Commercial Lending X with Brad Podcast

I know, we are a bit late to the trend, but I have finally launched our own Commercial Lending podcast.  The goal of this podcast is to provide insight into what is going on in the commercial lending world and help educate our borrowers, lenders, referral partners, and everyone else working in and around businesses and real estate about how social, economic, and political trends are impacting lending and how it impacts the financial decisions being made every day.  We will be bringing on guests who are experts in various parts of lending and the economy, and we hope to continue to provide insight into what we are seeing and experiencing every day in the commercial lending world. 

Our first episode is live now and we hope you will take a sneak peak of the type of content we plan to bring you.  There will be more to follow shortly, so please subscribe to our YouTube channel and get the alerts when new videos drop. 

Four Trends In Commercial Lending We Are Experiencing

A belated “Happy Halloween” to everyone or should I say an early “Happy Thanksgiving”.  Although you probably thought the horrors of Halloween were behind you, unfortunately there are a few trends unfolding in the Commercial Lending world that are equally as scary.  I certainly do not want to put anyone into a panic, but due to current market conditions there are a number of things unfolding in the commercial lending world that you need to keep in mind if you have future financing needs.  These concerns are not merely speculation on our part, but are things we are seeing borne out in the work we do and in the conversations we have with our lending partners and clients every single day.  I want to have a quick discussion on these items today.

Interest Rate Risk - the quick rise in interest rates is having a profound impact in a number of different ways, and quite frankly, higher interest rates are playing a partial role in one fashion or another in every issue discussed in this newsletter.  Not only are higher interest rates making it harder and more expensive to borrow money for an investment property or business purchase, but higher interest rates are having three other detrimental impacts. 

Recession Risks - Just about all economists at this point have stated they expect a recession at some point next year, and there are still others that claim we have been in the start of a recession since the first quarter of 2022.  Either way, banks and lenders are nervous about what the future holds.  Lenders are being more cautious in their underwriting for new loans, especially loans to higher risk businesses and those more likely to be impacted by a recession or higher interest rates.  We are also starting to see some banks not renew loans or indicate to Borrowers they want them to move their relationship when their loan matures.  These banks are trying to get out in front of potential issues.  Banks not renewing loans is a problem specific to businesses that have not fully recovered or who are failing to meet performance metrics post pandemic. 

Lastly, we are starting to see investment real estate loans not get renewed by banks.  This is especially a problem for Borrowers who do not report sufficient cash flow on their tax returns to support their mortgage debt at today’s interest rates.  I cannot emphasize enough to Borrowers, if your tax returns do not show the cash flow historically to support debt service, it can be very hard for conventional bank lenders to renew your loans.  Be sure to report that rental income and cash flow.  The difference you may pay in income taxes could be nothing compared to the substantially higher interest rate and fees you need to pay a non-bank or bridge lender, not to mention the hassle and time involved in having to struggle to find a new lender for your property.      

Sales Price Adjustments - We are seeing many business purchases and investment real estate purchases being negotiated at prices where they do not cash flow under today’s interest rates.  As is often the case when interest rates rise quickly, the market can be slow to adjust.  Real estate and business sales that closed 60 to 90 days ago were likely set by pricing 60 to 90 days before that.  The market is looking at those sales as comparable pricing for today’s market.  However, since May 1^st the Prime Interest Rate has jumped from 4.00% to 7.00% and the 5-Year Treasury Yield has jumped from 2.92% to the 4.00% range today.  This change in pricing ultimately impacts what Borrowers can afford to pay based on what they can afford to borrow.  However, sellers continue to look in the rearview mirror and they expect pricing on their sales based on recently sold properties and businesses.  In addition, the purchase market was flush with buyers and there was plenty of 1031-exchange money looking for commercial investment properties (with 1031-exchanges often providing more than the typical 25% in a down payment), which has continued to keep prices high.  There has also been an abundance of capital chasing business purchases, which has kept business values elevated as well.  However, over the past several weeks we are starting to see signs of buyers holding the line and prices dropping for real estate purchases and multiples declining for business acquisitions.  We think this is a trend that will accelerate going into 2023.   

Capital & Deposit Concerns - Although not broad based, we have heard some lenders being concerned about their capital levels and starting to slow growth to be sure they have the capital to survive an economic slowdown.  Due to the Dodd Frank Act banks are required to keep higher capital levels than in the past and most banks have much larger loan loss reserves then they had prior to the Great Recession.   Still, there are bankers with short memories and they are concerned with the current slowdown in home sales, that we could have a repeat of the Great Recession, and they want to be prepared.  Although we think that is unlikely to materialize for a number of reasons, the growing capital concern by some bankers will continue to plague the market in the near future. 

The high deposit levels many banks and credit unions have enjoyed the last couple of years due to all of the government stimulus money, lockdowns, people not spending, and businesses hoarding cash, is starting to run off, and some banks have seen their loan to deposit ratios jump substantially.  When loan to deposit ratios climb, banks start to lose some of the liquidity they need to lend, which lessens their appetite to do new loans.  Historically, banks would borrow money when their loan to deposit ratios were elevated so they could continue lending, but due to higher borrowing costs the banks are facing, there is more risk and less return for banks to borrow money to lend then there was previously.  Higher loan to deposit ratios are pulling some capacity out of the market. 

