Commercial Real Estate Lending

Despite the “gloom and doom” that seems to exist around the Commercial Real Estate (CRE) market, there are many good CRE lending opportunities out there if credit unions can learn to effectively manage the risks involved.  With that in mind, CU Business Group, our partner for providing reliable, knowledgeable advice to aid credit unions through every step of the lending process, published the following guidance in regard to CRE lending…

The Commercial Real Estate Market:
Area of Opportunity or Meltdown?
by Larry Robbins, CUBG Senior VP and Chief Credit Officer

Many experts are predicting the commercial real estate (CRE) market will be the next big meltdown in the economy. Some markets have been hit much harder than others. For example, the Silicon Valley office market in California is clearly overbuilt, which means years of recovery. More than 43 million square feet of office space stood vacant at the end of the third quarter 2009, according to the CB Richard Ellis Group Inc.

To effectively manage risk in this industry sector, first and foremost, credit unions should not take on loan situations that are beyond their capabilities. Frankly, credit unions should not be impacted by Silicon Valley office tower foreclosures because these loans are more than we can effectively manage. Credit unions that stick to smaller, “plain vanilla” CRE lending will have better results in the long run.

Second, while it is important to have a macro view on economic conditions, understanding submarkets is the key to making good loan decisions. A current appraisal remains the best way to understand these submarkets.  A thorough review and understanding of the appraiser’s due diligence, assumptions and conclusions remains a top priority. Quality appraisals require a detailed discussion of the state, county and local market for the subject property. The appraisal should tell whether the submarket is improving, declining, stagnant, or over-built.

Beyond this, the fundamentals of appropriate commercial real estate lending rarely change. Below are some key points to remember for CRE lending in today’s market:

1. Demand current appraisals with a qualified secondary review.
2. Don’t automatically go to 80% loan to value. You may need more cushion in a declining market.
3. Who is the borrower? Is it an existing member with good experience? Is it a new member? Is the deal sourced from a loan broker? If so, how well do you know the broker?
4. If the loan is a refinance to payoff another lender, are you taking on someone else’s problem loan?
5. Cash flow is still king. Does the property historically support a minimum 1.25 DSCR?
6. Who are the major tenants and how strong are they?
7. Is the property multiple use, specialized or single purpose?
8. Be wary of construction loans in this market. If the payback is from future sales or future unidentified tenants you may want to pass.
9. Be cautious with strip malls and retail buildings, especially with a large anchor tenant (think Circuit City).
10. Remain diligent with environmental issues.

The bottom line is that there are still many good opportunities out there for credit unions. Just stick to the fundamentals of commercial lending and your chances of success will increase dramatically.

CU Business Group, LLC, was formed specifically for the purpose of assisting credit unions in offering business lending and deposit services.  Through a partnership with CU Business Group, your credit union gains access to the expertise, experience and infrastructure needed to align your services with the business needs of your members. 

For more information on the services available through a partnership with CU Business Group, contact Circe Gleeson today at 800.721.2677 | Ext. 106, or simply email marketing@kansascorporate.org.