BANKS ARE EXPECTING A STRONG YEAR (2019) FOR CRE LENDING
The Mortgage Bankers Association (MBA) recently reported another stellar year for commercial/multifamily mortgage originations in 2018. Although the MBA will release final data next month, results from its fourth quarter mortgage originations survey point to volume that could be 3% higher than the record $530 million reached in 2017.
Banks are facing more competition. Growth of non-bank lenders has added a whole new dimension to the competitive landscape, particularly in bridge and construction financing, notes Kathleen Farrell, executive vice president, line of business executive, commercial real estate, at SunTrust Banks. There are multiple bids on any opportunity or new project that needs construction financing. According to the MBA, GSEs and life companies increased loan originations by 16 percent and 10 percent respectively in 2018. Debt funds also saw a big jump of 29 percent from an estimated $52 billion in 2017 to $67 billion in 2018.
Counsel Mortgage Note: If you’re only looking at banks for your CRE mortgage financing, you’re limiting your market search. Bank lending actually took a drop of 10% in origination volume last year, while life insurance companies and debt funds increased volume 10% and 29% respectively.
Banks were riding good momentum coming into 2019, with Q4-18 mortgage originations up 5% year-over-year, according to the MBA. Although that increase is lower than the broader market, which saw an estimated 14% jump in mortgage originations during the last three months of 2018.
The core property types that are most in demand continue to be multifamily and industrial, followed by office, hotels and then retail. However, banks are exhibiting caution even for favored property types in markets that have seen high levels of construction. Lenders are drilling down to look at specific submarkets and micro-markets to determine if there are concerns about oversupply. Community and regional banks remain very active in commercial real estate lending; in some cases, more active than some of the national banks. In addition, community and regional banks are stepping out and doing larger and larger deals in terms of loan amounts.
One important backdrop for the current bank lending climate is that bank commercial and multifamily loans continue to perform extremely well. The delinquency rate for those bank loans that are 90+ days past due is near record a low of 0f .48 % as of Q3-18. Banks historically have had “measured confidence” about lending as long as their delinquency rate remained low, although to my mind this is like driving forward looking in the rear view mirror.
One of the notable trends to watch in the banking sector is that some banks are doing more long-term, fixed rate loans with 7 or 10-year terms for clients on a select basis. For example, SunTrust Banks started developing a permanent loan product about two years ago. SunTrust’s longer term fixed-rate loan product started to gain momentum in 2018, as interest rates began to rise. We might expect, however, that the Fed’s announced “patience” in continuing it’s previously announced 2019 rate increases will likely trigger a shift in borrower demand back to variable rate loans.
Looking ahead to 2019, banks could face more headwinds in construction financing due to the late stage of the cycle and rising costs. Banks have been pretty disciplined this cycle in maintaining their underwriting standards when they evaluate construction loans. As the cycle runs this year into 2020, expect underwriting criteria for construction projects to become more strict and covenants more demanding.
On the positive side, however, there is still a lot of equity targeting CRE and what appears to be a steady transaction pipeline that will require financing.
Money Center Banks Cutting Back in 2019
The nation’s largest banks are being more cautious with their commercial real estate lending, based on what they are saying on their earnings conference calls.
The same headwinds that slowed bank lending last year are extending into 2019, as economists debate how much longer the current economic expansion, on pace to reach a record stretch in July unless the effects of the government shutdown stop it sooner, can continue. Interest rates are projected to keep going up and institutions face stiff competition for deals from non-bank lenders.
Additionally, borrowers are prepaying loans sooner as properties trade hands, slowing the growth of loans on bank books.
Marianne Lake, CFO at JPMorgan Chase & Co., reported commercial real estate loans were up 2% in the Q4-18, less than its recent pace of about 3.9%, according to data from the FDIC. That was below the industry average of 4.5%.
“In mature markets we’re again being pretty prudent,” Lake said. “I won’t call it tightening, but being very selective.”
Lake added the bank is “tightening” construction lending.
