Sept. 29, 2020

Outstanding CRE Debt Continues to Increase, In Spite of Tighter Credit Standards

Credit is the lifeblood of the economy, therefore a substantial tightening in credit conditions could cut the current recovery short. The latest Senior Loan Officer Opinion Survey points to banks tightening credit across all major loan categories. But loans at commercial banks account for only about 30% of the total credit extended to the U.S. private non-financial sector. Debt capital markets are more or less wide open again, which has helped keep credit flowing to larger businesses, and to households indirectly.

The level of commercial/multifamily mortgage debt outstanding rose by $43.6 billion to $3.76 trillion, or 1.2% increase, during Q2-20, according to the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Mortgage Debt Outstanding quarterly report.  Multifamily mortgage debt alone increased $32.2 billion to $1.6 trillion from Q1.

Despite a drop-off in originations during Q2, “the total amount of mortgage debt outstanding continued to rise,” said Jamie Woodwell, MBA’s VP of commercial real estate research. “The pandemic is having different impacts on various property types and capital sources. Loans backed by multifamily properties accounted for almost three-quarters of the total growth, and Fannie Mae, Freddie Mac, and FHA accounted for nearly three-quarters of that amount.”

The four largest lender groups are:

  1. banks and thrifts;
  2. GSE portfolios and MBS;
  3. life insurance companies; and
  4. asset-backed securities including CMBS.


Aug. 28, 2020

How Bad is It ... ?

Commercial real estate (CRE) and multifamily loan originations fell almost 48% year-over-year in the second quarter, and 31% vs. Q1-20, the result of a pandemic-related temporary freeze in lending and transaction markets between mid-March through early April, according to the Mortgage Bankers Assn (MBA) quarterly survey. (How “temporary” is it?)

Liquidity returned to the market later in the quarter, and multifamily-agency and certain industrial deals “were bright spots” during the three-month period (Q2), per the CBRE Lending Momentum Index. Other sectors suffered, however, as lenders grew more selective in their deal and property-type financing choices.

“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals which face the greatest underwriting challenges,” per Brian Stoffers, head of debt and structured finance for capital markets at CBRE.

The overall commercial mortgage-backed security (CMBS) delinquency rate rose to just under 6.4% in June, up from 1.2% in March (About a 430% increase ladies and gentlemen.) June delinquencies reached 22.8% in the hotel sector and 17.7% among retail outlets.

Banks were the source of more than 70% of loan originations in Q2, a lending share that has more than doubled from recent averages. Much of that growth was driven by regional banks, according to a CBRE report.

Life insurance companies had the second largest share of loan originations with 23%, down slightly from the second quarter in 2019. Most loans in this sector were conservative with loan-to-value ratios of 60% or less.

CMBS conduit lenders struggled to rebuild deal pipelines following the market disruption and the sharp rise in spreads during March and April.  Additionally, loan underwriting remains challenging.  Industry-wide CMBS issuance was close to $30 billion in H1 2020, the slowest pace since 2016.”

Alternative lenders, including debt funds, mortgage real estate investment trusts and finance companies, sourced few loans in the second quarter with some of those lenders struggling with liquidity issues, according to the report.

Across all sources, the average loan-to-value ratio fell, while the average debt service coverage ratio and debt yield rose – raising the bar!

The changes in loan underwriting measures reflected the underlying property type composition. While both multifamily and commercial underwriting were more conservative, the overall results were skewed by a higher proportion of multifamily loans which tend to be underwritten slightly more aggressively than commercial ones. 

Meanwhile at Counsel Mortgage, we’re anticipating closing a gas station acquisition loan in New Orleans in the next week or two for $1.3mm underwritten at 5.5%. The lender is out-of-state. (A short delay was caused by a couple of hurricanes!) 

DISCLOSURE:  Michael Green, Designated Broker of MJG, is also a Commercial Loan Originator with the Counsel Mortgage Gp. in Scottsdale AZ.)

And we’re looking for a term sheet any day for the ground-up construction of a gas station/c-store and carwash in Arizona.  The $5.6mm project is expected to be underwritten for about a $4.5mm loan, or 80% LTV, requiring about $1.1mm equity-in from the borrower/sponsor. The construction loan will automatically roll to a permanent loan upon completion of construction. The borrower is an out-of-state multiple-store operator who is relocating to AZ.  We’re pleased to have been able to facilitate site selection, represent the borrower with city officials for PAD uses, and counsel the borrower in the selection of the architect, contractors and lender.  (Michael Green is also a commercial real estate broker and represented the borrower in the acquisition of the land.) Much of the development process has already been done.  Once the term sheet is approved, we expect to clear underwriting in 3-4 months (even with COVID, and the national election on the way). We enjoy previous relationships with the team members selected.  Effective communication within the group is essential to meeting time and budgetary targets for a successful project. Ground breaking is expected be in Q1-21 with a construction timeline of 4-6 months.  Our unspoken and uncontracted commitment to our client is to stay engaged in the process through receipt of the Certificate of Occupancy. 

Many of you reading this will recognize gas stations as a particularly difficult sub-segment of retail to finance at any time.  In our particular environment, some would say impossible. 

July 27, 2020

Who Has Money to Lend, and How Do You Get It?

Why Banks are Puckered

Commercial and multifamily mortgage bankers are expected to close $248 billion of loans
backed by income-producing properties in 2020, a 59% decline from 2019’s record volume of
$601 billion, the Mortgage Bankers Association (MBA) reported.

Total multifamily lending alone, which includes some loans made by small and midsize banks
not captured in the overall total, is forecast to fall 42% this year. MBA anticipates a partial
rebound in lending volumes in 2021, with commercial/multifamily lending rising to $390 billion.
“The ongoing COVID-19 pandemic continues to disrupt commercial and multifamily real estate
markets,” said Jamie Woodwell, MBA’s VP for commercial real estate research. He said NOI,
values and cap rates across the different property types are “expected to experience varying
levels of stress in the months ahead, with hotel and retail properties already being the hardest

Snowballing distress in commercial real estate loans are threatening to become an avalanche
that could overwhelm banks.

