Posted: July 23, 2010

The financial environment for local businesses seems to be struggling along at best. It appears most businesses are just getting by, making just enough to pay the employees, pay the rent and pay the taxes. Not much left in there for profit. With dwindling profits, the sales of commercial properties are also way off from years past. It appears that buying a building is the furthest thing from most business owners' minds. Besides, who's lending any money these days?

I wanted an answer to that exact question, so I started asking around and was surprised at the responses I got back from the local and regional commercial loan officers I talked with. The great news is that most of the banks have money they want to lend to local businesses. There are a few banks that are overextended and have pulled back on their commercial real estate lending, and we are off the radar for some of the national banks.

Across the board, the world of banking has changed a bit but the opportunities are still out there. Lending rates are fabulously low and look to stay that way for a little while.

From the lender's perspective there are some concerns you do need to understand to open the vault doors. First and foremost, banks today are looking for banking relationships. They don't want to just give you a loan; they want your long-term business. They want your deposits, your business checking account, a chance to get your insurance business and as much of your other financial business as they can. Deposits drive their train and allow them to make more loans. More specifically, lenders are looking to lend to operating businesses, preferably commercial and industrial, medical and other nondiscretionary types of businesses. They also really like commercial owner-occupied buildings; this is an opportunity.

As part of the new environment we are in, lenders are more conservative with their lending practices; they want less risk and a bit more of your equity in the game. Loan-to-value ratios are sliding slightly downward and this is driven by a concern for appraised property values. Where you used to be able to get 80 to 90 percent loans against appraised value, the new norm is 75 to 80 percent loans against actual cost. Yes, you can still get Small Business Administration 504 loans at 90 percent loan to value. Because building sales have dropped off, appraisers are having a much harder time finding comparable properties and are therefore being more conservative with their values. This pressure pushes appraised values down slightly, creating a bit of a downward cycle for the short term.

The general consensus is that there is not going to be a house-cleaning of commercial properties that created the situation we saw with residential properties. For a lot of property owners the gravy has slipped off the plate but the meat is still there. There are higher than comfortable vacancies, but the cash flows are holding in there and covering the bills. Lenders are still more interested in working with the owners than trying to force them into bankruptcy. It takes a bit of work on all sides but a little longer term, a little more equity and the deal starts to look OK again, for the time being.

Lenders are also looking over their shoulders a lot these days with all the changes in financial regulations. So far the regional banks have stayed out of the regulatory spot light but they are ever watchful that the regulators might want to tighten up on them next. This makes the lenders a bit more cautious and they are therefore somewhat more conservative with their decisions. Hopefully, having a better understanding of the lender makes it easier to approach this unique time in the lending world.

This really is a unique time in the commercial real estate and banking industries. Property values are down from the highs of a couple of years ago, loan rates are at their lowest in recent memory, the banks really are interested in talking with business owners again and we might just be at the bottom of the market. Those companies that survive these tough times and prepare for their future will be the ones that prosper the greatest when we have our resurgence. It may be time to look ahead a little bit instead of just looking down.

Special thanks to all the commercial loan officers that shared their insights with me.

Jonathan Guion operates Jonathan Commercial Properties in Virginia Beach. He can be reached by calling 496-0866.