Tag: CRE

Do You Really Want To Lend Below A 10% Debt Yield?

PROFITABLE BANK LENDING
PROFITABLE BANK LENDING

Commercial lenders should be aware of the important factors that drive customer behavior to borrow funds. Our clients borrow from us when they refinance debt, or purchase equipment, real estate, or finance working capital. However, there are three key elements that make debt especially appealing for borrowers. Commercial lenders that understand these three elements can better position themselves for success.

 

The Three Key Elements to Borrower

 

Why Commercial Loan Prepayment Provisions Matter

Protecting Commercial Loan Profitability

In an article two weeks ago, we discussed why community banks should desire prepayment provisions in their loans.  We also acknowledged that in this very competitive banking market banks are unable to negotiate a meaningful prepayment provision.  In this blog, we will identify techniques that some banks may use to obtain a meaningful prepayment provision, and we share a video explaining how CenterState Bank lenders use these techniques with commercial borrowers to negotiate a powerful prepayment provision. 

 

How Top Banks Predict The Future With A Loan Scorecard Methodology

Commercial Loan Scoring - Retail Building

In addition to traditional underwriting, some banks utilize a scorecard to rank their commercial properties. Projects are run through a scorecard and then rated on a numerical value. For banks without a credit or pricing model that provides a probability of default and expected loss, the scorecard allows an intermediate way to compare loan quality. In this article, we take a look at a sample scorecard and give banks some examples of how to use the methodology for better commercial real estate (CRE) underwriting and pricing.

 

The Current State of Commercial Real Estate Lending

More Profitable Commercial Real Estate Lending

Many banks today are satisfied to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV).  Banks typically approve credits above 1.20X and below 75% LTV – with many loan-specific factors that may skew these acceptable levels either way.  For competitive reasons, we see some banks who are dipping to 1.10X DSCR, and some deals are approved at 85% or even higher LTVs.  However, in today’s business c

Use This Calculator to Monte Carlo Your Multi-Tenant CRE Loans

Probabilistic Underwriting

If your bank is lending on a property with a variety of units available to lease, there is a chance that all those units might be leased up and there is a chance that none of the units will maintain their lease over the life of the loan. The reality is, the outcome is likely somewhere in between. The average banker would look at one set of cash flow and calculate their debt service coverage off a base case using a set of assumptions. The good news is you are not an average banker. Otherwise, you wouldn’t be reading this.

The Current Risk and Reward in Multifamily Lending

Multifamily Lending

Multifamily lending has been doing exceedingly well lately. A growing economy combined with a shortage of housing in many areas has created an increase in rents and a decrease in vacancies in most markets. The probability of default, as of April, is a mere 11 basis points. Despite the loss given default being up due to the higher loan-to-value (LTV) levels, the projected expected loss is still near a record low. In this article, we discuss pricing, return, a new potential risk in the market plus we highlight a great opportunity for banks.

 

Here is What Real Estate Investors Think About The CRE Market

CRE Risk

As we analyze commercial real estate (CRE) capital allocations this morning, we can’t help but draw similarities to last night’s second season opener of Westworld – in our opinion, one of the best television shows ever produced. A common rubric on the show is the Romeo and Juliet quote, “These violent delights have violent ends” and it fitting to any bank’s CRE analysis. As community banks, we can’t stay away from CRE, but we know it is dangerous at some point.

The Commercial Real Estate Eclipse

Crowdsourced CRE Outlook

With eclipse-mania in full force, we note that according to market professionals, commercial real estate has gone through an eclipse of its own and is now starting to wane. A survey released last week by JP Morgan of major real estate investors to include banks, insurance companies, pension managers, hedge funds, money managers and REITs shows that most investors believe we are in the late stages of the commercial real estate market expansion and that a more defensive posture is warranted.

How To Set The Loan To Value

CRE Underwriting

When it comes to underwriting commercial property for a bank loan how do you determine the right loan-to-value (LTV) ratio? Many readers will look at that question an answer – “We set our LTV at the maximum of our policy,” or “We set LTV where the borrower wants to the maximum of our policy.” While not bad answers, that methodology does not optimize the risk/reward profile of a commercial real estate (CRE) loan for a bank. Quantitatively inclined banks can do a better job both in term of risk management and return by expanding their analysis.

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