In comparison to their large-balance counterparts, small commercial real estate loans may outwardly seem too inefficient to make their case for inclusion in most lenders' repertoires – particularly in today's climate of capital markets unrest and an emphasis on cutting costs while maximizing profits.
However, the demand for this type remains robust, and many lenders expect their small-loan origination volumes to constitute an even larger piece of their overall business in 2008, reported industry executives who spoke at the California Mortgage Bankers Association Western States Commercial Real Estate Finance conference, held recently in Las Vegas.
Countrywide, for example, operates both an on-balance-sheet small-loan program and a small-loan conduit program, said Peter O'Kane, vice president of the Pacific Northwest region at the bank. He predicted that despite the overall drop in loan origination volume anticipated for 2008, small loans will form approximately 25% of that volume – an increase over 2007's percentage.
Â "Even with the recent turmoil, things are still competitive with small loans," agreed Scott Robinson, director of loan origination at StanCorp Mortgage Investors, which also plans to ramp up its small-loan origination in 2008. "There are still a lot of banks out there with money to lend, and I don't see that changing."
Lenders' welcoming attitude toward this loan type, however, should not be mistaken as any trend toward loosened standards or acceptance of any marginally acceptable proposal.
By applying the same – or greater – level of careful analysis and selectivity to potential small-balance lending opportunities as would be used with a larger loan, lenders aggressively filter out the deals that are less likely to provide attractive results, the panelists stressed.
Secondary and tertiary markets will not necessarily be avoided, though specific product type and the lender's ability to view the property in person may be deciding factors.
For instance, Builders Bank primarily provides financing in infill locations, but an exception may be made if a particular asset type or property "makes sense," according to Carrie Nikols, senior vice president at the company. She added that Builders Bank has been able to maintain a "very clean portfolio" with approximately $200 million in small loans issued thus far in 2007 – chiefly through consideration of property locations within the firm's comfort zone.
With any deal, because the lender's costs involved with issuing any loan typically remain the same regardless of loan size, lenders working in the small-loan realm must remain constantly cost-conscious and strive to reduce inefficiencies wherever possible.
For productivity purposes, LaSalle Bank has had a dedicated small-loan staff since 2004, said Tim Ervin, managing director in the firm's real estate capital markets division. The bank additionally aims to streamline its small loan business through process integration. "The underwriting process and the closing process actually work together – step-by-step," he explained.
StanCorp Mortgage Investors, likewise, strives to save time and money in the small-loan space by reducing negotiation time and remaining flexible about certain missing documents from borrowers in order to prevent delays. "For us, it's a common-sense approach to getting a loan closed," Robinson said.
Furthermore, to cut costs, many lenders have adopted an overall technique of accepting only – or mostly – small loans that can fit the same general mold and can be approached the same way, thus enabling a streamlined process across several individual loans. Borrowers must keep these specifications in mind when seeking financing.
"In the small-loan world, you're trying to do as many cookie-cutter deals as possible," stated O'Kane.
When issued appropriately and efficiently, small loans offer a few inherent advantages over large loans: First, they can serve as a comparatively easier way for a lender to diversify its portfolio across property types or regions, Nikols pointed out.
In addition, while the loan's small amount may mean lower returns, it also limits the risk on any individual loan. Such considerations have taken on even greater importance in today's somewhat less risk-tolerant environment.
At the same time, loan values that drop below a certain critical point will usually be of minimal appeal to most lenders, who may only look at extremely small loans for the sake of developing or enhancing a particularly valuable borrower relationship. Loan amounts issued by both small-loan divisions at Countrywide begin around $500,000 unless smaller deals are grouped, O'Kane said.