Getting a glimpse behind the curtain on how bank loans are performing isn’t easy. “It’s amazing
that we have gone from the great financial crisis to now and still have no better transparency
into the banks at a granular level as we do with CMBS,” says K.C. Conway, director of research
and corporate engagement at the University of Alabama’s Alabama Center for Real Estate
(ACRE) and chief economist for the CCIM Institute. Some banks are more transparent than
others and there is definitely a lag in the data, he says.

In addition, the FDIC is allowing banks to forbear on loans and not have to report them as
troubled loans for up to 180 days. “We’re not going to see anything big show up in the numbers
until this deferral period expires,” says Johannes Moller, director in North American banks, at
Fitch Ratings. The next big question is how the Federal Reserve is going to act and whether
there will be further forbearance, which will help to determine when clarity on defaults on
loans held by banks will be revealed, he says. (According to the Mortgage Bankers Association,
commercial banks currently holding 39 percent of the $3.7 trillion in commercial/multifamily
outstanding mortgage debt in the U.S.)

The nation’s largest banks are facing a possible $47.6 billion loan loss on commercial real
estate over the next two years in the worst-case scenario for economic fallout from the
coronavirus, according to the latest stress test results from the Federal Reserve Board.

The U.S. central bank’s regulatory body considered three progressively worse downside
scenarios in determining banks’ abilities to withstand the current crisis. In each case, the
results suggest that commercial real estate will take large losses.

The results are not designed to be forecasts but are a measure of the money banks need to
have on hand to survive the pandemic. Banks could take a hit on loans beyond commercial
real estate. In total, losses in the three scenarios ranged from $560 billion to $700 billion —
or about 47% to 57% of banks’ retained earnings and additional paid-in capital. (Do you think
banks want to increase their exposure?)

Even though all 33 of the banking groups in the stress test exceeded the required minimum
capital and leverage ratios, the Fed took several actions to ensure large banks don’t deplete
their cash.

 The Fed is forcing institutions to re-evaluate their longer-term capital plans.
 The Fed also is capping dividend payments to the amount paid in the second quarter
and is further limiting them to an amount based on recent earnings
 Lastly, for Q3-20 the Fed is requiring large banks to preserve capital by suspending
share repurchases.

“Actions by the board to preserve the high levels of capital in the U.S. banking system are an
acknowledgment of both the strength of our largest banks as well as the high degree of
uncertainty we face,” Randal Quarles, vice chair of supervision for the Fed’s board of
governors, said in a statement.

In contrast to the 2007-2009 financial crisis, the nation’s largest banks entered the pandemic
with high levels of capital and liquidity: $1.2 trillion in common equity and $3.3 trillion in
high-quality liquid assets, Quarles noted.

Fed Plans to Further Nationalize the Economy

When your only tool is a hammer, every problem becomes a nail!

So, how many ways can the Fed provide liquidity, or potential liquidity if and when needed?

The Federal Reserve Board on Tuesday (7-28-20) announced an extension through December
31 of its lending facilities that were scheduled to expire on or around September 30. The three month
extension will facilitate planning by potential facility participants and provide certainty
that the facilities will continue to be available to help the economy recover from the COVID-19

The Board's lending facilities have provided a critical backstop, stabilizing and substantially
improving market functioning and enhancing the flow of credit to households, businesses, and
state and local governments.

The extensions apply to:
 the Primary Dealer Credit Facility,
 the Money Market Mutual Fund Liquidity Facility,
 the Primary Market Corporate Credit Facility,
 the Secondary Market Corporate Credit Facility,
 the Term Asset-Backed Securities Loan Facility,
 the Paycheck Protection Program Liquidity Facility,
 and the Main Street Lending Program.

The Municipal Liquidity Facility is already set to expire on December 31, with the Commercial
Paper Funding Facility set to expire on March 17, 2021.

Don’t ask what this does to the USD. That’s a different discussion.

And Now to the Money

Yet, since last March Gantry has closed 67 CRE loans totaling nearly $400 million! Who’s Gantry
you asked – and rightfully so? It so happens that Gantry Inc. is the largest private mortgage
banking firm in the country! Some 30 years in the making … 9 offices nationally (including
Phoenix), originating an average of $4 billion per year. Who knew!

At Counsel Mortgage we have not only heard of them, but also of the not-so-highly ranked. If,
or as, banks may go out of business, current money center banks (the “big boy banks”, e.g.,
Wells Fargo, BofA, etc.) pull back acceptance of loan apps pending more data points, and we
begin to have an environment reflective of 2008-2009, banks step aside and non-bank lenders
fill in the gap. So how do you finance the opportunities we all know are coming? With
“alternative” lenders, of course. These are not all hard money lenders, or bridge lenders with
hard money terms. Finding them may be more of a challenge, especially when you’re looking
for the “right fit”, even with the internet. And working with them is taming a different kind of
beast than your familiar local bank or credit union.

June 30, 2020

Not a Surprise, But What To Do?

The repeat CRE sales of $39.1 billion for the first 5 months of 2020 fell 24.2% from the same time a year earlier, according to the latest monthly CoStar Commercial Repeat Sale Indices.

This is the first look at the year’s commercial real estate pricing trends, calculated by using the price change from the pair of first and second sales of properties sold multiple times. The indices are based on 538 repeat sales in May and more than 227,324 since 1996.

Volume held up generally well vs. the prior year for the first 3 months of 2020, but dropped precipitously in April and May reflecting overall caution among investors as well as physical challenges in transacting deals in a lockdown. The shrinkage in deal volume was felt across the size and building-quality spectrum.

Whether you’re an investor with a now-underperforming property due to tenant late pays (or none at all), or an owner-occupant suffering from lost sales, there’s a need among CRE owners for liquidity, and/or increased cash flow.  There’s a reluctance to sell properties due to the unknown level of pricing – yes eroded, but how bad?

Do you really want to apply for the next Government lifeline?  Talk about dancing with the devil!

The case for refinancing, and why it’s the hot topic in CRE.

With historically low rates there’s significant value in the ability to convert loans to full term or partial interest-only at this time. For some owners and operators, better net cash flow after debt service is a priority, and for some, return of equity from debt refinance (cash out) is valuable. With a long-term hold strategy, refinancing helps hold onto great assets at a low cost of debt. Further, refinancing generates a tax-free cash flow distribution to the borrower (We don’t give tax advice – check with your accountant on this.) With cash out, excess proceeds from refinancing can be reinvested in any asset class over any time period without being subject to the pressure of 1031 exchange time frames or Opportunity Zone criteria.

