Commercial Loans and Fun Blog

Commercial Loans and Balance Sheet Lenders

Posted by George Blackburne on Wed, Dec 30, 2020

balance sheetIn a recent tombstone, my friends at George Smith Partners wrote:

"George Smith Partners identified a national balance sheet lender with an intimate knowledge of the submarket and arranged $13,340,000 in acquisition/bridge financing for the purchase and repositioning of a six-property multifamily portfolio located in Long Beach, California."

 

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So what is a balance sheet lender?  A balance sheet lender is one which makes a commercial loan, with the intention of keeping that loan on its own books.

In contrast, Real Estate Mortgage Investment Conduits (REMIC's) are commercial mortgage companies that originate very standard and cookie-cutter commercial loans that are destined for re-sale in the secondary market.   REMIC's are known as conduits for short.

Conduit loans are usually larger than $5 million, and the loan has to be secured by one of the Four Basic Food Groups - multifamily, office retail, or industrial.  

 

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Conduit loans can't be too kinky.  For example, you might have great deal on a shopping center, but part of the parking lot is not owned in fee.  Instead, part of the parking lot is on leased land.  This unusual twist or kink is probably too tough for the loan to be suitable for a conduit.

All conduits loans are destined for re-sale to a trust, set up usually by a major investment bank or commercial bank.  When around $1.5 billion or more of these standard, cookie-cutter commercial loans have been assembled into the trust, the loans in the trust are then securitized.

Securitization means that some rating agency comes in and looks at each of the loans.  Some loans may even be kicked out of the pool as being too risky or too unusual.  

 

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The sponsor of the securitization; i.e., the investment bank or major commercial bank (think of a Bank of America, a Credit Suisse, or a Deutsche Bank) will then issue and sell bonds, backed by the commercial loans in the portfolio.

A conduit lender is therefore the opposite of a balance sheet lender.  It's loans are destined from Day One to be re-sold in the secondary market.

Another name for a balance sheet lender is a portfolio lender.  The big advantage to submitting your commercial loan to a balance sheet lender or a portfolio lender is that the lender can choose to forgive or ignore any flaws in the loan.

 

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Flaws or unusual conditions on a commercial loan are often called black hairs.  "This commercial loan has a black hair because the personal guarantor has a net worth of less than the loan amount."

Remember, folks, the Net-Worth-to-Loan-Size Ratio says that the net worth of the borrower should be at least as large as the loan amount.

Conduits are not the only type of commercial lender that is not a portfolio lender.  The originators of non-prime commercial loans - formerly called subprime commercial loans - do not keep their loans on their books.  Bayview Financial is the largest originator of non-prime commercial loans these days.

 

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Non-prime commercial loans are intended, from Day One, to be sold to some Asset-Backed Securities (ABS) pool.  An ABS pool contains various types of loans - credit card loans, equipment leases, scratch-and-dent residential loans that got kicked out of some residential mortgage backed securities pool, and non-prime commercial loans.

Even though ABS commercial lenders can be forgiving of borrower credit and even on occupancy, their ability to overlook too many black hairs is limited.  They still have to re-sell the loan.

What about life companies?  They intend to keep their commercial loans on their books, right?  Yeah, but when you are the prettiest girl at the dance, you probably won't choose a guy who is missing his front tooth.  Life companies have the best rates on commercial loans in the country, so they get to pick the most perfect deals.

 

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Therefore, I really do not consider a life company to be a balance sheet or portfolio lender.

Balance sheet lenders are known for being able to forgive flaws and black hairs.  Most balance sheet lenders are mid-sized or smaller commercial banks.

 

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Topics: Balance Sheet Lender