It's back to basics, as the five C's of credit rule lenders' guidelines

Gina Koenen, vice president, commercial loan and marketing officer, Provident Bank

As published in Scotsman Guide's Commercial Edition, July 2010.

From 2005 to '07, many commercial mortgage lenders based their underwriting decisions on strong future projections. In that period, lenders typically considered full occupancy in an office building or retail strip mall to be a loan's primary strength. They would look less at the borrower because the property's tenants often fueled the rental income to support the loan comfortably.

Most lenders didn't consider the potential decline in tenants' businesses, however.

As these businesses began to fail, commercial, retail and office vacancies increased steadily. As the vacancies grew, property values declined quickly. Now property values are at eight- to 10-year lows, and many loans are near 110-percent loan to value (LTV).

As a result, many property-owners who need to refinance their now-adjustable rates cannot get a loan. Commercial mortgage brokers can help clients prepare for the "new normal" of commercial lending -- which is a return to the basics of lending. Brokers should understand what lenders now look for in a loan, as well as how borrowers who don't qualify can best position themselves for the future.

The 5 C's plus one

In today's market, banks must consider the property condition and location, the tenants, and lease lengths and terms. Property type matters significantly. They also are avoiding certain properties, such as restaurants and those with automotive purposes. There is greater scrutiny on the borrower and their reserves. Essentially, banks have returned to the five C's of credit: character, capacity, collateral, capital and current market conditions.

Lenders also are considering whether the borrower is a current customer of the bank and looking at the depository relationship's weight and history. Guarantors' strength and their contingent liabilities also play into the mix. Banks are taking extreme caution to prevent business-owners and investors from becoming overleveraged and therefore are putting the most prominence on the second C: capacity.

In addition, loan pricing typically is based on any type of risk in all of the above-mentioned criteria.

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