Most often, lenders are paying close attention to including reserve holdbacks for debt service, operating expenses, or taxes and insurance at closing. They are structuring these reserve escrows to cover between 6-12 months, unless the transaction is low leverage. Lenders are also stressing the need to understand the real estate owned schedule, and if owners are experiencing any distress from other assets. 

There is considerable liquidity in long term fixed rate debt for stabilized product, like multifamily or industrial. Office, on the other hand, is seeing more debt availability for stronger markets, multi-tenant, national vs. local tenants, and safe building operation protocols to combat COVID. Other product types (hotel, retail, land, etc.) have proven to be more difficult. 

Deals that had been finding a home with marginal sponsors, transactions with rent assumptions leading the market (“Blue Sky” projections), or containing aggressive lease-up time frames, are not currently getting done. Those remaining in the market have been making loans “selectively” based on prior relationships or disciplined underwriting. Lenders have commented that pricing and leverage are now more in line with perceived risk of the business plan and asset. Leverage has reduced 5%-10% and pricing has expanded 0.50%-1.50%.

In today’s environment there are no easy choices … only hard choices, and harder choices.  You might find that having an ally, a confidant, a counselor is a good, if not necessary, member to have on your team.

Commercial Mortgage Financing in the Post-COVID-19 World

As I commented only a couple letters ago, pre-COVID-19 (paraphrased) …

                                      “It’s very difficult to make predictions, especially about the future.”
                                                                         Yogi Berra 
Yet, here we are! 

While we’re much more accurate reporting the past and extrapolating into the future, the recent data is largely irrelevant, and hence the process doesn’t serve us at this time.  However, before we fly in the face of popular opinion, we feel obliged to share with you what that popular opinion is.

                                                          “We are not lending any new money,” said David Druey, Centennial Florida 
                                                           Regional President, Pompano Beach FL. (Source: 4-13-20)

We could source many and varied others, but this encapsulates it.

We, however, respectively disagree!

Our own grass roots, boots-on-the ground experience tells us differently.  Since Feb 26, we’ve initiated and secured 5 commercial loans, all with banks (as opposed to non-bank lenders).  Three are SBA 7(a) loans … one for a gas station acquisition in New Orleans (a COVID-19 hotspot), one to re-fi an existing conventional loan with cash-out to the borrower, and one for construction of a gas station/c-store & carwash in the Phoenix metro market.  The two conventional loans are both re-fi’s, one of a hard money loan on a retail single tenant property owned less than 3 months by the out-of-state borrower, and one to re-fi 2 gas stations in AZ.

The notable thing is not that we found funding sources for these loans, but that we had multiple offers!

Which goes to the point … banks are liquid.  There were more than adequately flush before COVID-19, and all the Government & Fed pumping of money into the system has made them more so.  Now that interest rates are as low as we might see them before they go negative (if they do), lenders are “passing the savings on to you”.  (It’s not the rate, it’s the spread.)  Borrowing money at ¼ point means nothing if banks can’t lend it out.  Prime is still 3.25%.

Case in point … one of our conventional re-fi’s had fixed rate bids of the 5-year Treasury + 3%, and another of the 5-year Treasury 3.5%.  (The 5-year Treasury is about 50 basis points – ½%.)

What isn’t widely discussed is the loosening of Government Agency regulations on the banking industry.  Banks have more of a free rein in saving the economy – the Government doesn’t want a repeat of 2008-2009.  It’s commonly known by now that banks are over-run with PPP loan processing, and administrating other Government programs intended to essentially nationalize our economy.  Government inefficiencies under stress, however, are being passed down to the lenders, effectively making federally charted banks quasi Government agencies. Lenders we talk with, however, want very badly to make “real loans”.  It’s just that nobody is coming forth to apply – But how do you make it through the quagmire to get to the right person?  Who is the right person?  And when you leave a message, you never get a call back … then what?  Is it not what you know, but who you know?  Maybe … now more than usual, and when will usual come around again?


How’s the COVID-19 Credit Markets?

So much happening so fast – COVID-19 … current and downstream effects!  We’ll try to sift through the clutter and focus on those factors affecting our market over the next few month.  As I review data accumulated since our last letter, this will be a challenge.  So here we go.

The primary factor affecting the market’s current negative behavior is the coronavirus … COVID-19. So the primary battle to be won is to neutralize this threat to the economy.  Prior to the emergence of COVID-19 the economy was on fairly firm ground. Some pluses & minuses here-n-there, but largely stable.  Retaining the economy’s structural framework through the crisis is paramount to positioning for a quick resurgence to where we left off.  The Government’s quick actions over the last couple weeks have been directed to that end.  We’ll be able to gauge the success of these actions 

From where will the glimmers of hope originate?  Why from day-to-day improvement in the control & ultimately eradication of the coronavirus, of course. As incremental improvements are made in winning the COVID-19 war, the economy will be put back on track with incremental improvements, e.g., lifting of travel restrictions, various segments of businesses will be allowed to  re-open, specific geographical areas of the country are expected to begin hiring or reinstating employment.

But the Government is fighting to retain the economic structure with the few weapons it has –money … debt money. Be it funded from fiscal or monetary sources.  The current legislatively approved commitment is about $3 trillion. (This is a day-to-day moving target.) But where does it go? Will this indeed shore up the main street economy or become another Wall Street boondoggle like all the QE’s of not long ago.  We've all heard by now the loans  and grants to come froth from the Government, totaling some $2.2 trillion in the most recent CARES Act.  The Treasury swapping bonds and notes with the Fed in exchange for money that it then distributes through Government agencies to recipients, or some cases direct to you & me. So many programs ... so many arrows on a flow chart to track the money.  Total Government commitments approved & funded to date total about $3 trillion.  And we haven't seen the end.

What isn’t spelled out very well, however, is that somewhere in the Source-Recipient transfer is about $450 billion going to the Fed via the Treasury who is then to fund loans originated by banks.  The way banking works is that this money can be leveraged 10X between the Fed and the banks.  That $450 billion, then, represents $4.5 trillion of potential loans.  That makes the liquidity capacity of the CARES Act closer to $6-7 trillion than the advertised $2.3 trillion.  Clearly a minor oversight in public disclosure. That additional $4 trillion net of additional liquidity could very well find its way to supporting financial markets.  We'll have more on the downstream impact of this in an upcoming
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But our job at hand is to remain informed, optimistic, and ready to resume life as we know it when circumstances permit.

