Missouri commercial property developers have long depended upon banks as a source of needed debt financing. However, some banks have seen this sector become less profitable compared to other investments.
2015 was largely characterized by loss rates for commercial real estate bank loans that were lower than they had been for many years. Then, according to a provider of financial statistics, loss rates jumped up during the fourth quarter. While this end-of-year trend wasn’t unique to 2015, and resultant losses were still lower than they were in 2008, experts aren’t exactly sure what causes the phenomenon.
Commercial real estate lenders base their decisions on cash flow. When they are making loans to a property that is being developed, they want to see if there are tenants that are lined up. When refinancing an existing loan, they will look at the actual rents that are being paid. As cash flow has generally been good, and as the interest rates that CRE loans can demand are often higher than other forms of loans, banks have stayed in the market. However, regulators have been cracking down on reserve requirements and have noticed with disapproval that some banks have been loosening their underwriting standards.
Commercial real estate development is not without risk, and it requires both equity and debt financing. If banks start withdrawing from the market, alternative lending sources will need to be found. In many cases, experienced commercial real estate attorneys can recommend new types of platforms that may be suitable for their developer clients. Legal counsel can also review a proposed loan agreement to ensure that there are no provisions that could be problematic in the future.