PLACING A COMMERCIAL LOAN WHEN
THE BANKS ARE JUST TOO TERRIFIED TO LEND


First I’m going to depress you, and then I’m going to give you some terrific, practical tips.
The Tightest Commercial Mortgage Lending Market in 25 Years
Commercial real estate has already tumbled by 40%. Bank economists are secretly telling
their executives that a double dip recession is a serious possibility. Commercial real estate
could potentially fall another 40% from here. The banks are scared.

As a result, conventional commercial mortgage lending is down by more than 70%
compared to 2006. The entire conduit industry has completely evaporated. Investors no
longer want to buy bonds backed by commercial mortgage loans (commercial mortgage
backed securities).

The conduit industry used to make over 50% of the total dollar volume of commercial
mortgage loans. Imagine that – an industry that used to make around 53% of all of the
commercial mortgage loans in the country ‐ has been effectively nuked off the planet.
Life companies still make commercial mortgage loans ‐ if the commercial property is
almost brand new, if the loan amount is larger than $5 million, and if the borrower can be
satisfied with a loan amount that is just 55% loan‐to‐value.

The savings and loan industry has contracted almost out of existence. There are only two
surviving mortgage REIT’s in the entire country that are still making commercial mortgage
loans today, and both of them charge hard money rates.

This leaves only the commercial banks and a handful of hard money lenders still making
commercial mortgage loans.

Banks will make you a conventional commercial mortgage loan today, but they will do so
willing only if the borrower is a big depositor. If your borrower is not a “good bank
customer” (someone who maintains huge cash deposits with the bank), your commercial
loan will probably be cut back from 75% loan‐to‐value (LTV) to just 55% to 63% LTV. The
borrower’s credit will have to be almost perfect, and his commercial property had better be
pretty snazzy‐looking. And, of course, it will have to be fully‐leased.

What if the deal has a small black hair? Your borrower may have to pay hard money rates.
Ouch.

Bottom line: If you hope to place a commercial mortgage loan today, you are going to have
to work hard.

Where Should You Start?
What happened when the borrower applied to his own bank? You need to find this out
because the borrower’s bank could have an offer on the table that you will never be able to
beat. I often tell brokers, “The only lender who can make a cheaper commercial loan than
the borrower’s own bank is his mother.” The borrower’s bank doesn’t want to lose his
deposits, so the bank can often be pressured into making a commercial loan. When it does,
their loan terms can seldom be beaten by any other bank.

If the borrower’s own bank wouldn’t help him, try another small bank located in the town
where the borrower lives. Be sure to sit down with the bank president (branch manager)
and offer to move all of your borrower’s bank accounts to this new bank, if he
accommodates the client’s commercial loan needs. Bankers are always looking for new
deposits, especially bankers who work for small banks.

What if your borrower doesn’t maintain large enough cash balances to attract a bank? You
may want to refinance his personal residence and just store the cash proceeds in his
checking account until after you find a bank willing to make him a commercial loan.
Remember, banks will only make a loan when the borrower is sitting on a pile of cash.

Commercial Lenders Like to Make Local Loans

If your borrower doesn’t maintain large enough cash balances to attract a bank, you should
submit his commercial loan application to some banks located close to the subject
commercial property. All banks greatly prefer to make commercial loans in their own
backyard.

Match the Size of Your Loan to the Size of the Bank
Small banks make small loans. Large banks make large banks. Don’t try to submit a
$200,000 commercial loan to Bank of America or a $20 million loan to the tiny 1st National
Bank of Smallsville.

Be Prepared to Submit Your Commercial Loan Application to 50 to 150 Lenders
Before the Great Commercial Lending Drought, the first commercial lender to whom you
submitted a commercial loan would often fund the deal. That almost never happens
nowadays. Today a broker will often have to submit a commercial loan request to 50 to
150 banks before finally finding one who really wants to do the deal.
.
Look for Government Commercial Loan Programs
Earlier I used the term “conventional commercial mortgage loan”. By this I mean a loan
that is not guaranteed by the government. When times are scary, banks and other
commercial lenders greatly prefer to make loans that are guaranteed by the U.S.
government, such as SBA loans and USDA Business and Industries (B&I) loans.

You have probably already heard about Small Business Administration (SBA) loans. The
property must be 51% used by the owner’s business. The Federal government then
guarantees up to 90% of the loan, so the lending bank has very little money at risk. Banks
and other SBA lenders, because 90% of the loan is guaranteed, will often lend up to 90%
loan‐to‐value on owner‐user commercial properties.

But there is another government loan program about which you may not have heard – the
U.S. Department of Agriculture’s (USDA’s) Business and Industries (B&I) loan program.
This is a government guaranteed loan program for commercial and industrial properties
located in rural areas.

The USDA B&I program is modeled after the SBA loan program. The Federal government
will guarantee up to 90% of an eligible loan, in exchange for a guarantee fee. The loan must
still be made by a bank, but since a bank only has 10% of the loan at risk, the bank will
often make a commercial or industrial real estate loan up to 90% loan‐to‐value.

A rural area, for this program, is a rural city or town with fewer than 50,000 residents. The
city or town cannot just be a small city located in a highly populated area, where one city
runs into another. It has to be an area with a low population density. The USDA’s site has
a map of every town in America, and you can plot your property on the map and see if it
falls into an eligible area.
http://eligibility.sc.egov.usda.gov/eligibility

Now the really cool thing about a USDA B&I loan is that the property does not have to be an
owner‐user building. It can be a rental property.

Since banks are making few conventional commercial real estate loans, you should try
hard to fit your loan request into the parameters of some government loan program –
such as SBA loans, USDA loans, Fannie Mae or Freddie Mac apartment loans, or one of
HUD’s apartment construction loan programs.

Where to Find Commercial Lenders
Since the only lenders making commercial real estate loans at reasonable rates today are
banks, you could rephrase the above expression to, “Where can I find banks making
commercial real estate loans?”

Since just about every bank will make a commercial real estate loan, if the borrower
promises to be a big depositor or if the loan is located close to the bank and it is very, very
secure, we could even shorten the question to, “Where can I find banks?”

Unfortunately 20 to 40 banks may not be enough. During the Great Commercial Lending
Drought, you may have to submit your commercial deal to 50 to 150 different banks.
You can find additional banks by going to maps.yahoo.com. Bring up a map of the subject
property’s location. Then, in the Find a Business field, type in the word, “bank.” You’ll find
hundreds of banks located near almost every commercial property in the country.

Summary
Placing a commercial real estate loan during the Great Commercial Lending Drought is not
going to be easy. You will probably have to submit your commercial loan application to 50
to 150 commercial lenders.

If none of these banks wants to do the deal, you can find more banks located close to your
property using maps.yahoo.com.

Then it is merely a matter of being persistent. If your deal is bankable and you keep
presenting it to banks, eventually you should find a bank willing to do your deal.
Got a Good Commercial Deal That is Not Quite Bankable?
Call our hard money lending company

Lloyd Carrington Jr.
Interstate Financial Group Inc.
3629 US HWY 80 EAST #220
Mesquite, TX 75150
972‐891‐9364 Office
866‐486‐0197 Fax
lloyd@interstatefinancialgrouponline.com
http://interstatefinancialgrouponline.com