Richmond Property Management - Great Homes, Great Apartments, Great Prices Phone: (804) 282-1877
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Better know the new ground rules when it's time to renew your loan.
Lately, we've noticed some confusing changes in how banks are lending and servicing our commercial real estate loans here in Richmond. And we've seen some unexplainable rates hikes, even though these are good loans, and interest rates in general are at an all-time low. What's really going on?
With our clients' interests in mind, KRS Holdings decided to investigate, and asked one of our trusted advisors, Bill Bien, Senior Vice President of First Capital Bank to help.
He explained: "Though, in general, the rate environment is flat and probably won't be increasing any time soon, banks have had to compensate for the higher overhead of the increased loan management dictated by the federal government. There are now more stringent government regulations in place and all transactions are more closely scrutinized.
Due to the present economic environment, the real estate market and the regulatory environment, banks have had to almost double their loan loss reserves. Additionally, banking regulators are pushing banks to maintain higher levels of capital. The combination of higher overhead from increased regulatory compliance, increased loan loss reserves, higher capital levels and losses on non-performing loans have pushed up the cost of borrowing.
Banks are now in a quandary. The reality is that community banks must lend money to create revenue, however, in this regulatory and real estate market, they are compelled to lower the ratio of real estate loans to other loans carried in their total portfolio. On one hand, banks need to retain good customers; on the other hand, they won't mind your shopping for better rates when it's time to renew your real estate loans."
Other lenders need to make loans, such as a newly established banks, insurance companies and Fannie Mae. You may potentially be able to get a substantially better rate and better terms here. (As of this newsletter, Fannie Mae commercial loan rates were below 6%.) A community bank may be thankful that you migrated your loan to another lender, and the switch may actually be beneficial to both parties.
Bill Bien advises you to think like a banker when you negotiate your loan terms. Offer your banker creative solutions to justify lowering your rate. The stronger you can make your loan or the lower you can make the loan balance the better.
He offers the following tips:
Consider a shorter amortization (10 to 15 years rather than 20 to 25 years).
Consider paying down the loan for a rate decrease or adding additional security, even if the collateral is other real estate holdings.
Ask about a different rate structure that adjusts the loan to eliminate future increases.
If your loan is coming up in the next year, talk to your banker now to work out the best plan for you.
If you need to migrate your loan, but a prepayment penalty is indicated, the bank may be willing to waive it.
If you are interested obtaining a new commercial loan, Bill Bien offers this advice:
Loans are essentially no longer available for speculative development.
To apply for any new loan, be prepared to put in substantial equity.
Your project must demonstrate immediate and sufficient cash flow to cover the loan payments.
There is still some attractiveness to banks for owner-occupied buildings (owner occupies 51% or more of the building space).
There is still some attractiveness to banks for multi-family residential projects. (Talk to KRS Holdings if you are considering this.)
In summary, banks are not intending to take advantage of those who can pay. They are merely attempting to survive like the rest of us -- using whatever resources are available to them. KRS has truly enjoyed our relationships with our community bankers over the past 15 years. Without some of these wonderful people, neither us nor our clients would have had the opportunities for good fortune we have enjoyed through the years.
To discuss how our property management services might benefit you, contact |
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