Other than local banks and credit unions, many banks just aren’t making commercial loans. It seems like every day we talk to a qualified borrower with a great commercial property who can’t obtain financing. Some of these borrowers have had a good relationship with their banker for many years, have an excellent payment history, yet are still being turned away?
But what about the T.A.R.P money from the government that is supposed to keep banks lending? Why then aren’t banks making commercial loans?
Many of the banks that are still in business, desperately need to raise capital via stock issue. And investors won’t look at a bank’s stock right now unless no more than 20% of its portfolio is secured by commercial real estate. This means that banks must get this ratio down to attract investors to purchase their stock. This is one of the many reasons why so many banks just are not issuing new commercial loans.
For real estate investors looking to scoop up commercial properties sold for pennies on the dollar, they are quickly finding out that cash is certainly king in the current market. Most banks are requiring a 30% down payment, based on the purchase price, plus an additional cash deposit of 20% of the loan amount.
Just to illustrate this point, let’s say you found a 5 unit multi family property being sold for $500,000 when the FMV is more like $850K to $1 MM. You go to your friendly banker to obtain a loan. The banker asks for 30% of the $500K purchase price as a down payment. The banker then wants an additional 20% of the loan amount as a cash deposit at the institution. So now let’s do the math:
70% of $500K = $350K (This is what your bank will lend you on a property that is probably really worth $850-$1MM).
20% of $350K = $70K (This is what the bank will ask for as a cash deposit in order to make you the loan of $350K)
Total = $220K cash out of pocket to get the loan for $350K.
Does this make any sense? But this is the reality of conventional lending.
This is why so many commercial borrowers are using non-bank sources of financing such as hard money and private money loans. Investors prefer to pay the higher interest rates over the short term rather than parting with so much of their precious cash.
Any comments on this? Please leave them below.
Posted by Corey Curwick on August 18, 2010