After seeing small-balance CRE lending stick mostly with five-year and shorter terms over the past three years or so - outside the apartment sector, at least - MarketBeat subscribers may have noticed at least a few more seven- and 10-year transactions of late.
But it's not a matter of active small-balance lenders becoming more comfortable making longer bets - after all interest rates generally today are still about as low as they've ever been. Chalk it up instead to the entry (and re-entry) of more mid-sized regional-type banks to the small-balance arena - or at least those that managed to survive the Great Recession and have sufficient balance-sheet heft to fund new commercial mortgages.
Granted the small-balance space remains far from flooded with these lenders, i.e., reasonably healthy banks with assets of roughly $2 billion or more, observes Keith Van Arsdale, president/CEO of small-balance loan originations specialist BMC Capital LP in Dallas. But the low-rate environment is attracting more and more of these institutions - as are the more stabilized CRE market fundamentals compared to the recessionary depths.
"The reason they're in the market isn't all that complicated: they're looking for yield and would rather lend against commercial real estate than invest in Treasuries," Van Arsdale relates. "These banks are determined to offer these programs; they're seen as profitable models for them now that the downside has improved."
Hence the 10-year small-balance transactions are popping up quite a bit more frequently than was the case even 18 months or so ago. It's welcome liquidity for borrowers who've had to deal mostly with the smaller community banks that have been most active in the small-balance arena in recent years - and which perennially prefer to stick with three- or maybe five-year terms.
"A lot of borrowers that had trouble finding any lenders whatsoever a couple years ago are still wary of these short-term transactions," Van Arsdale continues. "They're concerned not only about general liquidity in the real estate sector, but also that if rates rise notably their collateral values might not appreciate sufficiently over such a short term to allow for a full-principal refi."
But the community banks in most cases bend over to accommodate these clients - as long as they avoid distress. "The thinking is that if the loan is still performing (at maturity), we'll go ahead and underwrite another five-year term," Van Arsdale explains, adding that the typical 65 percent loan-to-value ratios also builds in protection.
As recently closed transactions (below) illustrate, mid-sized and larger banks are often more comfortable writing 10-year deals these days if they bifurcate them into five or so years at a fixed rate (or even interest-only in some cases) followed by five floating or otherwise adjusted to a then-prevailing "market" interest rate.
Amortizing over 25 years is becoming more of a norm as well, Van Arsdale notes. And these structures tend to eliminate prepayment penalties after five years - and in rare cases altogether.
Of course with the prevailing interest rate environment and yield curve, even the long lenders may price seven-year loans well beyond five-year rates. "At the end of the day we're still dealing with a wide margin between long and short Treasuries - not to mention uncertainty about where things will be five years from now," Van Arsdale cautions.
"So the longer you go out, the higher the rate."
But at least small-balance borrowers are slowly seeing their options grow with the burgeoning interest of mid-sized banks - pushed in part by healthier balance sheets generally. While construction and CRE loans remain the biggest factors behind bank implosions, at least failures are becoming fewer and farther between.
To wit, the FDIC in 2011 took over barely 90 banks, compared to nearly 160 the previous year. And last year's failures averaged less than $400 million in assets, likewise down sharply from the 2010 average of nearly $600 million.
As for some of those recent longer-term small-balance deals arranged by leading mortgage broker types: