Borrowers who can show cash flow on their assets and a good personal credit history can get recourse loans in a commercial real estate lending market showing signs of life compared to a year ago.
Others need not apply.
So banking and financial experts said at a recent panel discussion sponsored by the Commercial Investment Division of the Westchester Putnam Association of Realtors. The panel exchange was tellingly titled, “Brother, Can You Spare a Dime?”
“First and foremost, your client has to breathe on a mirror,” said Michael Spencer, president of Admira Partners Inc., a financial research advisory firm in Cortlandt Manor. “You have to show life” in the form of returns on investment.
“They have to be real people,” Spencer said of commercial mortgage applicants. “One step beyond that would be having a relationship with the bank beyond just the mortgage,” such as through personal banking.
Michael Schiliro, vice president and small banking director at Community Mutual Savings Bank, said smaller banks still take a traditional, common-sense approach to underwriting loans, while larger banks “are having a harder time doing that” in the wake of the financial crisis. “Small banks are still doing well on the lending side because they haven”™t changed anything they”™ve done for the last few decades,” he said.
Schiliro said a good personal credit record is essential for a commercial loan applicant. Also, “There”™s no substitute for cash flow,” he said. “The days of having an asset and not having a meaningful cash flow are done.”
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Jeanne Cronin, regional managing director at Q10/New York Realty Advisors L.L.C., said recourse loans often now “are the only way they”™re going to get a loan done.” After the market”™s “crisis mode” of 2009 with no lending and little product, “There”™s definitely money available for commercial markets today,” she said, commonly at 65 percent loan to value. Banks have strengthened their balance sheets and rebuilt liquidity “and now they have money to lend.”
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“I do see that there is definitely a much more upbeat attitude,” Cronin said. “There are many lenders today looking at product. If you have really good product, there”™s going to be a bidding war and you”™re going to get a better rate.”
Charles Altman, president of First Dartmouth Advisors L.L.C. in White Plains, said that of the “huge” amount of existing commercial mortgage back securities, or CMBS loans, the percentage in default “has increased dramatically.” The special servicers who hold some of that debt have been reluctant to take back properties or work out loan modifications, instead doing deals with hedge funds and distressed debt investors who can buy loans at discount for cash.
Yet the panelists agreed the expected flood of deals for distressed properties by the fourth quarter of 2009 has not yet been seen in the market
Schiliro said some commercial property owners have taken on private equity partners “to stave that off.” And banks on smaller loans would rather restructure the debt than hold it as a troubled asset, he said.
While investors are “laying in the weeds” looking to buy distressed properties in the $1 million to $3 million range, said Schiliro, “Somehow these property owners are making their payments and sustaining their properties.” As vacancy rates continue to rise this year, more owners could reach the breaking point, he said.
Altman, whose firm provides workout services for nonperforming loans and evaluations for distressed debt investors, said the lack of deals in that area “has been very surprising to us.” Altman said he thinks loan servicers do not want the properties sold. Rather, “Special servicers are amenable to new people coming in in place of the old borrower.”
