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CRE investors may have to forego small bank lending

10/20/2016 | Real Estate Blog

Pennsylvania commercial real estate developers could discover that their funding options are increasingly limited. The Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation have cautioned CRE lenders multiple times on the grounds that their loan terms weren’t sufficiently rigorous. This has resulted in fewer small lenders¬†wanting to originate new loans.

Another side effect of the FDIC and OCC warnings is that small banks are also selling off their existing loans. This has resulted in financial institutions like private equity funds having to provide more lending. It also means that certain types of CRE deals, such as those having to do with construction and redevelopment, are less highly sought after.

Notably, a few small banks are going against the prevailing wind by increasing their loan activities. Some have partnered with mezzanine lenders to facilitate simpler, faster deals. Although the small banks’ general unwillingness to purchase loans means that larger banks are lending less because they won’t be able to sell debt, reports say that foreign banks have also stepped in to¬†fulfill some of the demand.

The high entry costs associated with commercial property projects mean that many developers have to seek significant fiscal backing from outside sources. The availability of such funds is subject to many factors, and when market constraints force them to rely on unfamiliar lending sources, they may find it harder to structure lucrative deals. Those who wish to work with nontraditional lenders may benefit from reviewing the proposed agreements with a commercial real estate attorney.