Florida Banks For 3 Years Have Cut Commercial Realty Loan Exposure
By Zachary S. Fagenson
Florida banks for the past three years have reduced their commercial real estate loan exposure, though lending for multifamily residential real estate and nonresidential projects after initial increases have remained flat.
In 2008 Florida banks on average had about 409.2% of their total risk-based capital dedicated to commercial real estate, according to the Federal Deposit Insurance Corp.’s state banking profile. That’s $4 of lending for commercial real estate for every $1 in bank coffers. Of that, construction and development on average represented 105.8% of risk-based capital, multifamily accounted for 13.8% and nonresidential projects accounted for 238.2%.
Fast forward to the last quarter of 2010: statewide, banks on average had about 368.7% of their total risk-based capital dedicated to commercial real estate. Construction and development loans sank to 67.4% of total risk-based capital.
Multifamily residential and nonresidential lending, however, remained nearly flat at about 17% of risk-based capital and hovered around 270%, respectively, during 2009 and 2010.
Experts agree commercial lending in Florida will be scant for the near future and the only properties banks will consider will be performing class A assets.
"Selectivity is still the name of the game in terms of the borrower as well as the assets," said Alex Zylberglait, associate vice president of investments for Marcus & Millichap.
"We’re seeing deals right now being financed anywhere between 60% to 75% loan-to-value generally."
Yet Miami-based banking expert and economist Ken Thomas didn’t share that optimism.
"Go anywhere in the country and say Florida commercial real estate and eyes roll, because it’s considered one of the greatest areas of potential exposures," he said. "Banks that aren’t into it don’t want to be and banks that are into it don’t want any more."
Though he conceded "some banks here are getting more involved in it," a key challenge to opening up commercial real estate financing, which he argued is at the core of South Florida’s economy, is overcoming investors’ and regulators’ negative perceptions.
"So many banks are just cutting back because the regulators want them to or have encouraged them to," he said. "If they’re public banks, they don’t want to report that they’re getting more involved in it because it’s considered an area of concern."
As such, most commercial real estate financing being done is through the Small Business Administration’s 504 program, which allows business owners to invest in land, buildings and some types of equipment and machinery. A bank lends 50% of the project’s cost, a certified development corporation lends 40% and the borrower contributes 10% equity. The program reduces the bank’s risk, making it a more attractive loan.
The product, according to Kohn Commercial Real Estate President Ronald Kohn, is being mostly used by banks to extend financing for owner-occupied properties of class B or C.
Pure bank loans, he said, are being extended to buyers with deep pockets, like real estate investment trusts, for class-A performing assets.
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