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Jon Knutson, Published November 21 2009

Banks clamping down on lending for commercial real estate

Landing a commercial real estate loan in Fargo-Moorhead isn’t as easy as it used to be.

Would-be borrowers for commercial real estate projects also may need to pony up more of their own money to get financing.

“In the 30-plus years I’ve been doing this, this is about as tight as it’s been,” Konrad Olson, a veteran Fargo-Moorhead commercial real estate agent, said of financing for projects.

Nationally, lenders are adjusting to a weak economy and their own reduced tolerance for risk.

Banks on balance have been raising their standards for loans for two years, according to a Federal Reserve survey of bank loan officers released earlier this month.

About 35 percent of the banks surveyed this fall further tightened credit for commercial real estate loans, the Fed survey found.

Locally, “We’re definitely seeing the lenders are a lot tighter with the money right now,” said Kevin Bartram, a Fargo architect and developer.

“They’re really scrutinizing the projects further and not loaning as much money,” he said.

For instance, “It used to be pretty typical to do an 80 percent loan to value,” he said.“It’s getting harder and harder to find that. Now they want to go back to 75 percent loan to value, which is what they wanted to see in the late ’90s.”

The loan-to-value ratio is the dollar amount of a loan as a percent of the value of the asset being purchased and used as collateral. A lower ratio involves less risk to the lender.

“You need more skin in the game to play today, that’s true,” Peter Doll, Moorhead manager of developmental services, said of the loan-to-value ratio.

But banks in this area were conservative to start with, said Doll, who’s deeply involved with development in the city.

That means rising loan standards have less impact here than in markets where standards were relatively low, he said.

Local bankers have a mixed reaction when asked if they’re doing things differently.

“I’m not sure about other banks, but here at Wells Fargo we’ve been very consistent in our underwriting. We haven’t changed anything in terms of how we underwrite credit,” said Judd Graham, the company’s community banking president for Fargo, West Fargo and Moorhead.

“We’ve continued to focus our underwriting on the borrower’s ability to repay the loan,” he said.

He also said his banking company has seen less loan demand in the past year.

Blaise Johnson, director of lending for Fargo-based Gate City Bank, said concern over the economy and businesses has affected his institution.

“We definitely do more reviewing of financial statements, look for a little longer history,” he said. “We have tightened our underwriting as far as qualifications and making sure we’re real comfortable with their cash-flows and the debts out there.

“There’s a tightening, definitely,” Johnson said.

Realtor Olson and his company surveys the metro office and industrial real estate markets every year.

Results of the 2009 survey will be released early next year.

Olson said financing for so-called spec buildings, or ones built on speculation that tenants will be found, can be particularly difficult to obtain.

Financing for buildings that the owner will occupy is relatively easy to get, he said.

Olson said it’s difficult to predict when the metro real estate market will begin to strengthen.

Nationally, capital will start to flow back into commercial real estate by the end of 2010, according to a recently released annual survey by the London-based PriceWaterhouseCoopers professional services firm and the San Francisco-based Urban Land Institute, which seeks to create and sustain thriving communities.

For now, commercial real estate industry investors and professionals “remain decidedly negative,” the survey found.


Readers can reach Forum reporter Jonathan Knutson at (701) 241-5530