Wells Fargo gave a similar outlook as JPMorgan for 2019.
The Federal Reserve Board’s latest Beige Book, an anecdotal look at conditions around the country, suggests a better lending outlook from smaller banks, which reported steady demand for commercial mortgages.
Commercial real estate loan losses are still minimal, as underlying fundamentals remain strong.
The Mortgage Bankers Association is reporting it expects another strong year of loan originations.
“Mortgage bankers look to 2019 as another strong year for the commercial and multifamily mortgage markets,” said Jamie Woodwell, MBA’s vice president of research and economics. “The majority of top firms expect that ‘strong’ appetites from both lenders and borrowers will drive commercial mortgage originations higher.”
Mixed messages? To be sure. If the top 2 mortgage lenders reduce their appetites for CRE mortgage lending, that leaves a notably large gap to fill to meet demand. Smaller banks, be they community or regional, are more niche oriented than the larger money center banks who address the market with a broader brush. We all know WF, BofA and Chase, but who knows the Bank of Hemet and what their sweet spot is? (besides Counsel Mortgage) Competition will heat up for the remaining players in the market, and terms and conditions will have more “live fields”.
It’s shaping up to be a hectic year, but that can also mean profitability for those who can navigate the terrain. Markets hate uncertainty – it forces many participants to the sidelines. And in the meantime opportunities pass. If you’re going to stay in the game, we suggest you not go it alone. Find a skilled and trusted ally who will work in your interests, not the lenders. If this is you, we suggest you give us a call.
When considering financing of a gas station, it's important to recognize whether you're financing a business, the real estate, or both. If you're buying an operating gas station business in Arizona, you'll likely find both the business and real estate being offered for sale - the real estate will look like an asset of the business. If you want to buy the business with the real estate, this will greatly enhance your ability to obtain financing. Enhance because the real estate provides valuable collateral that lenders prefer - 1 of the other C's.
For buyers of gas station businesses with the real estate, there are still only 3 sources of capital: the buyer's own equity (an all-cash buyer), the seller (known as a seller carryback), and an SBA loan. The seller carryback is the easiest to structure, most flexible for possible terms, and least attractive to the seller resulting in either a higher price being paid for the business, a higher rate of interest being charged that an SBA loan, or both.
For gas station financing, SBA loans come in two varieties, a 7(a) and a 504. For financing the business and the real estate, either a 504 or the 7(a) is available, or they may be used in combination. The complete particulars of each loan, how they compare, and which may be best for any particular situation is left to individual discussion. Contact us if you'd like further information. A few easy points of distinction and application: The 504 loan is really 2 loans, 1 made by the SBA directly, and 1 by a bank. The percent of down payment for a 504 on a special use property, e.g., a gas station, is typically 15%. The amortization period for the SBA's portion of a 504 loan is typically 20 years, but can be 10. For a 7(a) where the business includes the real estate, the amortization period is 25 years. Both the 504 and the 7(a) have specific qualified use of proceeds, i.e., what can be financed with each type of loan. In either case, the borrower's experience in the gas station business is still a critical fact; adding real estate as collateral doesn't mitigate this risk in an operator. If this applies to you, call us for preliminary discussion. One thing to note about SBA lenders, either bank or non-bank lenders: they tend to specialize, or favor, either the 7(a) or the 504. They can usually do both - they just choose not to. If the Business Development Officer, Loan Officer, or Relationship Manager (all the same function, just different titles), work directly for the lender and not a broker, it's unlikely you'll be offered both types of loans.
How large a loan can you get? The current ceiling for both 7(a)s and 504s is $5,000,000 in each case. These can be combined for up to $10,000,000. Also, they are not limited for use on just 1 property and/or business Theoretically, you can build your gas station portfolio with SBA loans, if you do it right.
