Exploring Small Balance Commercial Loans
Steelhead Capital offers full spectrum Investment Advisory Services for commercial mortgages.
(Transcript of Capital Synergies Podcast)
DARBY WARLY: Hello, welcome to the Capital Synergies talk show for real estate investors. My name is Darby Warly. And today on the line I am very pleased to welcome Mr. Art Silverman who is Vice President of Debut Commercial Direct. Art is going to talk about some unique and exciting trends in the lending process for smaller balance commercial loans. Art welcome to the show.
ART: Thank you Darby.
DARBY: So Steelhead Capital to my understanding works closely with Commercial Direct because they offer fixed and adjustable rate commercial real estate loans with up to 30 year terms for both owner occupied and investment properties is that correct?
ART: Yes it is.
DARBY: Ok. So in our previous shows we’ve spoken with executives from Steelhead Capital regarding the qualification process for traditional commercial loans for amounts above a million dollars. So today we’re going to learn a little bit more about the more flexible and even residential like programs and its advantages offered by Commercial Direct. So Art, can you give us just kind of an overview of your loan programs?
ART: Sure. Gladly. And to start off Commercial Direct is a national lender focusing commercial loans a million dollars and under, with a minimum loan size of a hundred thousand. And we have two distinct programs. We have one which is more of a bankable type which is more for people who can document income if they are willing and able to do that then we can get them a loan that’s competitive with a bank.
And then we have what we call a stated program where borrowers don’t have to provide any documentation. We don’t do any real underwriting on it. The rates are a little higher but they can still get a conventional loan where as generally the have no options at all for something like that.
DARBY: Ok, so what are the - what are some of the highlights of some of your loan programs?
ART: Ok, you touched upon something earlier which is 30 year term and amortization. That’s great because we offer long term fixed rates as well so someone us can get a fixed rate for the life of the loan for the full 30 years where the bank most often will only offer a five year term.
DARBY: Right.
ART: So that’s critical because when you spread the payments out over 30 years, our rates may be slightly higher than a bank rate but our monthly payment should be lower. Our program is a little bit more about payment than it is about rate. You know what’s nice about having a long term, is the borrower is not looking at repeating the loan process every five years which is a lot of people don’t really like to do that.
DARBY: Yeah a lot of people are feeling a lot pain around that right now, but not sure….
ART: Sure, sure. You know it’s a tough environment outside our company. You know that it is tightening so you know that people who are looking for financing right now will have some fewer options than they did just six months or a year ago.
Besides the 30 term and end, we’re all about speed to close most of our loans within 45 days or less. And the reason even that is still a lot better than the traditional commercial loan which could take several months. The reasoning that it even takes up to 45 days is because a commercial appraisal could take anywhere from 2 to 4 weeks to complete.
We talked a little bit about not having a balloon or a short term loan. We don’t require ongoing financial reporting which is great. So once you have a loan with us you pay, you stay. We’re not looking for financial information. I used to be a small business owner myself and to make our creditors happy we have to have certified financial statements every quarter.
A lot of banks will want that, require that as part of the covenant to their loan, and that’s costly, very costly. And if the bank doesn’t like what they’re seeing in terms of the latest financials, most times they have the options to pull the loan, or say, “I don’t like what I’m seeing and you need to pay up now.” So we don’t do anything like that so…
DARBY: What about a balloon payment?
ART: That’s what I say, we don’t have anything like that. A balloon would be at the end of five years ok you owe us the half a million dollars that you borrowed. Then you’re in trouble if the picture is a lot different now than when you initiated the loan 5 years ago. If the business isn’t doing so well or if your credit isn’t so good, it’s going to be challenging.
So it’s definitely advantages to working with us in terms of getting into a long term program. The majority of our loans are going out on a fixed rate. There is comfort in that and we know that, because we hear that from our borrowers. Every month they know what their payments is going to be, and they know its going to be that for as far as they can see into the future.
DARBY: Ok. And they can borrow up to 97 percent of the property value.
ART: Yeah. Which is fantastic, which is an amazing, yes, our company is so revolutionary. There’s just a couple…
DARBY: That’s a new program right?
ART: Brand new. You know, within the last few months and that’s for owner occupied situations where our owner actually is operating a business in the property. And we’re still…
DARBY: What are some examples of that would that be an apartment building or what?
ART: No. Actually that would be ... an apartment building loan would be more an investment property. But, you know there’s a lot of commercial condos, maybe an accountant wants to buy an office condo for their practice or there’s a distributor who buys a warehouse where a florist wants to buy a retail store? So those situations where just people want to buy their own real estate.
So we actually make it…it’s a good story a lot of times business owners will be leasing the property, makes more financial sense for them to own it and have tax advantages to owning the property. So often times we run into that situation where we help them buy the property, and what you just described with our 97 percent financing program they can come with as little as 3 percent down to buy the property. Which is amazing, most banks max out at an 80 percent loan to value, loan to property value. So we’re well above that. Most borrowers need to plunk down at least 20 percent to buy a property, with other lenders.
DARBY: And how has the problem with the sub prime lending in the residential market…impacted that offering or has it at all?
ART: Well it hasn’t affected us and we’ve always taken I don’t want to say a necessarily a conservative approach when you’re lending 97 percent that’s not too conservative. But we’re aggressive but we’re not crazy. And so its business as usual here right now and I’m hearing and reading and I’m staying abreast of all the things that are happening and there is a bit of a crisis going on. And that’s in my mind - you know it’s never a better time to be employed by Commercial Direct or to be working with Commercial Direct as a borrower. So there’s really been no impact and it’s business as usual.
DARBY: And that’s enough because you don’t have these loans that are going to change five years down the road. These people know what they’re getting into….
