For decades, business owners who wanted to purchase a commercial property picked up the phone and placed a call to their local bank. You might remember when phones had round dials instead of buttons and you had to somewhat carefully place the call.
Times have changed. Rotary and push-button phones have been replaced by digital devices. In today’s want-it-right-now economy, e-mail or a smartphone app may be the preferred way to connect to financing options. Within this new paradigm, commercial real estate lending is rapidly changing and mortgage brokers should be aware of the nonbank lenders that are leading the charge. Increased specialization, the need for speed and a marketplace that wants changes in customer experiences are among the many factors impacting the commercial real estate industry.
In that fast-pace, changing environment, there are few businesses more risk averse than banks, which often means they can be slow to embrace innovative deals.
Conservative bankers at big institutions prefer to bet on sure things, and most entrepreneurs are not in this category. Too often, bankers aren’t concerned about helping business owners achieve their dreams. It is the commercial mortgage broker’s job, on the other hand, to do just that as part of their service to clients.
Commercial mortgage brokers often say they like working with nonbank lenders that are straight talkers and don’t string along deals. When a nonbank lender turns down a deal, they usually do it quickly, and they give a reason why.
Start with specialization
Big banks constantly need to grow to satisfy shareholders. They frequently accomplish this by adding new products and services, and by building interconnected business relationships with their clients. Banks want your business checking account and line of credit, your personal savings account and home mortgage loan, as well as your boat loan and maybe even a shot at your retirement savings.
Banks also may want a business owner to provide an inside line to their employees, too, to sell them the same products. Commercial real estate lending sits somewhere in the midst of these various offerings. Many banks and credit unions will only do a handful of commercial real estate loans per year, and the requests that are funded may involve doing favors for those who are funneling a lot of other business toward the bank.
Nonbank lenders don’t get paid until a deal closes, so urgency and speed are paramount.
Nonbank lenders, in contrast, often focus on one or two niches or areas of specialization. A nonbank lender will complete dozens, if not hundreds, of transactions per year and builds unmatched experience after seeing it all in the world of commercial real estate finance. When you consider that many business owners only buy a property once or twice in their careers — and it might be the biggest purchase they ever make — specialization is crucial in these instances.
Get up to speed
Another area of distinction is speed. With respect to the typical bank description and the banker who is earning fees on several existing accounts, there is little incentive to get your commercial real estate deal done quickly. Sure, the bank can make money, but no reason exists to fund the request quickly.
In fact, for the borrower, the opposite is likely true. Banks are traditionally conservative and want to be sure your proposal is an ideal match for their lending criteria. Further, some banks and credit unions still operate under a loan-committee model that forces their clients to wait as long as a month for a decision — or longer if they have questions that need answers.
The nonbank business model is completely different. Nonbank lenders don’t get paid until a deal closes, so urgency and speed are paramount. Since they are not drawing fees from any existing bank accounts, they are incentivized to complete a deal. They are not doing a deal as a favor and will analyze a transaction as quickly as possible because it is in their best interest — and that of the borrower.
Interact and simplify
“Customer experience” is a popular catchphrase of late, but how nonbank lenders interact with mortgage brokers and borrowers will always be critical in commercial real estate finance. As previously mentioned, the traditional banking relationship has changed.
Many in Generation Z — those born after millennials — will step into a bank branch to open an account but will likely never know their banker. It is not just young people who expect financial-services professionals to cater to them. Business owners of every stripe demand both speed and a high level of service.
Innovation in most industries comes from small, nimble organizations. In the world of commercial real estate finance, this is defined by nonbank lenders.
Today’s commercial mortgage borrower wants the transaction to be as simple as possible.
Nonbanks are competing in a marketplace where huge numbers of transactions that previously required human interaction can now be managed with an app. While we may be a few years away from buying a property without using a desktop computer or a scanner, those days are certainly coming.
Savvy consumers have low tolerance for hassles, so the customer-service experience had better be great. Frankly, this is an area where nonbank lenders have traditionally shined. Nonbank lenders, without the typical red tape of a traditional bank, have stolen many customers by being faster and more accommodating to busy clients.
For lenders that don’t have huge marketing budgets or the luxury of millions of customers to mine for loan prospects — like big banks do — creativity is a must. Nonbank lenders have learned that innovation can be a key advantage.
The first mobile app for U.S. Small Business Administration (SBA) 504 loans, for example, was created years ago, right around the time apps became a popular thing. More recently, a commercial real estate loan-evaluation system that uses artificial intelligence to provide loan approvals within two hours was developed.
The system enables borrowers to fill out key information fields, then drag and drop financial documents into the secure file system. The software then reads documents, such as tax returns, financial statements and business-debt schedules.
The system reviews the documents, structures the loan, applies the real estate transaction data to underwriting guidelines for qualifying deals and then produces a detailed loan-approval letter. This represents a truly disruptive innovation in commercial real estate finance. What normally takes two to three weeks has been reduced down to mere hours. Innovation in most industries comes from small, nimble organizations. In the world of commercial real estate finance, this is defined by nonbank lenders.
• • •
The shift is clearly on when it comes to commercial real estate lending. Banks are lumbering along and attempting to compete with nonbanks in this new era, and it’s critical that mortgage brokers make the right choice when contacting a lender for their next deal. Let’s hope they aren’t using a rotary phone.