Many local banks now require a borrower to place a minimum of 10 percent of the loan amount into deposit accounts at the bank. As more scrutiny is placed on the banking industry, depositors are paying more attention to the strength and viability of their banks. If any red flags appear and there is a moderate to aggressive run on the deposits of banks, insolvency becomes an issue. This is not in the underlying fundamentals of a bank’s assets, but rather the cash-to-loan ratio becomes unbalanced and exceeds the fluctuations that can be managed by using the overnight Fed window.
Nervousness on the part of depositors also can be a self-fulfilling prophecy as the run on deposits is the very thing that sends a bank into insolvency, not the bank’s performance. The deposit-account requirement is a tool that banks use to build in an additional delta in the deposits to loan ratio.
For larger, single-property loans and loans supporting multiple properties on a regional or national basis, regional and national banks and life insurance companies are the best options. Among other risk factors, these lenders concentrate on loan-to-value (LTV) and debt-coverage ratios. The higher the LTV ratio, the stricter the rest of the loan terms. However, LTV ratios have been trending downward recently. You will see more banks doing transactions that are either full recourse or feature some alternative source of credit enhancement such as a letter of credit.
In today’s economic environment, it is important to stay abreast of who is and is not lending. And once you find a source with available capital, you then must drill down to their specific lending requirements and criteria. With this information and proper expectations, you can better focus your search for realistic financing sources that can successfully support your transaction. Be sure to do your research and consult with a capital markets consultant if necessary to obtain the best information and options for your needs.
Jessica Mandel is an associate director in the Houston office of HFF (Holliday Fenoglio Fowler LP). She can be reached at 713.376.2216; email@example.com.