Access to capital has always been – and likely always will be – a challenge for smaller real estate investors.
The amounts are small – $1 million or less – the loan-to-value ratios are high, and the underwriting stringent.
Not the sexiest sector in lending.
Now, business may be getting even tougher as the bank with the largest market share retreats from that segment.
A number of insiders are telling IL that PNC Bank and other large banks are abandoning the business, telling clients they will not renew maturing loans and short-term mortgages for smaller real estate investments.
And – ironically – the CEO of the largest Louisville bank, rated by deposits, is one of those clients getting the boot.
Oddly, risk aversion does not seem to be the main factor.
One investor told IL Tuesday he got a call from PNC’s offices in Dayton, notifying him two loans would not be renewed. One is a $200,000 mortgage on an office building valued at $850,000. “These are low loan-to-value deals. These are no-brainer loans,” the source said.
The PNC executive from Dayton told the source, who asked not to be named, that PNC is “not focusing” on small real estate investment deals. The source said he pointed out to the PNC executive that the loans were current and had never had any issues.
“The guy said, ‘Look, I’m just delivering the message …'” the source told IL.
The message is that PNC is exiting smaller investment real estate loans to focus on deals in the $15 million to $20 million range. The PNC executive told the source the bank will still do “‘owner-occupant and larger deals.’ My only question for them was, if I had an owner occupant loan with PNC and investment real estate loan that they weren’t renewing, why would I refinance the owner-occupant loan with you down the road?
“Banking should be a relationship, and this defies all of that logic.”
PNC executives appear to have made a decision on loans not considering the ramifications, with several sources saying they are reappraising their relationship with PNC in other areas, including wealth management.
What really irritated him, the source said, was his local PNC loan officer didn’t contact him. “That’s probably the saddest part of this,” the source said.
Marcey Zwiebel, vice president and senior manager at PNC Financial Services Group, said this is not formal PNC policy.
Zwiebel said there have been no changes at PNC regarding smaller real estate investment loans. “We have not made changes in our lending policy. We are renewing loans. But these decisions are made on a case-by-case basis.”
Financial information is confidential, she added, saying she can’t discuss individual details. But she emphasized there is no broad-brush PNC policy across the bank regarding such loans. The circumstances in each case determine the outcome. “Each loan is evaluated individually,” she said. “Each renewal decision is evaluated individually.”
If that’s the case, it’s difficlut to explain this one: Steve Trager, chairman and CEO of Republic Bank & Trust Co., is one of the PNC clients notified his loan wouldn’t be renewed.
“We understand that a lot of customers are getting calls from PNC and other large banks advising that their commercial real estate loans will not be renewed,” Trager wrote in an email.
From that email:
I can personally attest because as I’m not allowed by regulation to borrow from Republic I had a loan originated with National City that matured this year and I got a call from someone out of state advising me that they would not renew my loan.
PNC, of course, acquired National City Bank in 2008, in a deal negotiated by federal officials during the darkest days of the Great Recession. Before 2008, National City was the most aggressive commercial lender in Kentucky under then-state president Chuck Denny, now PNC’s president of the Kentucky and Tennessee markets. And that may explain what’s going on: NatCity’s underwriting in 2008 may not match the more restrictive requirements of 2014.
Banking insiders tell IL the moves are largely a response to the Great Recession and the lingering weaknesses in some business sectors. Big regional and national banks often react to perceived weaknesses in certain sectors such as multi-family housing, retail or office developments by issuing broad fiats, banning those loans.
That, of course, opens new opportunities for the competition.
“I’m proud to say that Republic is a great option and has picked up a lot of commercial real estate loan business as a result,” Trager stated in his email. “Our sweet spot is in the range of up to $10 million and we continue to pick up a lot of business in this category that apparently the large banks don’t want.
“We make it easy for our customers to get loans.”
“This is exactly why we are in the process of hiring two business bankers to work the Louisville market,” Adrian Brown, First Harrison Bank vice present and director of business development, stated in an email. “We will concentrate on closely held companies under $5 million in revenue and commercial real estate deals under $2 million,” said Brown of the Corydon, Ind.-base bank.
Ja Hillebrand, president of Stock Yards Bank & Trust Co., one of the local banks that made it through the recession with few problems, said his bank is still lending on investment real estate and owner-occupied deals.
Hillebrand said SYB executives are aware since the downturn that larger banks have also retreated from commercial and industrial lending – short-term lending on capital investments backed by collateral, and the broadest banking category.
On the investment real estate side, SYB follows traditional underwriting methodology, including requiring borrowers to bring 20 percent of the amount to the deal rather than lending 100 percent, which was not atypical before the recession.
“We’re not going to make mistakes now that we didn’t make the first time,” Hillebrand said.