Lenders who have not paused their lending activity have used several methods to reign in risk.
Because of Covid, the entire commercial real estate landscape is changing. This is especially true for debt capital. Some lenders are on pause for the foreseeable future, some are laying off staff, but most are more conservative with their lending parameters.
Since most lenders fall into the third bucket, scaling back their lending parameters. Let’s break down all the ways we are seeing commercial real estate lenders COVID-adjust.
Prior to COVID many lenders were ready and eager to lend 75-80% of the total property value.
On average, that has scaled back by 5%-10% across the board: construction, bridge, and permanent financing. It’s still possible to get to 80% and sometimes higher, but those lenders are much harder to find. A capital advisor / mortgage broker can help here if you’re not prepared to dig into underwriting with dozens of lenders to find higher leverage.
Permanent financing lenders are typically adjusted 25–50 basis points higher in relation to underlying bond indeces, like US Treasuries Yields or LIBOR.
“That’s weird, I read in the news that rates were going lower?” That’s true on a macroeconomic scale, but commercial real estate lenders are all about mitigating their risk and being compensated for lending on that risk.
Construction and Bridge financing lenders are typically adjusted 50–100 basis points wider. That means if your bank or debt fund lender was at LIBOR + 300 prior to COVID, for the same exact deal they are now around LIBOR + 350 to 400.
“Libor? What the heck is that?” See our commercial mortgage terms cheat sheet here:
To be clear, this isn’t all lenders but just a common theme we’re seeing.
A reserve account set aside with enough funds to service debt payments for 6–12 months.
This is a new one. We didn’t see this often prior to COVID but it seems that almost every lender is requiring this out of fear that tenants will stop paying rent.
For floating rate debt, lenders are instituting a 1% LIBOR floor rate.
This is another new one. This means that even if the 1-month LIBOR index is at 0.20% today and your rate is Libor + 400, your rate is 5.00% (because of the 1% floor), instead of your interest rate being 4.20%.
Lenders are going to have hesitation if your cash out request isn’t intended to be reinvested into the property to make it a stronger asset.
Some have a strict “no cash out” policy while others are saying “we need a good reason and we need to know exactly what it’s going to.”
Lenders that were once nationwide, now want to be closer to their home turf. They prefer that your property is within 50 miles of one of their offices (or where their email signature says their office is — since we are all WFH now).
Also, if they previously lent in the top 50 MSAs, they are probably now restricting lending to the top 25 MSAs. (“What’s an MSA?” Thank you Wikipedia: https://en.wikipedia.org/wiki/List_of_metropolitan_statistical_areas)
“Sorry, we are only able to lend to our current relationships.”
“Sorry, we are no longer allowing out-of-state Sponsors. The client needs to live in the same state as the property.”
This is especially true for banks and credit unions. PPP had many banks so bogged down that their CRE lending activities went by the wayside. If you’re unfamiliar with the PPP loans enabled by the US government’s CARES act, see Investopedia’s explanation.
Did I miss anything? I’m happy to engage more in the comments section so that everyone can learn or feel free to email me at email@example.com.
The above is a just sample list of the most common things we are hearing. This is not true for all lenders.
This is NOT true for ALL lenders.
The world is changing so fast! We are learning new things about lenders every single day. Next month, I might have a whole new list for you. Best of luck out there everyone and hopefully this helps you navigate the lender waters just a little bit easier.