As mid-year 2016 approaches, the availability of debt and equity for commercial real estate (CRE) and financing has been much discussed. It appears that the health of the banking sector and Northeast Ohio’s CRE market are both strong. Vacancy is generally low or declining in many asset classes and submarkets, while rental rates are steady or increasing.
New development has generally been steady, while over-building — the cause of significant weakness in prior cycles — has not been apparent.
This environment has been largely positive, yet some borrowers are expressing increased difficulty in obtaining CRE financing for their project. Several factors may be influencing the current market, so here are tips on how to best position your CRE opportunity to win financing.
Regulatory environment
There are several important developments that are impacting the macro-environment, including High Volatility Commercial Real Estate (HVCRE) capital regulations and CMBS risk sharing. Without getting into too much detail, these are both new regulatory scenarios that, generally, require banks to hold more capital to buffer from potential risks on CRE loans.
These rules have been in planning and implementation stages for several years, so they are not a surprise, but their implementation and resulting impact is relatively new in 2016. These capital rules are often causing lenders to consider amounts of loans, interest rates and fees, loan structures and other risk factors in new and different ways.
My experience in discussing with many CRE lenders is that the impact is subtle, yet real. Loan terms appear to be slightly tighter and pricing has not been as aggressive in CRE as in other commercial lending segments or in prior CRE business cycles.
Relationships matter
Throughout my career in banking and CRE, relationships with financing sources have been critical for CRE developers. Invest the time on a regular basis to develop and cultivate those relationships. Waiting until your first choice has let you down is not an opportune time to explore alternatives.
Changes in personnel, organizations and appetite for certain types of loans or geographic concentrations can have an impact on lenders and developers.
These factors can change quickly, and a developer may find that their project is not desired by a particular lender, regardless of whether the developer has done anything right or wrong.
Communication is critical
Whether arranging a first meeting, discussing a potential loan opportunity or providing reporting on an existing loan, prompt and clear communication is critical.
The party that the lender will communicate with should be clearly identified and any timing expectations spelled out.
Additionally, any bad or negative news should be communicated as soon as possible and not buried in some other reporting.
Loan request
A financing request should contain all pertinent information: a description of location and expected product to be delivered (number of units or square footage), project budget in reasonable detail, estimated income assumptions and explanation of how developer equity is comprised.
In addition, information on all of the parties involved, their experience and financial capacity should be included, even if in summary form. Finally, detailed maps, site plans, renderings and lists of tenants are critical to paint the picture and help the lender make a quick decision.
Reason for success
A former coach of mine instilled in members of our team that communicating early an absence from a meeting or practice gives you a reason, whereas communicating afterward is an excuse.Sowing the seeds of a banking relationship must be intentional and not haphazard. Through market knowledge, relationship building, communication and clear loan requests, give your project a reason to succeed in financing, not an excuse. Good luck!
Greg Ward is a senior vice president and senior relationship manager in Associated Bank’s Cleveland commercial real estate division. More information about Associated Bank, including commercial real estate services and financing solutions, is available at www.associatedbank.com. Email Greg at [email protected].
