Extra, extra read all about it! New standards on commercial real estate loans. Goodnews or bad news?
Commercial real estate refers to any income producing real estate that is used only for businesses such as stores and offices. Typically, an investor purchases commercial property, leases out space and collects rents from the business that operate within the property. Financing, development and reconstruction of those properties is usually accomplished through commercial real estate loans.
Here’s the big news! Over the past year, loan officers reported “tightening” their lending standards for commercial real estate loans. This could be bad news for investors who greatly rely on commercial real estate loans. Regulators have been warning banks about being overly aggressive in commercial real estate lending. A joint bulletin in December notified the industry that, during 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with commercial real estate lending. These new standards on commercial real estate loans are affecting investors all over the country.
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Things like loan demand, credit standards, and loan pricing are finally lowering stock prices. If bank lending does not turn around, investors need to not only question the health of bank stocks but the overall economy. The Federal Reserve regularly surveys bank senior loan officers regarding lending conditions in the U.S. The most recent report reveals three big trends that have short-term and long-term implications to bank investors.
- Loan demand is slowing
- Banks continue to struggle increasing the spread of loan rates over cost of funds
- Banks are tightening credit standards for auto, commercial real estate, and multifamily lending
After four strong years of loan growth, bank lending has slowed considerably since November 2016. Many reports say that the slowdown in lending is partly because of the inability of bank stocks to keep pace with the S&P 500 during the past 3 months. Bank investors should be concerned about 2017 revenue growth. Investors who are expecting the GDP to grow 3% or more during the remainder of 2017 will want to pay close attention to bank lending this year. It is hard to imagine how the economy can grow significantly in the absence of strong bank lending. Likewise, banks need a strong economy to grow.
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With all that being said about the new standards on commercial real estate loans, let’s end this article by quickly explaining the different types of commercial real estate loans.
1. Bridge Loan
With this type of loan the borrower gets instant cash flow to be able to finance the immediate needs and requirements of a project. Bridge loans have a term period of one year and are temporary. They are usually obtained when the borrower is actually waiting for the long-term financing to come through and are usually offered through private lenders. For a bridge loan, the borrower needs to have excellent credit score and a proof of income and the borrower has to show that they have sufficient cash to cover the existing expenses of the property and the new loan.
2. Real Estate Purchase Loan
Real estate purchase loans have certain requirements. Such as, in order to qualify for this type of loan the borrowers must have an impressive credit score of 700 or more. Borrowers are also required to have substantial savings in personal and business bank accounts.
3. Hard Money Loan
Here the owner has to list the commercial property as “collateral” to qualify for hard money loan even if the loan is taken for the purpose to save it. Private lenders commonly offer hard money loan. Hard money loans are temporary and are only offered when time is of critical importance like a foreclosure proceeding.
4. Joint Venture Loan
When the partners of a property share the profits and losses of a property equally, a joint venture loan tends to be the appropriate option of commercial real estate loan. If neither of the party is able to gain advantage, this type of loan can be beneficial. Investment firms and private investors usually offer joint venture loans. Normally two of the partners of a group apply for the financing.
5. Participating Mortgage
This is where the lender in participating mortgage, is allowed to share in part of the profit acquired produced by commercial property. A monthly mortgage payment is received by the lender with interest along with a share in the rental income of the property or the sales proceeds. Among commercial property loans and property development finance, participating mortgage is popular for retail and office properties as the financial stable tenants sign long-term leases.