A note on SBA guidelines. SBA guidelines are reviewed an amended as-needed annually as part of the Congressional budgeting process. The SBA is funded annually for it's allocation of loans and guarantees. Meaning the $5,000,000 limit is subject to change, as are the other parameters. For SBA loans, even though there is the Government's involvement, lenders have discretion in what loans they'll approve. An applicant can meet all the guidelines (parameters) required and still be declined by a lender. The subjectivity among lenders is what separates them in the market - not all SBA lenders are made equal !! This is particularly notable when attempting to finance a gas station. Gas stations have always been a challenge for financing, even before 2008. Some lenders just aren't comfortable with them !! Since lending resumed about 2010 there's been a constant turnover in lender interest for gas station financing. What they like today they don't like tomorrow, and who didn't like gas stations today love them tomorrow. This constant fickleness of lenders has been a continuing challenge to those of us who cater to gas station buyers, sellers, and borrowers. At MJG through Counsel Mortgage, we are constantly updating and expanding our resource pool of gas station lenders, and generally keep a short list of active lenders for our clients.
Buyers of a gas station business and real estate can also use conventional financing. Just recognize that conventional real estate financing will not apply to the business component of the valuation. In this case, the leverage is reduced dramatically. For example: a $1,000,000 gas station that values the business at $300,000 and the real estate at $700,000 will qualify for conventional financing of $455,000 (65% of $700,000). The remaining 35% of the real estate value plus the total amount of the business value will have to come from other sources, typically cash from the buyer, or a seller carryback.
This financing overview will give you a peak into affordability - the feasibility of buying a gas station. For all the gas station businesses we represent we have developed a Financing Feasibility model based on the individual businesses historical financial performance. These are available for your consideration as a qualified buyer - just ask.
Buying a Gas Station Business Only - Not Including the Real Estate
When considering financing of a gas station, it's important to recognize whether you're financing a business, the real estate, or both. If you're buying an operating gas station business in Arizona, you'll likely find both the business and real estate being offered for sale - the real estate will look like an asset of the business. If you want to buy the business only, planning on being a tenant of a lease, this will greatly affect your ability to obtain financing.
For buyers of gas station businesses only (will be a tenant to the real estate owner), there are 3 sources of capital: the buyer's own equity (an all-cash buyer), the seller (known as a seller carryback), and an SBA loan. The seller carryback is the easiest to structure, most flexible for possible terms, and least attractive to the seller resulting in either a higher price being paid for the business, a higher rate of interest being charged that an SBA loan, or both.
For gas station financing, SBA loans come in two varieties, a 7(a) and a 504. For the business-only loan, the 7(a) is what will be used. Plan on having 20-25% down, and a term of 10 years. Depending on the business historical profile and the borrower's history and credit profile, we've seen deals done with as little as 15% down, or seen the other way, I've seen them as high as 30%. The 10 year term will require a minimum of 10 years on the lease. It's important to note that the loan is made by a bank, not the SBA. The SBA only guarantees the loan in case of default. For this guarantee the SBA charges a guarantee fee at loan funding (close of escrow), The guarantee fee ranges between 2.5 and 3.5% of proceeds, and can be financed along with the cost of inventory and closing costs. One thing often not considered: the borrower's experience in the gas station business. This has become a deal-breaker with a lot of lenders. We've found some ways with particular lenders to compensate for this. If this applies to you, call us for preliminary discussion. A financing overview will give you a peak into affordability - the feasibility of buying a gas station. For all the gas station businesses we represent we have developed a Financing Feasibility model based on the individual businesses historical financial performance. These are available for your consideration as a qualified buyer - just ask.
Collateral for SBA Loans
I ocassionaly hear surprises that rapidly turn into complaints about a lender for an SBA 7(a) loan wanting additional collateral (property) for a loan they have pending. This has only surfaced recently as the prices buyers have been willing to pay have been increasing and are leading the values that appraisers are coming in with - somewhat typical in a recovering real estate market. (Bear in mind that appraisers took a big credibility hit in the 2008-2009 real estate collapse.)