Along that line … in every chaotic event there is opportunity!

Cloistered away as well are, however, our day-to-day emotional pulse is limited by sources that represent the mood of the nation, whether a small circle of family & friends or the national media – not a positive environment. We wonder is there really “normal” work being done out there? How much longer might this go on?  How bad can “bad” get? No answers … only speculative opinion. War is hell!

But this from the front lines:

  • We have an SBA loan that was approved prior to COVID-19 and are only pending updated documentation.  The lender has not pulled their commitment or wanted to re-underwrite the loan for the current environment. And it involves construction.

  • We have 3 additional loans in process of submission; two SBA and one conventional.  All loans are being aggressively received and we expect multiple offers on all 3.  Underwriters across the board have not raised the bar on standards, although some of the more conservative lenders are starting to make moves in that direction.  Not always as straight forward as reducing LTVs or raising states rates, but more subtlety in covenants, particularly with conventional loans.

  •  The SBA has announced that it will pay the first 6 months of payments for 7(a) loans funded by the end of Sept. (Trump is trying very hard to protect his small business segment … as I recall about 40% of the workforce.)

  • Borrower inquiries remain firm, although the tone of conversations reflects caution. 

  • Borrowers (and lenders), however, are in a quandary. The question is how will my business and/or real estate be valued for the negative effects of COVID-19?  If it’s valued primarily on an income approach basis, what will that get me when my financials have to reflect Mar, Apr, etc., going outbound, and for how long? A concern not overlooked at The Council Mortgage Group. 

We’ve discussed this topic with 3 commercial appraisers we know well in the AZ market. They’re working with various adjustments to data to reflect the anticipated situation, but nothing concrete … with one exception.

One of the appraisers we have a long-standing relationship with is the AZ rep for a national valuation company. His company has developed a model reflecting just what we’re talking about.  It was originally developed and released internally several weeks ago, and has been updated weekly.  This appraiser was kind (trusting) enough to send us a copy of their most recent report – to be treated of course with confidentiality.  So this is not something we can share with you.  We haven’t reviewed it yet, but will do so in the very near future.  We suspect we’ll be able to apply the methodologies to current properties and businesses for acquisition and re-financing. (This area is also a big concern to folks who might want to be selling their properties for the same reason.)  This also has direct application to the lending business. For underwriting, the primary basis their loan offers is the ability to service the loan from the underlying business, or property in the case of a rental.  


A recession is unlikely to hit this year, but that doesn’t mean that you shouldn’t start preparing. Experts say that this is the perfect time for investors to reevaluate portfolio performance to prepare for the next downturn—whenever it may come.

Real estate is a cyclical industry, and it is impossible to predict exactly when a downturn will happen. As was once said by a well-known and celebrated source (paraphrased) …

                                                  “It’s very difficult to make predictions, especially about the future.”
                                                                                                       Yogi Berra

Most experts agree that the current economic expansion began in June 2009, and last summer made it 10 years old, the longest in U.S. history,” Ed Hanley, president of Hanley Investment Group, recently told “An economic downturn doesn’t impact every market and every investment the same.  So, as the current election year unfolds and whether a downturn is around the corner or not, this is the perfect time to evaluate the current performance of your portfolio, and (determine) how to best position it for the future.”

There you have it!  Now, Mr. & Mrs. real estate investor, you know just what to do to secure your real estate portfolio against the downturn that is sure to come … just evaluate the current performance. 

But what does that mean … exactly?

A portfolio evaluation may include deferred repairs and preventative maintenance, and also perhaps some upgrades where needed, all of which can be essential to tenant retention during a correction. Mr. Hanley continues, “Properly evaluating capital expenditures now to retain tenants and stable occupancy levels may put you in a better position for the next downturn or market correction.  And of course with capital improvements comes the question of how to pay for them, cash or debt - access your liquidity pool or increase your leverage.

Of course, the CRE fundamentals are much different (and better) in this cycle than at the end of the last cycle, but some of the lessons learned during the last downturn are still important. In the last cycle, one of the biggest mistakes investors made was being over-leveraged or not having sufficient reserves to weather an economic downturn. Most CRE investments should be performing well and have good cash positions. 

Although interest rates remain at historic lows, it is prudent to review current loan terms now to prevent any potential inability to refinance an existing loan in the future, or the need to refinance in a not-so-permissive environment. 

A couple years we refinanced two properties for an investor.  These were stabilized and had been performing well for several years.  The loans were originally placed when the investor bought the properties several years before and had substantially higher interest rates.  The apparent goal was to reduce his payments, but in the process we found that his capital appreciation and amortization had reduced his leverage level to about 50%.  We refi’ed him back to a modest 70% LTV and were able to get him $1,000,000 cash for his next investment.  At that stage of the cycle he was looking to add to his holdings.  That investor recently contacted us to re-fi two more of his properties with a similar outcome anticipated.  While we expect to be successful in the re-financing, we cautioned him on maxing out his leverage at this stage of the cycle when cap rates are low (prices high) and banks are aggressively funding loans  with “cheap” money – typical behaviors at end-of-cycles.  

The bottom line in surviving a downturn is to prepare for one.  Recognize that a downturn, correction, re-cycling the cycle (your choice of terms) is a process, not an event. (Going through it is a process; historians will call it an event.)  Part of managing the survival is being in a position to take advantage of opportunities that will occur along the way. A little cash will go a long way then. 

Incidentally, our $1,000,000 cash-out investor still has his $1,000,000 cash in the bank.  He hasn’t found that next investment yet.  So why re-fi the other 2 properties now?  To be even better prepared to not just survive, but to capture more of those end-of-cycle opportunities during the process – and to lower his payments!

Footnote:  We have written about black swan events earlier and the inability to forecast them, or the impact they may have economically, and financially on the various markets.  The current caronavirus outbreak is such a swan. How this will impact the CRE and CRE lending markets is unknown – perhaps suspected, but unknown.  We encourage all to take prudent healthcare precautions in your day-to-day activities.  We understand that the flu is more of a menace than the coronavirus, and that the preventative measures are the same for each.


What About That “Other” SBA Loan?

