News

By Bill Greenleaf, Senior Vice President and Real Estate Lending Team Manager

It’s not a stretch to say the COVID-19 pandemic is unlike anything we’ve ever witnessed in the lending world. Oddly enough, business continues as usual for many who are able to work from home. Deals are getting done as we all do our part to stop the spread and keep others safe.

The economic and lending disruptions, however, are especially felt in the retail, restaurant, and commercial real estate markets. These have traditionally been the industries at the center of so many loans. Questions lacking answers abound: Will offices look like they did before? Will people shop in stores again? What will the restaurant scene of 2021 and beyond look like?

As an example: I recently spoke to an individual who is purchasing an established profitable adult beverage company. The rural business he is buying is experiencing an uptick in sales despite COVID-19 as more people head to the country on the weekends. He presented his acquisition loan request to five banks, and despite good income, great credit, and a substantial down payment, the lenders could not get comfortable with financing his purchase.

But with so much uncertainty in critical industries, the anxieties extend to banks, which — with the backdrop of the upcoming elections and social unrest – are in a “wait and see” mode with some property types and proceeding cautiously with others.

I get the benefit of talking to many small business owners and developers across Virginia, all of them entrepreneurs who remain filled with optimism even if 2020 has pushed back from every direction. No one is stopping their plans. They may be adapting or changing, but they are not slowing down.

Here are three trends we’re seeing in the current lending environment.

 

1. Borrowers asking for extended interest-only loans.

Borrowers are asking banks for flexibility in the event things get worse. This can help a developer if, for example, the building they purchased turns out to have more problems than initially understood. It frees up cash to cover emergencies.

This request is a prominent theme, and we’ll see more of it. Still, this flexibility is usually only granted to trusted borrowers.

2. Asking the borrower to set up a reserve account.

As borrowers seek interest-only periods for new loans, banks are asking for six to 12 months of cash reserves set aside for debt service to mitigate any potential economic setbacks.  Requesting a reserve account is becoming especially common for new borrowers, though it can be asked of established ones, too. The issue, of course, is that many businesses or developers don’t have that kind of cash on hand to set aside. But, as a financial institution, we and others sometimes feel such a move is necessary to keep our own organizations resilient to potential economic swings.

3. Seller financing.

For some deals, you can skip the bank altogether and let the seller handle the financing. Here’s how it works: Say you want to buy a building that costs $1 million. You, the buyer, will put down $500,000, and agree to pay the seller the additional $500,000 over the next 10 years in loan payments, plus interest. That rate is typically higher than the bank’s, but the deal gets done.

That’s my perspective as a lender. If you want to hear what’s on the minds of borrowers, join us for a conversation on October 22 with Virginia real estate developers Ed Walker and Dave McCormack. How is the pandemic impacting their plans for projects a few years down the road? Will their residential buildings still include first-floor retail, restaurant, or commercial space? Are they considering more rural developments, given people are flocking out of the cities?

Come hear what’s on their minds on October 22 at 12 p.m., via Zoom. Bring lunch. I’ll see you there.