The general SBA requirement is that the bank takes as collateral anything that is being financed. In the case of a business that includes the real estate, that includes the FF&E and inventory. If the value of the acquiring collateral does not cover the loan, the loan is still eligible. If the loan is considered under collateralized, however, and there is additional collateral available, the additional collateral must be used to secure further the loan. The "other collateral" typically means real estate with greater than 25% equity that is owned 100% by a guarantor. Whenever it's available, the lender looks first for the borrower's home.
Remember that SBA guidelines are just that ... guidelines. Some guidelines are more stringent that others, and some lenders hold them to be more conservative or aggressive that other. Collateral is just one of several guidelines that lenders consider with more or less flexibility in competing for loan placement. Most borrowers view all lenders through the same looking glass - this is a mistake. Also, many borrowers I deal with have the belief that lender's are doing them a favor by offering them a loan - also a mistake. Lenders complete for your loan. In lending on special use, or single use, properties such as gas stations, there are relatively few lenders who know the specific businesses such that they can be very aggressive in completing for the loan. If a broker intermediates the loan, they also have to be knowlegable about not only the business being financed, but the lending business also.
At MJG not only are we real estate and business brokers, but both Lynda and Mike are Commercial Loan Officers (BDOs) for the Counsel Mortgage Gp., with all that capability focused on gas stations and c-stores as a specialty. A recent count of identified SBA lenders with gas station capability tallied 50 lenders. Notably, only 27 are in AZ! The stress on lenders since the 2008 bank bailouts, and the additional extreme (in our opinion) regulatory burden placed on the industry by the Dodd-Frank law has caused terrific disruption to the lending business, and in turn for borrowers trying to identify a lender and negotiate a loan. It's also place a companion burden on lenders trying to determine what exactly is a qualified borrower today - and "today" changes almost daily! Out of our current inventory of 50 SBA lenders we keep an active short list of 6-8 lenders known to be currently making gas station loans. We are in contact with these lenders frequently and are constantly updating our short list.
Financing has been a critical element of real estate for longer than most of us can remember. Much of the credit and financing industry we operate with today came with the creation of the Federal Reserve System in 1911. Evolving immediately thereafter on the heels of WWI and the fiasco that was the Treaty of Versailles, which spawned the seeds of WWII, and subsequently the Bretton Woods accords, following up with the advent of fiat currency, we now live in a global economic, finance, and investment environment totally dependent on credit and financing to keep the wheels of progress rolling.
Have you ever thought about where the word "credit" comes from? (Probably not.) The term has it's roots in Latin, French and Italian words meaning "belief" or trust". Way back when, as long as your creditors trusted you, and believed you had the willingness and capability to pay them back, you were fine. The price you paid - interest rate - was a judgment about your willingness and capability to repay the loan. For instance: The Pilgrims borrowed $7,000 dollars (actually pounds) in 1620 from an investor group in London to come to the New World. They paid it back over the next 23 years at a rate of 43% ... the price of perceived risk.
Lenders still use this willingness to repay as one of the 5 C's, character, in underwriting loans. We've come a long way since 1620 ... we've added 4 more C's !
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COUNSEL MORTGAGE ANNOUNCEMENT
We're pleased to announce that Counsel Mortgage is now (effective 2015) licensed in California for the origination of both residential and commercial mortgage loans. Requests to or through MJGfor residential mortgages will be referred to a licensed residential originator at Counsel Mortgage - Counsel Mortgage Loan Officers who are also AZ real estate licensees will work only with commercial mortgages. See EZ click to Counsel Mortgage website, below.
(CA DBO# 60DBO43873; CA MLO# CA-DBO179539)
DISCLOSURE: Both Michael Green and Lynda Gromek are Commercial Loan Officers with theCounsel Mortgage Group LLC, 8700 E. Pinnacle Peak Rd., Ste. 224, Scottsdale AZ 85255. Arizona Lic. # MB0909580. To learn more about the Counsel Mortgage Group and services offered, Click Here. NOTE: When you "Click Here" you will be leaving the MJG Gas Station Specialists website and going to the Counsel Mortgage website.