Most people talk about SBA loans as if there’s only one, and that typically being the 7(a).  The other equally useful in the right situation is the 504.  This doesn’t get much exposure, probably because it’s more complex.  I recently had the occasion to review a 504 with a borrower (my client) and a bank BDO.  A brief overview of the loan is offered for orientation:

The 504 is really two loans packaged as one. (Now you begin to see why it can be confusing.) Both are backed by real estate – no business only acquisitions using this one.  The 1st deed of trust (DOT) backed loan is really a conventional loan made by the bank.  This typically to 50% of the total loan.  The 2nd DOT-backed loan is made by the SBA through a Government chartered Certified Development Company (CDC).  The SBA loan is actually funded by debentures (bonds) sold in the debt market – hence a market driven rate, not a legislated or statutory rate, e.g., the 7(a).  The CDC 2nd funds (up to) 40% of the total loan amount.  This leaves the borrowers equity-in to be 10% (or possibly higher).  Depending on the use of proceeds (acquisition, construction, etc.) the allocations of participation may vary.

The rates for the two loans don’t have to be, and usually aren’t, equal.  Other variables have to do with the term of the two loans and pre-payment penalties.  In evaluating the rates you’ll hear the term ‘blended rate”.  This is a blending or averaging of the two loans rates and amounts of money funded at each rate.

One of the attractions of 504s is the size of the loan that can be obtained.  Not well known is that the SBA guarantee in the case of the 7(a), and the amount of the 2nd funded in the case of the 504 cannot exceed $5mm.  However, if the 504 only uses 40% of the total loan amount, the total loan size can be as high as $12.5m.

The 504 can be used for acquisitions of existing businesses with real estate, or construction of new real estate.  The loan has a construction (pre-existing development) component that can be used for the construction of a project and upon completion, rolled into the permanent loan.

Pre-funding ahead of the SBA issuance of the debenture is accomplished by a bridge loan from the lending bank. Because the debenture is funded in the future, the actual rate will be unknown until funding is complete.  Market movements (volatility) during the bridge funding period in nominal, typically measured in basis points.

For rate-only comparisons today:

     504 25-year debenture purchase rate (December’s auction):          3.64%

     Lender’s 1st  DOT rate:                                                                       4.5-4.75%

                                (The blended 504 rate is somewhere in between.)

      7(a) rate:  This loan is made by the lender (bank) at a rate not to exceed Prime + 2.75%.  (SBA guideline).

Prime today is 4.75%.  How much each particular loan is priced over Prime “depends”!!

Generally, if your project doesn’t exceed about $5.8mm (85% LTV of acquisition or construction), you’ll find a 7(a) easier to use, although with a higher rate, but more accommodating (managing) once on the books.) It’s also cleaner to analyze ahead of the decision.


Banks are Reverting to Old Bad Habits

Banks could be slipping into old bad habits. Last year, as interest rates fell, banks started to loosen underwriting standards reminiscent of the last cycle—the kinds of missteps that ultimately led to the great recession. This includes high loan-to-value ratios as well as skipping essential steps, like income verification – no-doc loans are back in the CRE lending market!

“The banks are starting to get a little bit scary. You are starting to see the behavior that you saw in 2006 and 2007 again,” says Steve Jacobs, CEO of Ten-X Commercial in an interview with”.

I don’t think this is a mainstream trend - yet, but it’s something that I’ve noticed recently. This ramps up buyer activity and compresses cap rates, pushing pricing up. This translates into a buyer maybe paying a 4-cap for a property when it really should be a 5-cap. This is when it gets dangerous. I’m told this dynamic is also present in the residential market, but at the commercial desk we only observe the residential market from a distance.

On the commercial side, I’m seeing lenders that were holding tight at the 60% or 65% loan to cost or loan to value starting to play in the 70% or 85% range, depending on the asset class and pre-construction vs. existing income-stable properties.  I’ve seen lenders wonder aloud of 85-90% loans, but not seen anything actually close at these levels.

It is hard to say what is driving this trend—especially since the downfall of the last cycle wasn’t so long ago. It could be the reduction in interest rates, which made money cheap while demand remains high - it may stem from that. Generally as rates drop banks make less money; spreads get compressed.  Lenders operating aggressively in low rate environments may be sacrificing profit for market share.  If so, any one bank can’t conduct this strategy for long.  This being the case, you may find significant rate spreads in funding offers.  (Don’t forget to check all the other covenants in their proposal – ask questions.)



Low Interest Rates Spur More Refinancing Activity

Even more favorable rates have unleashed a fresh wave of refinancing activity during H2-19.

Borrowers have been enjoying a low interest rate environment for some time. Yet the Fed’s last 3 rate cuts in H2-19 have stoked a surge in refinancing activity.

The Federal Reserve kicked off the first of three rate cuts in late July, which subsequently pulled commercial real estate lending rates lower in the third quarter. Notably, the 10-year Treasury dropped by 50 basis points in August to a near cyclical record low of 1.47%. The favorable rates have unleashed a fresh wave of refinancing activity. Borrowers are paying off loans early to take advantage of the low rates.

 For example, some of the 10-year loans that were done 7 years ago were done at 5.5 % or so, whereas borrowers now have an opportunity to refinance at sub-4%. So, the math on that is pretty simple, even if you factor in a small pre-payment penalty for an early exit.

The current refinancing activity is widespread across asset classes. For example, Fitch Ratings noted that the pace of defeasance on CMBS 2.0 loans surged following the July rate cut, with Q3-19 volume that totaled $3.92 billion. Overall, the 2019 defeasance volume for CMBS 2.0 deals through the third quarter was on par with the full-year 2018 activity at $10.9 billion.

Other data sources show a similar spike in activity. The Mortgage Bankers Association reported that the volume of commercial/multifamily mortgage originations in Q3 jumped 24% year-over-year, according to its most recent quarterly survey of commercial/multifamily mortgage originations. Research firm Real Capital Analytics reported an even higher increase on year-to-date refinancing transactions through the first three quarters that was up 63% year-over-year.

Spreads have narrowed.  For example, there was a window in Q3 where some uncertainty on reaching lending caps caused Fannie and Freddie to widen spreads in order to slow lending volume. However, agency spreads have narrowed and, along with the Feds’ rate reduction, it remains a very low rate environment.

