Las Vegas HCC
November 6, 2020
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In Tough Times Commercial Real Estate Borrowers Go Beyond Big Banks

Author: Administrator
By now we all know that the financial meltdown of 2008 has had a major negative impact on the banking industry around the world. Even usually rock solid commercial real estate has suffered because banks who are fighting for their lives have tightened the strings considerably.

Traditionally big banks have relied on commercial finance as one of their most profitable areas. That is because larger commercial projects have been seen as more reliably and objectively evaluated and risks more easily quantified than is the case with smaller projects.

Near the beginning of the downturn in the domestic real estate market in 2008, commercial real estate projects continued to find favor with the big banks. Commercial real estate loans were seen as a safer investment for companies with large capital reserves. As a result the commercial market continued to grow even as single family homes sales were plummeting.

In order to understand what is currently happening in the commercial real estate sector it is important to note the differences between commercial financing and residential financing. While they both involve an advance of funds based on the value of the properties involved, there are some significant differences in the way the risk is evaluated.

We all know that the collapse of the residential sector was brought on by mortgage companies making far too many irresponsible loans to people who could ultimately not afford them. The residential mortgage system came tumbling down like a house of cards when mortgages had to be renewed at amounts greater than the value of the houses, and at rates people could simply not afford to pay. Many of those people did the rational thing and walked away from their homes.

In several important respects commercial real estate loans are different. Most residential real estate loans are limited to several hundred thousand dollars. Commercial real estate loans on the other hand are usually for millions. Some commercial loans even reach into the billions.

While it is true that a bank or investment company is risking more on a commercial project, commercial lending is still seen as a safer investment. For the most part, the criteria for commercial loans are very stringent. Commercial borrowers are typically required to provide a substantial amount of collateral and must present accountant verified assets and income statements. This allows the lender to make an informed decision on a borrower's credit worthiness.

Because commercial products involve larger sums of money, the perception has been that smaller institutions cannot compete with large banks. But the events of 2008, and the adjustments that most big banks are having to make are having an interesting impact on commercial lending.

Big banks with extensive exposure to real estate markets are pruning marginal accounts in an attempt to limit their exposure to the sector as a whole. Whether this makes sense of not, it is typically what big banks do. In many cases whether a commercial deal looks good or not it will not go ahead with a large bank because they have decided their exposure in that sector is already too high.

This creates opportunities for small banks, lending institutions and brokers with connections to alternative sources of funding. These smaller lenders are not overexposed to the commercial real estate market, and are often willing to consider good deals that the large banks no longer find attractive.


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