Rob Diodato is the president of York Commercial Finance,
a commercial mortgage advisory company with offices in
Dallas and New York. Diodato arranges financing for commercial real estate transactions nationwide for all property
types. Diodato has more than 30 years of experience
in the commercial and residential mortgage industries.
Reach Diodato at (214) 561-8671 or
“Leverage Can Amplify Return on Investment,”
“Ask the Right Questions Upfront,”
“Weave Knowledge Into Business,”
by Rob Diodato
View these articles and more at
“The Untapped Commercial Gold Mine,”
“Commercial Lenders Find a Residential Loophole,”
Some Financing Deals
Gain More Traction Than Others
Owner-occupied transactions are becoming the ‘loans du jour’ of the banking world
By Rob Diodato
the property, which is calculated using rental income
against expenses. Owner-occupied deals also afford
another benefit to the bank in the form of recourse
against the borrower, the business and any entity
that owns the real estate. In the event of a default,
this provides added security for the loan that invest-
ment properties do not afford.
The real underlying reason for the increased demand
for owner-occupied commercial real estate deals, however, is the opportunity such deals provide for bringing
in more deposits to the bank. Retail deposits are a cheap
way for banks to bolster reserves.
Given the rise in interest rates since last year, banks
are less inclined to borrow money in the form of federal funds as those rates have risen. The gap between
wholesale costs to borrowers via that market, compared
to attracting customer deposits in a retail format,
In fact, the fed funds rate, which is controlled by the
Federal Reserve, is projected to increase several more
times in 2018 and 2019. Hence, banks are seeking a
less expensive way to meet reserve requirements and
manage the cost of funds while still making sound
commercial real estate loans. Enter the owner-occupied
commercial transaction to help fill that need.
At the tail end of any commercial real estate cycle,
lenders look at investment properties much more
conservatively. They look at the type of business that
a commercial tenant operates, the risk of that business
defaulting in the current economic environment and
Change is in the air. Lenders appear to have commenced a slow transition over the last year toward originating more loans for owner-occupied commercial
real estate transactions.
The abundance of “owner-occupied specials” offered by lenders in recent months is emblematic of
the shifting focus taking shape. Since the start of the
year, lenders’ appetites for investment properties
have been waning and owner-occupied commercial
real estate transactions are what banks, in particular,
are more inclined to approve.
One school of thought is that this sea change is
the result of regulators clamping down on the percentage of investment-property loans that banks
can hold in their portfolios, while others point out
that it’s a byproduct of the stark reality that we may
be heading into the tail end of this commercial real
estate cycle. Many commercial mortgage brokers
likely are finding that banks are keen to originate
more owner-occupied deals and scrutinizing
investment-property deals more closely.
Banks pursuing owner-occupied deals are not limiting
financing to just U.S. Small Business Administration (SBA)
loans, where a lender’s leverage risk is most often limited
to 50 percent. These lenders also are offering what can
be described as “SBA alternative” conventional financing
for owner-occupied deals, with loan-to-value (LTV) ratios
up to 85 percent.
The philosophy is understandable. Investment
deals routinely only bring into the bank the operating
account of the entity that is purchasing the property.
There is limited opportunity to develop depository
relationships or to offer lines of credit, credit cards,
commercial and industrial loans, equipment financing,
etc., to such clients, who may own a business unrelated to the investment property.
Owner-occupied transactions open up opportunities for banks to cross-sell other products while
also bringing a business’s operating account into the
bank. This establishes a relationship with the client,
not just a one-off transaction, and that is highly
desired by all banks.
Cost of funds
From a risk perspective, an owner-occupied commercial real estate deal allows the lender to focus
more on the success of the borrower/property owner
and the ability of that business to service any new
debt, rather than the debt-service coverage ratio of
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