The Return of the Local Bank

Sure, they have always been around. Some are called Community Banks, other Savings Banks or Commercial Banks. But they are all effectively the same. They take your deposits, leverage them, and lend the money back out at a profit in the form of commercial mortgages.

How competitive have they been in commercial real estate lending? Earlier in this recovery, bankers told me, commercial mortgage“For a commercial mortgage, we can’t compete against Life Insurance Companies or CMBS” or “we can’t offer long term fixed rate product at any leverage level.” I can’t tell you exactly what day it all changed, but it was in April or May this year. Now, we are off to the races.

Generally in commercial mortgages / commercial borrower, there is a perception that you have to give up something that you want in order to get something that you would want more. For example, you want a low long term fixed rate commercial mortgage, which means that you must give up any type of pre-payment flexibility. This meant that if rate and dollars were your priority, you would go to FNMA, Freddie, Commercial Mortgage Backed Securities (CMBS), or Life Insurance Companies for your loans. If the ability to prepay your loan without a ridiculous penalty is more important, you would stick with a local bank.

These two worlds have now collided. Banks have stepped up, and are now offering 7 and 10-year loans, with step-down prepayment penalties, non-recourse, at leverage levels approaching CMBS! Not just one bank… several.

In 2011, I had lunch with a local bank executive who explained that non-recourse loans would not be possible due to the regulators, and the increasing scrutiny on each bank that came with the crash of the real estate and capital markets.

This same person is now a non-recourse lender for stabilized product only, and could see a potential pathway to limited recourse or recourse burn-downs on structured bridge product. Another lender, quoting an office building for me this week, asked if a partial guarantee would ‘kill the deal’. When I said yes, the response was ‘ok, I should be able to get this done’. Wow! I can get a 10 year fixed rate, non-recourse loan on an office building, with a step-down prepay… I don’t think that I was able to get that done even in the best of times of the previous cycle.

So, it appears that banks are back and better than ever. The competition to land a good commercial mortgage from good borrowers has necessitated major shifts in terms, and our clients are fully enjoying the benefits. Still, the other commercial mortgage lending sources have their place and can offer certain advantages. However, the gap has closed, and I believe that CMBS, Life Companies, and the Agencies have been surprised by who they are competing against today, and how hard they have to compete today.