FEATURE ARTICLE, MAY 2005

TRENDS IN THE SMALL-BALANCE LOAN MARKETPLACE
The small-balance commercial loan business will continue to grow as more brokers see the advantages of this segment. 
Joanna Schwartz

Schwartz

To a commercial mortgage broker accustomed to writing larger deals, loans in the space of $100,000 to $1 million may not seem worthwhile, given the complexity of the process and time involved in relation to the loan size. However, as lending firms recognize the need to serve consumers and brokers in this market, more simplified programs with increased efficiency for brokers and a speedier process for the consumer have begun to emerge. A streamlined, familiar process — more like a residential loan — presents a more attractive option for investors and greater money-making opportunities for brokers.

With the stock market decline in recent years, more people are looking at income-producing property as an investment vehicle. Where is the best place for a new investor to start? Precisely in the small-balance category.

Potential borrowers who are unfamiliar with the commercial loan process may find it intimidating, so brokers are wise to take the time to understand financial goals and specific needs when initiating a small-balance loan. A common obstacle for would-be borrowers looking for financing is property cash flow. For example, a prospect with strong credit might be interested in a property that does not provide adequate cash flow to qualify for a commercial loan. This is especially true in urban markets where prices have risen significantly in recent years and cap rates are low. In this case, an innovative lending program that provides an alternative to typical commercial underwriting could be the answer. 

Lenders and programs that demonstrate flexibility in products and business practices are a smart choice for brokers looking to broaden into this niche. Commercial lenders poised for growth in the small-balance segment have likely made adaptations based on market needs, making the space more attractive for the borrower and more lucrative for the broker.

In general, fees on small-balance loans are well worth the effort. Through a combination of up-front points, yield spread and fees, brokers can earn several points on each transaction. For example, suppose a program allowed the broker to earn two points on the front end of the loan and two points on the back through yield spread premium and reasonable additional fees. That means on a $500,000 commercial loan, a broker can earn between $20,000 and $22,000 in fees and commission. Now, the small-balance loan becomes a more attractive deal for a commercial broker who had not previously considered it worthwhile.

Small-balance commercial loans are most commonly used for the purchase of owner-occupied or investor properties such as multifamily, mixed-use, retail, office and warehouse space. Typically, the loan purpose is a rate/term refinance, cash-out refinance or purchase. Loan-to-value, rates/rate locks, closing costs, prepayment fees and other details tend to vary by program and loan type.

In addition, brokers can look for programs that have done away with negative attributes commonly associated with commercial loans, such as lender points, yield maintenance, mandatory lockouts and loan committees.

Brokers are wise to consider working with firms that have not only streamlined program guidelines, but also provide adequate training on their loan programs. Until recently, brokers were not receiving sufficient support or incentive to pursue small-balance commercial loans. Now, lenders that offer innovative programs coupled with outstanding customer service are positioned for success as the early entrants in this previously underserved, niche area.

Technology is another important aspect when considering a small-balance lending partner. When evaluating a program, take a look at the company’s Web site — are rate sheets and forms available on the Web site? Can a loan application be submitted online? What about electronic training options? The answers to these questions will provide great insight about a company’s quality of support.

Finally, some lenders provide value-added incentives to create and maintain loyalty with their broker networks. From promotions to loyalty programs, these extras help sweeten the deal while providing a goal to drive toward.

The small-balance segment of commercial lending will continue to grow as more brokers see the advantages of pursuing this type of business. With less complicated programs now in the marketplace, residential brokers are already competing for the small-balance customer. Commercial brokers  — who seize the opportunity now to tap into an underserved market, position themselves as specialists in the category and leverage small-balance loans as a tool for business growth — will surely enjoy the payoff.

Joanna Schwartz is managing director at Miami-based Silver Hill Financial LLC.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.