Underwriting commercial loans is more complicated and time consuming that traditional residential loans. This is particularly true when looking at loans on retail and office properties.
Those in particular require an in depth look at the tenants, their leases/terms, and the history of those tenants in the property. Leases on these types of properties vary not only from property type to property type, but in each property as well. Many times we see a retail property for example where one tenant pays a lower monthly rate but reimburses the landlord for their portion of the common area maintenance, property taxes, utilities and insurance where another tenant pays more but all of the foregoing fall on the landlord.
As such, unlike a residential loan which only considers the financial strength of the borrower, in commercial
properties you have that component but deeper analysis of the tenant cash flows as well. Then once the loan is closed, the lender must service the loan. And unlike residential loans, most commercial loans require the borrower providing an annual personal financial statement, their tax returns and the financial information for the property itself. Lenders do this in most cases as a means of averting loan issues down the road by getting ahead of potential problems early. For example, a property might be experiencing higher than normal
vacancies.
By seeing the year end data coupled with current rent rolls/lease summaries, a lender might see a potential problem for the property supporting the loan payment. The lender can in turn contact the borrower to determine the actual situation and if any intervention is needed. Contrary to popular belief, lenders Do Not do this as a means of foreclosing. Actually the opposite is true and annual reviews are a means of avoiding defaults and foreclosures. All of that said, reviewing those annual reports is time consuming and is
done by actual review by a person.
When you put these two parts of the process together, most lenders would prefer to make larger loans since that means fewer loans to underwrite (and the related time consumption) up front and fewer loans to review in servicing annually once closed.
This is also why the best interest rates tend to be reserved for larger loans. Lenders understand the costs long-term are much lower for larger loans. If you consider that it takes the same amount of time for someone to review – post closing – any commercial loan than that cost as a percentage of the loan is smaller when the loan is larger. And with fewer loans in a portfolio, fewer servicers are necessary to review those loans annually.
Smaller loans are still available, however, they tend to be done by local community and regional banks. Larger loans tend to be made by nationwide lenders whether banks or mortgage bankers who eventually sell those loans on Wall Street.
Commercial mortgage brokers tend to face the same dilemma about the financial sense of working on smaller loans. At Commercial Lending Group, we have always felt compelled to help those in this space and treat them the same as clients with larger requests. Particularly on smaller loans, it’s important to find the right fit between borrower, property, and lender. If you have any questions, please reach out any time!
