Do You Know the SBC Market?

The Scotsman Guide’s February’s City Spotlight fell upon Tampa, FL this time around. The exciting article by Melinda Young, associate editor at Scotsman Guide, lists a slue of facts proving that this booming Florida metropolis will see a lot of action in 08′.

Young Writes:

“… It also doesn’t hurt that Tampa is part of a state attracting more new businesses and experiencing population growth. Florida ranked fifth in the 2007 Tax Foundation study of states’ business-tax climates. Tampa and neighboring St. Petersburg were Bizjournals’ 14th-best market for small businesses nationwide in 2007. And Central Florida has been expected to add 2 million residents between 2001 and 2030.

With these factors in mind, developers are gearing up. Construction is on the rise in all commercial property types in the southern city.”

Click Here for full article

To learn more about all the great opportunities available in the greater Tampa Bay area, Contact one our Metwest Tampa Representatives today.

Ph: 813-294-1096.

We have our fingers on the pulse of this community and would be more than happy to share our knowledge of the small balance commercial market in this area with you.

This Just in! Looks like the good people at Boxwood Means are launching a new website, smallbalance.com. If you’re not excited, you should be. Much like our blog, SmalBalance.com will be an excellent place to exchange ideas and information concerning the SBC market. Keep up the great work guys!

Small Balance.com

Talking about the internet, in a couple of months we’ll be launching a new web site dedicated to the small-balance market. Yep, it’s called SmallBalance.com. We intend to offer data and analytics to lenders that will help lubricate the process of originating and underwriting loans. After all, we all know how much time is lost searching for hard-to-find information related to the collateral in this arena. We’ll be leveraging a lot of our own commercial loan transaction data, sales and rent data that we formulate from listings provided through our strategic partner, LoopNet, and much more. If you have particular information needs or suggestions on what types of information might help you succeed in this space, feel free to tell us, and we’ll try and accommodate you at some point in the future!

Here’s another great article from the latest Boxwood Means newsletter. As their research shows, it looks like the SBC market is looking strong and gearing up for “another solid full year of originations.”

Third Quarter Volume Slips

Small-balance originations declined 8.3% sequentially in the third quarter of last year to $31.3 billion, as the turmoil in the capital markets began to hit close to home. As of this latest period, year-to-date originations have crested $100 billion, guaranteeing another solid full year for originations.

That said, there are headwinds to success ahead. Loan pricing remains volatile, cap rates are beginning to rise and lenders are more risk averse, among other unfavorable conditions. It comes as no surprise then that purchase mortgages for small-balance loans are down 32% year-over-year. Any short-term stimulus will likely come from refinance loans, which have been growing in importance as interest rates decline. In this segment, the volume is up 1.6% since this time last year.

Our research also indicates that small-balance originations have been particularly vulnerable in metropolitan areas hard hit by the housing slump. Such markets include L.A., down 30.5% from the corresponding period in 2006 as well as Orange County (-19.7%), Phoenix (-16.7) and San Diego (-13.2%) among others. On the other hand, stronger markets such as Seattle (+12.3) and Brooklyn, NY (+17.9%) continue to be driven by strong local economies.

Take a look at this article from the latest commercial edition of the Scotsman Guide. Its loaded with great ideas and information on how to be prepared for what is shaping out to be another exciting year in the commercial market!

Don’t let the market catch you off guard — have a solid game plan for this year

One of the most-important steps in preparing for this year is to sit down and draft a solid game plan. The axiom “Most people don’t plan to fail; they fail to plan” holds true.

Take into consideration questions such as: How many loans do you want to close? What will your dollar volume be? How do you hope to hit those targets? And how much money do you wish to make?

There is a world of difference between dreaming about what you want to accomplish and writing it down in specific detail. By mapping out your personal goals on paper, you can refer to them during the course of this year.

When creating your goals, keep in mind that education, flexibility and perseverance can be vital to your success.

Learn from your past

When conceiving your game plan, it helps to start out by writing a summary “deal map” of every loan you closed and almost closed in 2007. List the deal name, amount, property type and why it did or did not close.

Consider what was strong or weak about each deal, then look at the list and ask yourself the following questions about each loan:

• Could this same loan close today in a tighter credit market?
• Was it “priced to perfection,” founded on overnight due diligence?
• How would the debt service look given today’s market rents, expenses and vacancy rates?

Determining how each of 2007’s commercial loans would function in today’s market will get you in the right mindset. Then do your research and ask yourself how each loan might fare in June or December.

The loans you work on this year will probably have significantly different rates, terms and other characteristics than the 2007 vintage.