Although the changes with interest rates and the concerns banks have with underwriting are going to continue to present some problems for the market, there are certainly many positives we have moving forward.  There are still plenty of banks with low loan to deposit ratios that are looking to grow.  Banks continue to be very active in commercial lending.  In addition, there are more non-bank / alternative lending sources out there now than ever before, many of which will fill the void and do deals when banks will not, even if cash flow is tight or recent performance has been weak.  It is more important now than ever to be sure you understand the market, that your lender is poised to be able to continue to assist you, and that you have secured all of the financing you need to grow and be successful whatever the future might hold.    With over 350+ unique lending partners that run the gambit from Banks to Credit Unions to a wide variety of non-bank lenders, we can typically present multiple solutions to just about every financing need we encounter.  Please do not hesitate to reach out to us at any time at 630-988-4852 or via email at brad@commerciallendingx.com.  Thank you and we wish you the best of luck through the rest of 2022 and beyond! 

Key Lending Programs to Consider in 2022:

SBA 504 Property Acquisition and Refinance Loans – Utilizing the SBA 504 loan program, you can now qualify to purchase or refinance 51% or more owner-occupied commercial properties and existing business equipment debt into long-term fixed rates via the SBA 504 program, including refinancing other existing government guaranteed debt such as existing SBA 504 loans and SBA 7A loans.  You can secure 10-year fixed rates on equipment and 20 to 25-year fixed rates on 51% or more owner-occupied real estate with interest rates below 3.00% today.  In some cases, you can even take cash out up to 85% of value to cover other business-related debt, and with no cash out can refinance up to 90% of value.  

Conventional Bank Property Acquisition or Refinance Loans – We still have many Banks and Credit Unions being aggressive in the financing they are willing to provide for acquiring or refinancing owner-occupied commercial properties or acquiring or refinancing commercial investment properties (retail, office, industrial, etc.).  We are still getting loans done with fixed interest rates starting in the mid 3.00% range, and are not only getting 5-year balloons done but also 7-year and 10-year balloons as well as some 5, 7, and 10-year ARM mortgages done as well (where the loan is fixed for 5, 7, or 10-years with the rate adjusting every 1, 5, 7, or 10 years after the initial fixed rate period for another fixed rate term), with an entire loan term of 20 to 25 years. 

Low Documentation Owner-Occupied Commercial Property Financing – Utilizing bank statements versus operating statements or tax returns, we can refinance owner-occupied commercial properties into either a 5/1 ARM or into a 30-year fixed rate mortgage with rates starting in the high 4% range and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for businesses that lost money during Covid-19 but still had revenues and have equity in 51% or more owner-occupied commercial properties.   

Low Documentation Commercial Investment Property Financing – Utilizing leases, a rent roll, an operating statement, and bank statements for the property versus tax returns, we can refinance commercial investment properties into either a 5/1 Arm or into a 30-year fixed rate mortgage with rates starting in the high 4% range and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for real estate investments that did not report sufficient cash flow historically via tax returns or recently became stabilized and the Borrower is looking to get cash-out.  

Single Family & Multi-Family Investment Property Program – using an application and either existing property income and expenses or projected property income and expenses, we can finance single family and multifamily investment properties on a 5/1, 7/1, 10/1 Arm or a 30-year fixed rate mortgage with rates starting as low at 4% and cash-out up to 75% of value and purchase money up to 80% of cost depending on cash flow.  Qualifications are largely based on the subject properties ability to support debt service at as low as a 1.00x debt service coverage ratio and the borrower’s credit score.  This program is a great way to get cash-out of existing investment properties and maximize the return available. 

SBA 7A Loans – whether buying a business, buying 51% or more owner-occupied commercial properties, starting a business, needing capital to expand your business, needing funding to refinance existing 51% or more owner-occupied commercial properties, refinance other business debt, or a combination of any of the above, SBA 7A loans can present a great solution for you.  With 10-year loan terms for business debt, 25-year loan terms for real estate debt, and blended loan terms between 10 and 25 years for debt that is a combination of both owner-occupied commercial property debt and business debt, SBA 7A loans provide long-term amortizations reducing monthly debt service.  SBA 7A loans can be used to consolidate existing debt and reduce monthly payments, while also getting additional capital to operate your business.  Also, SBA 7A loans do not need to be fully collateralized by hard collateral and typically they come without any loan covenants (future conditions to hit like a debt service coverage ratio).  For businesses that are struggling to hit existing debt service coverage ratios at their existing banks, sometimes a restructure into an SBA 7A loan will help them qualify by extending out the payments into a longer amortization.  For Borrowers who are short the collateral to support existing debt obligations, the SBA can step in without being fully collateralized and provide the capital necessary to refinance debt or expand without being fully collateralized so long as the cash flow is there to support the loan based on SBA amortization schedules.   

Become a CLX Referral Partner

Do you have customers in need of commercial financing and you do not know how to help them?  Here at CLX we offer several programs in which you can become a referral partner and earn commissions on opportunities you run across.  You can be involved as little as providing us with a name and phone number.  Or if you prefer, you can help manage the client through the entire lending process.  We have many training tools and marketing materials available to us to help you grow your own client base.  Please contact us directly at info@commerciallendingx.com if you are interested in learning more about referring business to CLX.  

About Commercial Lending X

CLX is a small business that specializes in helping other business owners get the business loans and financing they need to be successful.  To learn more about CLX and the services we provide please check out our website at www.commerciallendingx.com.  You can also contact us directly at info@commerciallendingx.com or via phone at 888-975-0007.