Current refinancing deals are offering more than just savings on lower rates. Borrowers are taking advantage of other benefits when refinancing deals. Some are shifting to non-recourse, moving out of short-term floating debt and into longer-term fixed-rate financing, or getting longer interest-only periods, which helps to drive cash flow and returns.

Many owners are also using refinancing as a means to pull equity out of a property in cases where values have increased. That strategy has become a popular alternative to selling assets in the current market, where it has become more challenging to redeploy capital into new real estate investments.

If you’re sitting on an asset and you don’t intend to sell, it’s an opportune time to term-out at more attractive financing.  Debt markets also appear to be marking properties at higher valuations than an owner could get in the sale market, so there is somewhat of an arbitrage there with a cash-out refi,” he says.

In addition to the low rates, borrowers are continuing to enjoy a highly competitive lending market where lenders are working hard to retain or win refi business with both economic and non-economic terms.

The downside of the recent flurry of activity is that it’s likely pulled some refinance business forward into 2019. Potentially, the loans being refinanced then could result in a thinner pipeline of deals next year, 2020.  However, it is difficult to say what the net affect might be on origination activity in 2020. Certainly, there are other drivers of demand, such as acquisitions and construction activity, which could remain robust and contribute to strong overall lending volumes in the coming year.



The Federal Reserve’s recent interest rate cuts have sent a surge of excitement through the commercial real estate (CRE) market.  Fed influenced rates have returned to 2018 lows, however, the Fed’s interest rate reductions have little to do with conventional CRE financing activity because most conventional commercial real estate lending is indexed over the 5 & 10 year Treasuries.  The exception being SBA 7(a) loans that are indexed to the Prime rate which is normally set within a fixed spread vs. the Fed Funds Rate. 

Treasury bills, notes & bonds are global instruments affected by worldwide geopolitical events, not necessarily United States monetary policy, i.e., a legislated rate. The recent spreads range from a low of 1.6% to 2.50% for most CRE properties and continues upward above 2.50% based on the risk profile of the property and the borrower, and other covenants of the loan.

Financing activity is tied to these factors, which have put recent rates in a range of 3.5% to 4.5%.  This is still considered an attractive cost of capital, and in most cases provides positive leverage.  For example, a not-too-exciting run-of-mill $5mm CRE investment with an initial NOI of 6%, that is leveraged 60% ($2mm/40% equity and $3mm/60% debt) borrowed at 4% interest, has a 6% return on investment (ROI), but as leveraged, has a 9% return on equity (ROE) … a yield enhancement of 50% over the unleveraged acquisition. 

With more than sufficient liquidity in the market and strong CRE fundamentals, the now          10-year cycle in the CRE market looks like it has more room to run.  But the Fed’s drop in interest rates is probably more of a psychological boost to financing.  The capital markets are where to look for clues to the future – what are lenders doing.  Keep an eye on the bond market.  This market has led less transparent markets by as much as a couple years.  The bond market will give you insight into the medium and long term cost of capital (5-20 years for CRE).  The Fed largely influences the short end – 2 years and less.  When they get out of sync with the public markets, e.g., an inverted yield curve, pay attention.   How this resolves to “normal” is significant.  Which party blinks first, the Fed or the bond market. 

The CRE investment opportunities are apparent; the financing opportunities perhaps less so. 



Reminder from our last issue:

You’ve heard of ZIRP – zero interest rate policy – from 2008-2015.  Now get ready for NIRP – negative interest rate policy.  Currently about $16 trillion of sovereign bonds (all countries that issue), or 25% of the total outstanding, trade at negative interest rates.  This trend is firmly in place and increasing.  The investor is paying the issuing country for the privilege of lending them money, or seen a different way, the investor has locked in a guaranteed loss if the bond is held to maturity. This is Alice in Wonderland monetary policy.  Will Jay Powell turn out to be the least insane man in the asylum?  And what does this mean to us in the CRE borrowing business?  How might we expect this trend to color our borrowing potential going outbound?

Assuming Powell follows through with rate-reduction madness (they just reduced rates again today), how far down the rabbit hole will lenders go in following the Fed?  For conventional loans we don’t know.  However for Government guaranteed loans the Treasury will see that funds remain available. That’s fine for residential loans – FHA & equivalents – but how about CRE loans with businesses … especially with businesses.  (Small businesses create jobs, and our Government is all about creating and retaining jobs.  Sub-4% unemployment is good at election time.)

This sounds like an SBA loan … it is an SBA loan!! A type 7(a) to be specific. 

There are 2 characteristics of this type of loan that are notable at this time.

1.  The rate is variable (with only a few lender exceptions that I suspect will fade away in the current rate-declining environment).  The rate will adjust up or down with changes in the Prime rate.  In our current lending environment this is good.  We think rates are low now, and historically they are, but we’re pioneering new ground on our way back to ZIRP, and possibly NIRP.  We suggest you not want to lock in the low fixed rates that are being promoted by lenders.

2.  More flexibility.  Borrower’s go nuts when they hear the term is 25 years fully amortized.  How can I possibly forecast 25 years in this highly charged rate environment?  After all, the Fed is only one step removed from the Government and fiscal policy … that’s 6 election cycles!  Well here’s the good news that almost always falls through the crack. The pre-payment penalty schedule for a 7(a) is 5, 3, 1, then zero!!  That’s 5% in year one, 3% in year 2 and 1% in year 3, then zero for the next 22 years!  After 3 years there is no pre-payment penalty. From a re-financing standpoint this looks a lot like a 3 year bridge loan with built-in extensions for the next 22 years, and without the up-front and back-end points (SBA guarantee fee notwithstanding). 

If rates are indeed going to bottom over the next few years, refi your loan then and lock in that fixed rate in the lower interest rate environment that will exist.  (I don’t expect you’ll get a ZIRP loan, but you never know.)



The black economic cloud that is typically associated with an inverted yield curve does indeed have a silver lining. 

The table below shows selected U.S. Treasury rates as of Oct. 1, 2019.  Rates look essentially flat from 1 month to 1 year, then take a noticable dip for years 3-10. and start to climb (normalize) from 10 to 30 years.  Longer term rates don't exceed the 1 month rate until almost 20 years, and then by only 14 bps in year 20.  Notable the 30 year rate is only 32 bps higher than the 1 month rate.. As an investor, going out a full 30 years would only get you only those few bps (basis points) more than buying a 30-day T-Bill.  Buy we’re not considering the investment side of this; we’re looking at this as borrowers.

