Small property owners get help from niche lenders.
That's all well and good for the big players. But while the spotlight falls daily on the Trump and Reichmann sagas, is anyone paying attention to the plight of the grass-roots owners of the real estate industry?
For every "investment-grade" property in the New York area, there are thousands of small apartment houses, loft buildings, neighborhood store complexes and multi-user warehouses. Collectively, they are the backbone of our industry, and their need for funding, especially refinancing, is no less acute than is the case for trophy buildings.
Largely unnoticed in the business press, however, is that the owners of these smaller properties have been nearly shut out from funding sources during the current crunch. Even those who have enjoyed long and successful relationships with traditional lenders are finding in many cases that it counts for little these days.
The reasons aren't hard to understand. Having lost substantial capital because of non-performing loans and declining real estate values, many banks are under strong regulatory pressure to avoid real estate lending of all kinds. In addition, those lenders that are able to make mortgage loans find the economics of small loans unfavorable.
The time and effort required to consummate a $500,000 loan, for example, is virtually the same -- and sometimes even greater -- than what it takes to close a $10 million loan. Both require inspections, appraisals, environmental assessments, certification of rent rolls, and title reports. Furthermore, the small borrower is likely to have less sophisticated reporting and record-keeping systems, which means more work for the lender's underwriters.
Obviously, a large bank can operate more efficiently by devoting its manpower to larger transactions. Moreover, to management's way of thinking, adding small loans to a mortgage portfolio that has some non-performing assets among its larger properties does not enhance the overall image of the bank's asset structure.
So what does the small borrower do? I have two recommendations: (1) Look for a niche lender, one that makes the smaller mortgage loan a specialty; and (2) improve your chances of obtaining the funding you seek by preparing the best possible loan application.
Despite the prevailing bias among lenders, there is a small handful of institutions in the metropolitan area -- including New York Federal Savings -- that want very much to do business with owners of small properties, regardless of whether these are income-producing or owner-occupied facilities.
These institutions are themselves relatively small in asset size. And since regulations place a strict ceiling on the percentage of its assets that a bank can lend to any one borrower, the natural tendency among these institutions is to specialize in small loans. Our bank, for example, concentrates on mortgages in the $300,000 to $800,000 range, usually with loan-to-value ratios of 60 percent or less.
How can small borrowers improve their chances of getting the mortgage they need? It's simple. Before you approach a lender, have your income and expense statements professionally updated and checked for accuracy, remove any building violations, and correct any environmental hazards.
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|Title Annotation:||Finance; small mortgage loan lenders|
|Author:||Shapiro, Donald L.|
|Publication:||Real Estate Weekly|
|Date:||May 20, 1992|
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