Strict Banking Requirements
May 25, 2013 03:35PM
By Traci Osuna
According to Gary Grote, Omaha group president for Great Western Bank, while commercial loans may not have been impacted by the low rates as much as residential loans have, there still has been a significant effect in the commercial market.
“The difference between residential and commercial is that in the commercial loans…there may be pre-payment penalties that apply until the maturity day,” explains Grote. “So you can’t always just pick up the phone and…refinance on a whim like with a residential mortgage.” He does add that though it may not be as “easy” to refinance a commercial loan, “many people have already taken advantage of the low rates…and we continue to see opportunities.”
Craig Lefler, senior vice president and manager of commercial banking with Mutual of Omaha Bank, agrees with Grote, saying while there may be a few more obstacles for commercial loans to be refinanced, there are still ample opportunities for businesses to seek lower interest rates on existing loans. “A lot of commercial real estate loans are done by banks on a five-year type of basis and some of those, depending on the bank, may have a penalty for early payoff. That would certainly be a consideration for [when it comes to the] cost of refinancing the loan.”
“The difference between residential and commercial is that in the commercial loans…there may be pre-payment penalties that apply until the maturity day." - Gary Grote, Great Western BankBoth Grote and Lefler say that although rates are at historic lows and there are many opportunities available for commercial loans to be granted as well as refinanced, the process and underwriting standards are higher than ever.
“After the financial crisis, credit certainly tightened up and [banks] returned to more prudent, conventional underwriting standards,” says Grote.
Lefler agrees that there are more stringent standards and more in-depth analyses today than in the past. However, those are countered by the benefit of lower interest rates. “It’s a mixed bag,” he says.
Interest rates for commercial spaces are different than those for residential mortgages. Grote explains that the typical five-year loan originated from the trouble that the Savings and Loans went through in the 1980s. The S&Ls offered CDs for two to four years at fixed rates. They then would loan money at fixed rates for 10- or 15-year loans. “When the rates went up, they got burned because their cost of money increased but their loans were at a fixed rate.”
He shares that banks typically keep five-year commercial loans on their balance sheets while traditional home mortgages are sold off to other organizations.
“A lot of commercial real estate loans are done by banks on a five-year type of basis and...depending on the bank, may have a penalty for early payoff. That would certainly be a consideration for [when it comes to the] cost of refinancing the loan.” - Craig Lefler, Mutual of Omaha BankAs another option, Grote says that some banks, such as Great Western, may offer certain clients 10– and 15-year fixed rates. But he says that this is a unique situation.
Thirdly, he shares that the Small Business Administration has a popular product called the SBA 504 Program, in which a portion of the loan allows the borrower to do a 10- or 20-year fixed rate. “So there are options out there, and it just kind of depends on the property and the borrower and where they’re at in their life cycle and what makes the most sense for them.”
Depending on whether the loan is for owner-occupied real estate or investor real estate, Grote explains that the lender will underwrite the occupant’s financial statements or the investor’s ability to rent space. Both men recommend that businesses have their financial records in order and ready to be submitted for review.
“Be organized and be able to quickly produce their financial statements in an organized fashion,” says Grote. “That helps banks respond quickly and be able to give good guidance and good answers.”
Lefler adds that, in addition to the financial records, the lender will also consider “the projection, going forward, of how the space will be used and ultimately, from the lender’s point of view, will the debts get repaid.
“My sense is that there is a feeling that banks are not willing to lend money on new business ventures and to projects like this, but I would say that this is not true,” says Lefler. “In our market, which is stable, banks play an active role in these spaces on a daily basis.”