As of                    1 mo.          6 mo.          1 yr.          3 yrs.          5 yrs.          10 yrs.          20 yrs.          30 yrs.

10-19                   1.79           1.82             1.73          1.51            1.51            1.65              1.93              2.11


Among all the credit markets there tends historically to be correlations among the various types of debt instruments.  The correlations are not exactly 1:1, but they maintain their linkages within fairly predictable ranges, in spite of the Feds intermediation the last decade.  CRE debt operates within this atmosphere. 

CRE lenders, be they banks, hedge funds, insurance companies, ESAs, etc. take their cues from their cost of money, alternative investment vehicles, creditworthiness of the borrower, geographical location, asset class, and a few other parameters.  Borrowers traditionally pay a higher rate (cost of money) for the longer the term of the loan.  At this time, however, longer terms have a lesser rate with the lowest rate in the 3- 5 yr. period, and longer term Treasuries don’t surpass the 30-day Bill until about the 20th yr.

If you’re considering a conventional CRE loan in the 5-10 yr. maturity range, you should expect to find tight spreads for rates, all other terms being equal (which they never are).  This suggests you can borrow longer term for a nominal incremental rate. What’s the cost to renew a 5-yr. loan at the end of the primary term? … a point?   Today the difference between the 5 yr. and 10 yr. is about 15 basis points.  You can extend that 5 yr. loan today for a successive 5 yr. period (a 10 yr. term) for less than a ¼ of a point, and no re-application cost or hassle.  Lenders will offer products up and down the maturity line as a function of the parameters mentioned above, in addition to keeping an eye on the competition. 

There’s currently an excess of liquidity in the debt markets, particularly among the non-bank lenders not subject to banking regulatory rules.  Late in the market cycle borrowers are cautious about taking on new debt.  This creates a supply-demand imbalance in the borrower’s favor.  Lenders will structure products (loans) to fit the current curve, promoting the shorter term maturities with fixed rates, and longer term offerings leaning toward variable or adjustable rates, the exception being Government guaranteed loans.  Longer term fixed rate loans in this environment may be hard to come by – at what point will banks start to pull commitments because their spread goes to zero?  Other terms and conditions may come into play compensate the lender for anticipated curve normalization over the term of the loan – be sure you read all the terms of the loan, not just the rate and maturity.

Be sure you consider private money sources, too.  They can be more aggressive/competitive in “unusual” environments like the one we have now, and possibly will have for the next year or so (or more?). 




We’ve endured the endless bombarding of “up-to-the–minute” news, “news-alerts”, and “this just in” for what seems like, dare I say, forever!  And this doesn’t even include the onslaughts to those of you who stay glued to your hand-held devices for the never-ending tweets and hashtags.  And the hot topics of the days gone by remain:  trade tariffs,  inverted yield curves, not if, but now when the next recession will hit, speculation about the Fed’s policies and whether the next FMOC meeting will raise, lower or hold pat on the Fed Funds Rate. The response of markets adjusting to the next shoe that drops seems instantaneous.
So many dots … how to connect them given that they keep changing?  Unless you’re a 10-minute trader on E-Trade, you don’t.  But clearly the news cycles have become opioids for the markets, this reflective most easily by considering the extreme volatility.   

The volatility seen in public financial markets reemphasizes the security of CRE (commercial real estate). The recent financial market swings reiterate both the stability of commercial real estate and the attractive debt yields offered by this asset class. In addition, the exceptionally low interest rates currently available provide a highly-levered yield premium on a risk-adjusted basis for CRE. The recent average combined CRE cap rate of 6.3% exceeded the 10-year Treasury by 480 basis points (4.8%), one of the widest margins this cycle. Key to obtaining CRE enhanced by leverage is the financing used.

Current CRE investors look at declining interest rates with one eye, and their current loans with the other, anticipating refinancing when the current declining cycle bottoms … “then I’ll do it!” they say.  This was the case in 2007 & ’08 when the Fed started us down the road to ZIRP.  Some of you may remember.  But borrowers also need to keep a 3rd eye on lenders. A funny thing happens when rates decline, especially if rapidly. (This typically in a recessionary environment, whether formally called or not.)  As the economy weakens and rates keep dropping, banks are busy raising the bar on their underwriting standards!  When rates get so low that you can’t wait to refi, you find that banks (and other lenders) have essentially stopped lending!!  Banks especially may advertise “low” rates, perhaps 2-3%. And applications may come pouring in, but sadly no body qualifies!  Now you’re stuck with that now-high-priced older loan at the bottom of the cycle until the economy recovers and the interest rate cycle clicks up again.

There isn’t exactly frantic lending yet, but the movement is afoot to get loans out the door before then next ¼ point (or ½ ?) rate drop.  Declining and low interest rates also eat into banks margins.  You may think rates are low, but banks can tell how low by the spreads.  If the spread on any particular type of loan gets too thin, the lender will discontinue that loan.  When the lending market went illiquid in 2009 it wasn’t because there was no money available. The Fed had been flooding banks with money through the various QE programs.  The banks simply cycled the money (quietly) back to the Fed in excess reserves – no loans were made, and the economic recovery languished.  The banks couldn’t afford to lend in the poor economic environment at the low-to-no spreads at the time. Hence the recovery waned. (Too bad it took the Fed several years with variations of the theme to figure this out.  Maybe they’ll do better next time … but it’s still the same Fed!)

There’s a saying in markets that nobody sells the top, or buys the bottom … it’s just a saying. But the same can be said for refinancing a loan.  Generally speaking, if you can make an incremental improvement in the debt component of your investment that otherwise makes sense, you should look at that pretty hard.  The nature of the improvement may be quantitative or qualitative, and the acceptable level of incremental improvement is a judgement call. Bear in mind also that the rate is only one of the many terms and conditions of a CRE mortgage.  Be sure you consider ALL the covenants.



By the time the ink dries on this BLOG, if the futures market is correct the Fed will have reduced interest rates (the Fed Funds rate actually), by ¼ point. (It’s giving a quarter-point drop today a 100% probability.) Perhaps a better question isn’t when will they drop or raise the rate again, or by how much, but rather why will they do either, or consciously decide to do nothing.

