Commercial loan strength returning

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Commercial loans were up 40 percent during the first two months of this year, compared to the same period last year.

Land Title Guarantee Co. Manager Randy Slaybaugh, who tallied the numbers, said they are a blend of new commercial loans and refinanced and modified loans, Slaybaugh said.

Industry insiders say a combination of market factors are driving the increase in activity, including three and five-year loans coming to the ends of their terms, low interest rates enticing borrowers to refinance, investors borrowing on properties they bought with cash and buyers taking out new loans on bottom-dollar properties.

New commercial loans are indicative of sales. But refinancing activity is also positive, Slaybaugh said, because it means properties are solvent enough to get financing.

Slaybaugh said refinanced loans accounted for about 63 percent of $484 million in local commercial borrowing during the first two months of 2012. Refinanced loans made up about 59 percent of $84 million during the first two months 2011.

The dramatic difference between the amounts includes $312 million loan that was modified this year.

“One big number like that can skew things a lot,” Slaybaugh said.

The $312 million was likely the full credit line of a national company that owns one or two properties in Colorado Springs, he said, and only a portion of $312 million would have made an impact locally.

Even excluding the $312 million, commercial lending was up to $173 million, about 50 percent, over the first couple months of 2011, Slaybaugh said.

Tony Leveque, vice president of business development for Central Bank & Trust, said he’s seen a dramatic influx in commercial lending and particularly commercial refinancing activity this year.

He said it’s hard to find sorted data that can highlight trends as banking agencies don’t tend to keep separate records of commercial versus residential loans and they don’t separate refinanced loans from new ones.

“Anecdotally, though, I can tell you the demand for loans, including refinanced loans, is huge, probably the biggest I’ve seen it in 10 years,” Leveque said.

He hasn’t seen so much commercial business come through a single bank’s door since the early 2000s.

While there was a lot of activity during the real estate boom, it was spread out among many banks that no longer exist. With fewer banks still doing business, those that remain are getting a lot of loan applications, Leveque said.

They have been cautious about their lending the last three to four years, Leveque said.

It makes sense to refinance now, said Geoff Wright, FirstBank market president.

“I really think it comes down to rates,” he said. “They’re at or near the bottom. They’re definitely at an all-time low.”

Rain after a drought

Banks have been so cautious that complaints of frozen financial markets and tight-fisted lenders have become a refrain for business owners, brokers and politicians during the recession. Those complaints continue and will continue until distressed properties turn around or lenders take them back and sell them to well-qualified buyers who are less leveraged.

But financing is loosening up some.

“Values have started to stabilize,” said Mike Herder, chief financial officer for 5Star Bank.

He said banks were not likely to lend while they saw real estate values falling.

“It’s that saying, ‘don’t try to catch a falling knife,’” he said. “But with those values starting to stabilize, I think there’s a comfort level for some banks.”

The comfort level has several players — some who industry experts expected to warm the bench for the rest of time — coming back onto the field.

The Commercial Mortgage Backed Securities market started returning last year and has come back stronger this year, said Tad Philipp, a Washington, D.C.–based senior research analyst with Moody’s Investors Services. CMBS allows lenders to bundle commercial loans and sell them to investors.

It was a popular method for managing big commercial loans during the boom. But with a glut of bad loans and loans on properties with plummeting values, they fell out of favor just as mortgage-backed securities did in the residential lending market.

With no one to buy loans the last few years, markets were tight.

But investors, like life insurance companies, have started looking for better returns than the pennies they’re accruing on cash in the bank and the securities market is returning.

In 2011, the CMBS market processed about $40 billion worth of commercial loans, Philipp said. That’s a big spike over recent years with almost no activity, he said. And it echoes the $50 billion a year market from the early days of the real estate boom.

Echo is the accurate term, Philipp said, because some of the loans in the CMBS market today are the same ones that were initially approved five years ago and have matured.

Commercial loans, while they might be on a 30-year amortization schedule, are typically adjusted every three, five or 10 years.

Loans made five years ago coming up for renewal now

Kevin Kratt, a commercial real estate developer who owns several retail centers in Colorado Springs, said the return of CMBS has made lending more competitive.

“All they want is the return,” he said. “It kind of takes the relationship element out of it.”

With the return of the CMBS market, healthy properties can shop for the best deals, Kratt said.

Money is still available today, he said. The difference is that property owners like Kratt have to have more skin in the fight. Lenders don’t want to be over-leveraged. During the boom, they would finance up to 90 percent loan to value. Today, 75 percent is high.

The trouble

If borrowers have loans coming up for adjustment now and they don’t have a healthy loan to value ratio or strong revenue, they will have to come to the table with cash, said Jack Kerr, market president for First Commercial Bank.

It happens a lot, through no fault of the borrower, he said.

“They borrowed $1 million on a piece of dirt and now it’s worth half a million,” he said.

Land depreciation and lack of revenue still plague commercial property owners and there’s little the banks can do to work with those borrowers because Federal regulations require that lenders’ portfolios meet certain standards.

They can have some of those high-risk loans on the books, but not many.

Banks can work with some borrowers they know and who have been good clients and made payments on time despite the depreciation of their assets, but only if the bank isn’t already over federal thresholds for high-risk loans in its mix. And that’s the trouble, Kerr said — most banks already have too many problem loans on the books.

“A couple years ago, we kicked out customers we spent 20 years developing,” Kerr said. “And you don’t get them back after you kick them out.”

Federal regulations required that the bank wipe those loans off its books, he said.

New lending market

He sees a lot of business owners coming in looking to refinance, he said.

“Most of them I can’t do because I’m looking at the problem of another bank,” Kerr said.

Philipp calls those borrowers “zombies.” They’re too strong to default on active loans, but not strong enough to qualify for refinancing.

Herder said there are options for those borrowers. The Small Business Administration offers loans that can make the loan work for a bank’s books and a loan guarantee that alleviates some of the risk to the bank.

Kerr said that while he struggles with loans for borrowers who bought at the wrong time, he is seeing a lot of investors seeking loans for deeply discounted properties that have gone through foreclosure and come out at a fraction of what the previous buyers paid for them.

Wright at FirstBank said he has seen a lot of refinancing and new financing applications from investors as well.

A lot of activity is coming from investors who bought foreclosed or distressed properties in the last year or two, Wright said. Those investors paid cash for buildings and got them for bottom dollar prices because no one would loan on them. The investors then repositioned them, got new tenants into previously vacant office and retail spaces and turned them into healthy revenue-generating assets.

“Now they’re looking to re-leverage into new deals,” Wright said. “Those deals are very interesting to us.”

Investors with holdings like that usually have the cash to back up a deal and aren’t looking to borrow the maximum. They’re savvy, and they’re in the deal at a good price to begin with, he said.

Philipp said he expects commercial lending to continue to loosen in order to keep up with maturing loans. Commercial mortgage security backed markets were processing $150 billion a year at the height of the market and those loans with 10-year terms will come up for adjustments in 2016 and 2017, he said.

Commercial loan orders in January and February

Year Number dollar amount(in millions) percentage that are refinance
2011 101 $84 59
2012 141 $484 (-$312 for a single loan = $173) 63
Source: Land Title