Education and training

In addition to staying on top of market research and predictions, you should also ensure that your skills and knowledge are marketable. What did you do during 2007 to enhance your job performance? What are you going to do this year to continue to make it better?

Start by seeking to improve upon something in which you are involved. This can include working on your computer skills — learning a new application or mastering a spreadsheet program you already use, for example. Or you could take a training course on successful negotiating, writing or another component of your profession.

Next, plan to study something new. If you have been working on apartment loans for a few years, perhaps this is a good time to learn about construction or other types of bridge loans.

As you study your local market, you may notice an area of increased activity or you may see a property type that is missing or not operating at full capacity. If you can stay up-to-date with your market, you can position yourself to be a step ahead of others in these areas by being ready to work on these types of new projects when they arise.

Flexibility

A strategy that merely aims to continue what you have already been doing may not be the most rewarding — especially in a period of dynamic change. Whether you are seeking new business or even a new job, one recipe for failure is to count on things to stay the same.

The commercial real estate business is undergoing its share of changes. Many of the marginal brokers, borrowers and lenders will be shaken out. This can create opportunities for the people who choose to stay and are flexible to the changes.

A key component to flexibility is having a backup plan. Sometimes, no matter how carefully you prepare, real life doesn’t turn out as you anticipated it would. Be ready and nimble when the unexpected inevitably occurs.

Perseverance

Despite changes in the commercial mortgage market, real estate investors are not all going away. Some of the highly leveraged players will be forced to leave the game, but many of the solid participants will stick around. Good deals will continue to get done.

If you maintain a positive attitude and persevere, you will not only find that you are more successful, but you will also find more satisfaction in that success.

In 2008 and beyond, there will continue to be demand for solid real estate investments. No matter what the market looks like, you can be ready for what does happen if you plan ahead.

Fred HollisterNathan LaBuddeFred Hollister and Nathan LaBudde are independent income-property-loan consultants based in the San Francisco Bay Area. They have more than three decades’ combined experience in all aspects of commercial real estate lending.

We stumbled upon this article featured in the Scotsman Guides first newsletter of the year, and found it very interesting. At Metwest we come across a lot of Gas Station loans, which also bring along a lot of baggage. This well written article by Mike Lamb, western regional manager, Petroleum and Franchise Capital, discusses the fundamentals of Gas Station Funding and is a must read for any involved in small balance commercial lending.

Be prepared for the questions specialized lenders will ask with these deals 

Slim fuel margins, credit card fees, fuel theft, inventory shrinkage — the list of issues that convenience-store and gas station operators face on a daily basis goes on and on

With all the other frustrations that operators face in financing their growth, the biggest challenge, in many cases, remains finding a lending partner that understands their business. That’s where commercial mortgage brokers come in.

Often, your clients will discover that local banks don’t wish to lend on a property considered environmentally risky. Further, the learning curve for lenders not versed in convenience stores and gas stations can result in an inordinate amount of time spent on projects that won’t close. Where can you turn, and who should you contact when seeking funding for these clients?

In order to answer that question, you must find a lender that not only understands the market but that also is well versed in it. In other words, find a lender with “grease under its nails.”

Specialized gas station and convenience-store lenders have parameters that allow flexibility not often found with traditional lenders. With the industry experience of their management teams, these lenders can structure deals in a manner that most conventional lenders can’t. Of course, even specialty commercial finance lenders need to feel confident that they will be paid back.

When trying to find the right specialized lender for your gas station-owner clients, here are some key questions you should be prepared to answer:

• How many gallons of fuel does the operator sell annually? Lenders are generally comfortable with volumes of more than 1 million gallons a year. They also have certain metrics based on carwash sales and convenience-store sales. For instance, 32 cents in convenience-store sales for every one gallon of gas sold is usually considered a solid number.
• What kind of underground storage tanks are there on the property? How old are they? Are they single- or double-walled? Many older sites have aging, single-walled tanks that should be replaced in the best interest of the owner and the lender.
• Is the operator aware of any environmental issues? Is there any remediation underway? Lenders will require either a Phase I or Phase II environmental site assessment depending on the condition.
• What is the operator’s margin per gallon of fuel? For most lenders, it takes at least a 7-cent-per-gallon margin for the deal to make sense. This is a net number calculated after deducting credit card transaction fees.
• What are the convenience store’s sales and margins? On a blended average, convenience-store margins should be in the upper 20-percent range. Cigarette margins are generally much lower than any other category. As such, the overall percentage sales of cigarettes will have a tremendous impact on the blended average.
• What brand of fuel does the station sell? Most lenders require a “brand”, either national or regional.

