposal in question, a great deal of time and effort can be saved. Any wasted time or money could mean missing a closing date and possibly losing out on the subject property.

A successful commercial mortgage broker must be more than an order taker. It is essential to build relationships that are more than transactional. Ideally, the broker will serve as a sounding board for their client when vital choices are under study. Developing strong relationships will pay huge dividends in the future.

Without a doubt, a broker is a dealmaker. This is the core of the brokerage business, but clients typically welcome the broker’s help in making better business decisions. The broker can provide invaluable insights, and investors want a broker who can provide alternatives and options. Ultimately, the most important aspect of the broker-client relationship is the ability to deliver in a timely manner. Today’s world is getting faster and the typical client expects a quick “yes” or “no.”

A good broker will not have to take the application package from bank to bank. They will have completed research in advance about a bank’s lending criteria and its appetite for the subject project. As the saying goes, time is of the essence. A commercial mortgage broker has one objective — to do a masterful job of representing the borrower all the way up to the point that the lender says “yes.” ●


  • Garry Barnes

    Garry Barnes is managing director of PW Partners Consultancy, headquartered in Salt Lake City, and is a freelance writer. He is a former president and CEO of banks in Arizona, California and Utah. He has taught at the university level, and is a frequent writer and lecturer on banking, finance and real estate matters. Barnes has served on the U.S. Small Business Administration’s National Advisory Council and received the SBA Arizona Financial Services Advocate of the Year award.

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