ART: But actually it’s a little bit technical. One of the reasons that sub prime is imploding right now is because there’s a lot of teaser rates or interest only starting out or negative amortization. In order to get a sub prime borrower to qualify for a loan, they might be at a six or seven percent interest rate for the first year or two and then three years down the line suddenly their rate on their loan is double digits.
So now that’s not working for them and suddenly they have a payment they can’t afford, and with values going down at the same time that’s a double edge – they’re under water. They can potentially owe more on the property than it’s actually worth. We’ve always underwritten our loans based on what the rate is going to be years down the road not just what it is the first year or two so from an underwriting standpoint, that’s why we haven’t had these sorts of problems.
DARBY: Ok. Can you speak to how does that pertain to someone that is perhaps new to commercial funding? For a small business owner whose just getting into the business sounds like that’s really a better or smarter way to go, because they’re not going to be borrowing against a future that they’re not sure of.
ART: Well in all circumstances it would be prudent for a borrower to make sure that they get into a loan that they could afford.
DARBY: If a business is brand new they may not know what - they don’t have a track record yet to look five years down the road.
ART: Sure. Absolutely those people are going to have a more difficult time today to get - getting financing. There’s the most lenders are taking a whole new look at the credit and risk and one of the things we haven’t talked about yet in this conversation is what’s magic about the Commercial Direct program is that we focus on personal borrower strength and that we take a global look at them. Not just what their business is earning or if it’s an apartment building what kind of cash flow the property is generating but also what kind of money they make personally in other investments that they have. It’s a real difference with what we do and what other commercial lenders do is we take a look at the borrower.
DARBY: Ok.
ART: Traditional commercial lenders they’ll base their lending decision on the cash flow coming from the property or the business financials. And what we’ll do, is we’ll look at the borrower personally and see what kind of person strength - for instance a vacant warehouse that somebody wants to buy as an investment. Banks wouldn’t lend on that! No way! There’s no cash coming in. That’s what’s called debt service coverage. There’s not enough cash flow from the property to pay the proposed mortgage payment. But if the borrower has half a million dollars in the bank or more and is very liquid and has income and we take a look at their tax returns and they can personally support the debt, we’re happy to make that loan.
DARBY: Ok.
ART: Or, in what you said. Lets say its an apartment building, if its fully occupied that’s generally one of the best commercial properties most lenders would love to lend on. But a lot of times an apartment building may have occupancy issues. If it does there is not enough cash flow so a bank is going to pass on it where we can take that property and again combine it with the personal income and get a loan out of it.
DARBY: Right. So what is your relationship with Steelhead Capital? How do you your two companies work together?
ART: Well, Steelhead is a web partner of ours. They focus only on commercial mortgages and we fill the space for them which is the small commercial loan under a million dollars. That’s a real niche. The smaller the loan size the less interest there is in it. Right?
DARBY: Right.
ART: You know the higher the loan amount the more people want to lend on it. The more attraction there is the more money there is all the way around. So we’re - I don’t want to say bottom feeders in the industry, but we’re in the niche. We’re in an underserved market where we feel, we know there’s “gold in them there hills” and there’s tons and tons of small commercial deals across the country that just everybody’s passing on.
And as the borrowing community becomes more aware of us we’re a great lender for these loans. So we fill that void for Steelhead Capitol on these hard to place small loans, that no else wants to lend on. A mobile home park in rural South Carolina for $200,000 as an investment property where the borrower lives in California. Nobody’s going to touch that. We’re willing to loan 90 percent on it, things of that nature. So they’re just nuances and funkiness to the industry where we are actually a dominant player in the small loan category. That’s our focus.
DARBY: Ok, now it sounds like you guys are probably pretty attractive to borrowers who are seeking their very first commercial loans. Do you have any advice for those types of borrowers especially in light of the recent changes to interest rates?
ART: Absolutely. Interest rates wise I don’t think the changes have been that dramatic in fact we’re still in a relatively low historical rate environment. In terms of a first borrower on a commercial loan I would suggest that working with a few different lenders, getting a feel for what you would have to provide as far as documentation, as far as their loan programs. Its not cookie cutter like the residential loan market is.
So people who have done a number of residential loans they might think it’s the same thing in commercial. But it’s a very different animal. Commercial Direct is all about borrower education and full disclosure and making them - helping them make an educated decision. In fact we’ve come out recently with a borrower handbook which helps explain - which is a great piece for anybody’s that about to enter this arena. It’s available on our website commercialdirectloans.com.
DARBY: Ok.
ART: So we’re all about educating the borrowers. Making sure they get in the right program. And we offer multiple programs as well to meet their needs. Its doesn’t have to be a 30 year term, we also offer a 15 year term or a 20 year term and we offer adjustable and fixed programs. But also fixed afloat programs where the rate can be fixed for two, three, five, seven or ten years and then turn it adjustable.
So we have a lot of programs that meet the borrower’s needs. My advice to any new borrowers is talk to different lenders. Get a feel for if they have an appetite for you deal, and make sure you know what’s required of you from the lender so you make sure you try to minimize any unpleasant surprises.
DARBY: Alright. Very good. Well Mr. Art Silverman thank you so much for joining us today on Capital Synergies and for and helping us understand some of the key differences when applying for a small balance commercial loan.
So if you have any investment ideas or lending needs you like to discuss you can go to the quick and confidential loan request form found at steelheadcapital.com. Art, again thank you very much for joining us.
ART: My pleasure and thank you so very much for having me.
DARBY: You bet. You’re listening to Capital Synergies. My name is Darby Warly and we will see you next time. Thanks for listening.
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