Arriving at the actual earnings — either through calculating net operating income or earnings before interest, taxes, depreciation and amortization — for this kind of borrower takes considerably more effort than in traditional commercial real estate transactions. This is all the more reason for you to talk to the experts that understand the industry.

Some specialty gas station and convenience-store lenders will also take into account the business-enterprise value in addition to the real estate value. The enterprise value is generally determined by looking at the cash flow of the convenience store combined with other profit centers such as carwashes and food services.

It’s worth your time to ensure your lender has a solid background in and understanding of the retail petroleum industry. Because of the multiple variables involved, take time to do your research before choosing a funding source.

Mike Lamb, western regional manager of Petroleum and Franchise Capital, began his career working for Kraft Foods. He went on to own and operate Burger Kings and then to enter into a joint-venture program with Shell Oil that allowed him to build a convenience store chain that exceeded $75 million in annual revenues. He has been with Petroleum and Franchise Capital since 2006. He graduated from the University of Nevada, Las Vegas. Contact Lamb at mlamb@pfcapital.net.

Here is an excellent article by Rishard Brown, account executive at Metwest Commercial Lender, discussing how effective marketing strategies help spread the word about your small-balance commercial services. This Article was featured in the December 2007 edition of the Scotsmanguide.

When you make the decision to include small-balance commercial loans as part of your mortgage services, you need to spread the word about your new specialty. To do this effectively, you must have a basic marketing plan.

Your marketing plan for gaining clients and referrals should start with a grass-roots effort — carry out some basics steps first and then conduct canvassing activities in your own community. From there, you can move to mass-marketing efforts.

The key is to let people know why you should be their new source for small-balance commercial loans.

Start with the basics

The first few steps in your grass-roots-marketing approach are fairly easy. You should:

• Order business cards that specify your expertise in small-balance commercial loans;
• Create signage and fliers that promote commercial lending and distribute them in your area; and
• Change your voice message on your office phone and cell phone to indicate that you broker small-balance commercial loans.

Next, speak about your services with people you know. Start building a referral network through your family and friends.

In addition, look at loan applications for past clients and place follow-up calls with your self-employed borrowers. They may be considering buying business property or might need a refinance.

Many business-owners acquire their initial loan through a bank, but banks are often unable to refinance these loans. This is where you can help.

Find the gold in your backyard

When you’ve completed the basic marketing steps, you should begin canvassing your community. Your local business district is a great place to start mining for potential customers.

You can start out on foot. Leave your business cards and fliers at the offices or locations of potential borrowers. Automotive-repair shops, barber shops and hair salons are always wonderful places to leave your material.

Other targets for your marketing materials should be high-traffic areas such as shopping centers, malls, libraries, universities and community centers.

You also should pick up the phone and call small businesses and commercial-property owners, especially apartment-building and multifamily-building owners. Let them know that you could have the resources to refinance their existing properties and that you have sources to fund their future commercial purchases.

Records of building-ownership can be found via your local courthouse or on the Internet.

Lawyers, accountants and real estate agents also are excellent resources for referrals. Seek them out and begin building long-term relationships with them. Reach the masses

Now you’re ready to send out your message — that you do commercial loans — to the multitude. There are several ways to reach people through mass marketing:

1. E-mail blasts: These are cheap and effective. Start by creating a database of e-mail addresses from friends, family and business-owners with whom you’ve come in contact. Send a message once a month with the details of how you can fund their commercial properties.

There are a few rules to remember:

• Keep your message short and to the point.
• Make your subject line related to the content in the e-mail.
• Write short paragraphs, and use bullet points for important information.
• Use capitals sparingly. Capping the first letter is fine, but try not to capitalize the entire word.

2. Direct mail: You can use this to generate new customers and to reinforce company loyalty. Your mail piece will tell your potential clients who you are, where you’re located, how to contact you and what your business offers.

You can purchase lists of addresses from list-brokers or from your chamber of commerce. Someone at your local post office can help you establish a direct-mail campaign within a selected ZIP code and determine the number pieces you must send to get started.

3. Radio ads: Contact the sales and marketing department of your local radio station for pricing on their advertisements. Many radio stations offer sponsorship packages that coincide with a segment of their regular radio programming, such as the weather, traffic or sports reports.

When you buy a sponsorship package your ad will gain exposure by being played with regularity and near these popular segments. A 30-second clip will be more than enough to get your name and phone number to thousands of potential clients.

The key to success with radio ads is frequency — the more your ad is heard, the more likely your chance of getting a response. You may want to work with specialists who produce radio ads if you’re not familiar with radio-marketing techniques.