The by-now-well-known (accepted) reason is to support the stock market, of course. But that’s old hat – everybody knows that, and as such there’s no particular advantage to any one investor. (Incidentally, nothing in the Congressional Act authorizing the creation & mandate of the Fed is support of the stock market mentioned.) But that doesn’t concern you … you’re reading this for information and insight into managing your CRE (commercial real estate) financing … perhaps to finance a new acquisition, refinance an existing property, or do a sale-leaseback in lieu of conventional financing.

So let’s consider the economic cycle, for this by their own admission is what the tea leaf readers at the Fed take their cues from to set and execute policy.  Standard thinking is:  weak economy => rate cuts => economic stimulus => rising GDP and a stronger economy.  But there’s some untimeliness afoot when connecting these dots with CRE and CRE financing.  It’s not that they’re unrelated, but they’re asynchronous – some would say random.  The unreliable element is timing, that serendipity variable we all try to get a handle on but never seem to be able to.  I yield to one of my favorite philosophers who waxed poetic on the subject:

                                        “I find it very difficult to make predictions, especially about the future.”
                                                                                                         Yogi Berra

(Not familiar with Yogi?  Try Googling him. He’s of sufficient fame that you’ll find several hits for him.)

But more to the point - let’s draw some relationships.

The value of CRE is primarily determined by its income stream. 

The value of CRE is often (and simply) gauged by the “cap rate”, i.e., the income stream in dollars expressed as a percent of the value (price).  This is an inverse relationship, i.e., if the interest rates go down, and income (NOI – net operating income) remains the same, the price goes up, and vise-versa.

But let’s consider why the the Fed may be dropping rates that ¼ point.  Ostensibly this is to support a slowing economy and perhaps, they hope, prevent a recession. If the economy weakens as expected, however, we might expect business to slow down, CRE vacancies may be expected to increase, meaning that the net income to the property owner should be expected to decrease. And if rent decreases shouldn’t the property value go down?  Of course.  But wait … how can the value of the property go up because rates and reduced, but also go down because income decreases? The answer, of course, is the timing of the movements.  But which comes first, the price movement or the interest rate movement?  Experienced investors will tell us price moves first in reaction to lower rates.  Experienced tenants, however, will tell us rents move first in anticipation of a slowing economy.

Unlike the stock market which is immediately transparent for all to see, the CRE and financing markets are much more opaque. This lack of immediate transparency causes the delays in movement between relationships.  And the delays themselves cause misinformation, interpretation of information, speculation, false steps along the decision path, and unfortunately some bad decisions.  

So how do you, the CRE investor/landlord/finance manager, track this information and divine the future to know where you are at any point in time so as to make accurate, foresightful, and yes, timely decisions?

Yes, the Fed is just the tip.  It’s what’s downstream that causes our consternation.


​Financing the Retail Asset

From a financing perspective, the retail sector continues to be challenged, but there are good gems to be acquired too.

From a lender’s perspective, there are particular challenges to retail deals getting done: 

  • lease roll overs,
  • expiring leases with no backfill identified,
  • downward pressure on retailer credit,
  • lack of transparency on retail sales figures, and
  • long term permanent loan take-outs.

All of these issues can have significant impact on leverage levels, pricing, and whether or not a deal can even garner interest from a lender.

And who’s the culprit threatening retail?  Why e-Commerce, of course.

However, in the CRE (commercial real estate) finance community one size definitely does not fit all.  Opportunistic lenders are seeing an increased flow of opportunities since they require a creative and entrepreneurial lens.

Tenant mix, strategic plans for maintenance or repositioning, the leverage level, and the strength of the sponsorship is very important. Lenders need to understand and underwrite the story for success. The right tenant mix today typically is a mixture of food service (restaurants), entertainment and services … those services that can’t be ordered and shipped by Amazon, et al, more commonly termed “e-commerce resistant”.  The retail center is starting to look a little like office services, just as the industrial park is beginning to resemble some retail.  As the lines blur lenders are adjusting underwriting parameters.

The disruption caused by technology has increased the risk of hanging on to old business/investment models, but has also created opportunities for creative investors and problem solvers.  These investor/borrowers are best served by aligning with equally risk tolerant lenders for successful acquisition and refinancing.  This, however, is a decidedly smaller pool than it was even a few years ago.


So What Have You Done Lately? 





We had a qualified borrower with all the qualifications lenders look for in a borrower.

The challenge:  finding a lender for a conventional owner-occupied property that would refinance a gas station (not a popular asset class) and cash out the borrower up to 70% LTV … in this case $1,000,000.



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.

  • “We’re going to protect profitability and credit discipline over growth at this point,” she said.

  • As of September 2018, JPMorgan Chase was the second-largest holder among U.S. banks of commercial real estate loans with $119 billion. Only Wells Fargo & Co. with $132 billion topped it.

Wells Fargo gave a similar outlook as JPMorgan for 2019.

  • “Commercial real estate loans were down $583 million from the third quarter and it declined for seven consecutive quarters, reflecting continued credit discipline and competition in the highly liquid markets and pay downs of existing and acquired loans,” reported John Shrewsberry, Wells Fargo’s CFO. “We anticipate these market factors will continue to impact portfolio balances in the near term.”

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.

Buying a Gas Station Business 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 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.  

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 !

​You'll find news and reports on timely financial topics by scrolling down. You may also find additional news and briefs on financial issues of the day in our News & Reports section - just click on the tab at the top of this page.

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MJG Gas Station Specialists LLC

MJG Gas Station Specialists LLC. All Right Reserved.

This was a refi loan of 2 existing gas stations with convenience stores in the Phoenix metro market. Underwritten as a portfolio loan, but structured as 2 separate loans.

The loan was conventional and refinanced 2 existing SBA 7(a) loans. The refinancing released about $2.3mm of SBA capacity to be re-used   for additional acquisitions. Combined loan amount was approximately $3.2mm, and included about $1mm cash out to the borrower.     

                                                                           LTV was about 70% with an interest rate in the low 5’s.

This was a strategic refinancing that allowed the borrower to reduce his debt service, liquefy an additional $1mm for cash down payments on additional acquisitions to expand his business, and position high-leverage financing for the acquisitions in the form of new SBA loans.


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.