* * * To make your transition to small-balance commercial work, you must have clients to serve — and in order to have prospective clients, you must start marketing. But spreading your message about commercial loans can be simple: Begin your marketing with basic steps at a grass-roots level, and when you’re ready, go beyond.Ultimately, remember that the service you give your clients is the greatest marketing tool you’ll ever use. Your effort and ability to go the extra mile for your clients often will give you clients for life.

Rishard Brown, an account executive at MetWest Commercial Lender, is an expert in small-balance commercial lending. He is known in the industry for his ability to explain and teach the small-balance loan process in everyday language. MetWest is a nationwide pioneer of small-balance commercial lending whose niche is commercial and investment properties from $100,000 to $3 million. Reach Brown at rbrown@met-west.com.

Here is another great article we found from Randy Fuchs of boxwood means, discussing property prices and cap rates.

Amid the nonprime debacle and contraction in capital-markets liquidity, most industry analysts cite healthy commercial real estate property fundamentals to dif-ferentiate the commercial market’s prospects from the beleaguered residential market.

Indeed, as of press time, most commercial market data suggest that the coast is clear. Vacancies are low, rents are still increasing and loan performance shows little sign of weakness. That said, there are hints that the small-cap market for loans of less than $5 million might be fatigued and more vulnerable to a pullback than larger commercial loans.

As I’ve mentioned in previous columns, research indicates the small-balance world is more tied to changes in residential loan cycles. This is because of the types of investors in small-balance. Origination volume for modest-sized small-balance commercial loans declined in 2006. Now, there’s some air seeping from sales prices and capitalization rates.

For instance, small-cap sales prices may be topping out for some property types. Although property prices have continued to increase each year nationwide, as of second quarter 2007, growth has slowed to single digits for retail properties (median sales price of $583,000) and office properties ($701,000), according to Boxwood Means’ research. Price appreciation for apartment ($1,094,000) and industrial properties ($818,000) remain relatively strong.

Trends in cap-rate spreads amplify these property dynamics. As noted in the table below, there’s some volatility in these numbers.

But note the upward trend of late — particularly with apartment, office and retail properties. These growing gaps are associated entirely with cap-rate increases in the small-cap sector. By contrast, cap rates for larger commercial loans remain relatively immune.

It makes sense that cap rates in the small-balance space, which reflect the sector’s relatively lower-quality assets and sponsorship compared to larger loans, might experience more upward pressure with the turmoil in the credit markets. The upward trend could be a short-term phenomenon. Then again, the outlook for commercial real estate in general likely will be driven more by macroeconomic trends — such as employment and the gross domestic product — than by the nonprime residential market alone.

By Randy Fuchs, Principal and Co-Founder, Boxwood Means Inc.

Wall Street attracted most of the attention this past summer when the liquidity squeeze and increasing volatility forced many investors to the sidelines. Meanwhile, Main Street — home to single investors, small-business real estate owners and “mom and pops” — kept cruising, albeit slightly slower.

Research from the second quarter of this year indicates that small-balance originations totaled $34.1 billion, 0.7 percent lower than volume in the previous quarter.

This indicates market stability, which is good news. It also points to the prevailing confidence among Main Street’s small-property investors that the market for commercial loans of less than $5 million is generally healthy and sufficiently insulated from the larger commercial mortgage space — as well as from the issues in the single-family-housing market.

That said, growth in small-balance originations declined 16.6 percent for the second quarter of 2007 compared to second quarter ’06. Property sales are largely to blame, as small-cap buyers and sellers wrestled with changing asset valuations and rising cap rates. Lenders also imposed more-stringent underwriting standards for acquisitions. As a result, sales volume for small-balance commercial and multifamily properties declined 16.1 percent between the first and second quarters of ’07 to $30.8 billion.
Further, property-trade volume shrunk 36.5 percent between second quarter ’06 and ’07. Small-cap buyers have been re-evaluating investment opportunities in light of changing credit requirements.

Lest we forget, however, that property investments reached record heights in the middle of 2006. Some moderation in capital flows can be expected.

Meanwhile, loan refinances, at $20.7 billion in the second quarter, are holding their own. Total refinances for the same quarter in 2006 were nearly the same — $20.9 billion — and represented 51 percent of total originations. In second quarter ’07, as shown in the graphs above, refinances ballooned to 61 percent as purchasemortgage volume retreated.

Credit-tightening and higher cap rates have altered the topography of the commercial real estate world for the first time in several years. Despite these cross-currents, small-balance commercial business remains solid and a relative shelter from the recent squalls on Wall Street.

By Randy Fuchs, principal and co-founder, Boxwood Means Inc.
From Scotsman Guide Commercial Edition and scotsmanguide.com, December 2007