Understanding the fundamentals of loan structuring and risk management is vital for credit unions looking to expand into the commercial real estate (CRE) lending market. Two critical components in determining the viability of a CRE loan are lease term and tenant security. The success of most CRE loans relies heavily on the rental income tenants generate. Therefore, credit unions must thoroughly assess the stability and reliability of these income streams to mitigate default risk.
Tenant Evaluation: Securing Low-Risk Investments
At Cooperative Business Services, we lead credit unions through a meticulous process of tenant evaluation, analyzing credit grades where possible and conducting detailed financial reviews. This ensures that the tenants occupying the property present a low risk of payment disruption. We strongly emphasize identifying commercial investment real estate transactions with established financial histories and solid reputations, such as large corporate brands or public companies. By focusing on tenants who demonstrate substantial financial stability, we help credit unions develop more secure loan portfolios and avoid risky investments, instilling confidence in their lending decisions.
Managing Higher-Risk Deals with Strategic Loan Structures
In contrast, higher-risk deals, such as properties leased to startups or newer tenants, require a different approach. CBS helps credit unions adjust loan terms by applying higher interest rates or offering lower leverage positions to account for increased risk. The loan structure for such deals reflects the tenant’s risk profile, ensuring that the credit union and the borrower know the higher potential risks involved.
Member-Centric Lending: Supporting Long-Standing Relationships
Moreover, CBS recognizes and respects the unique member-centric approach of credit unions to lending. This approach often drives them to offer more favorable terms to existing members. Even when the transaction carries higher risks, the institution may be more willing to offer competitive terms to retain its business if the investor is a long-standing credit union member. This contrasts with traditional banks, where deals are often treated uniformly. On the other hand, credit unions may prioritize supporting their members by going the extra mile, even in higher-risk scenarios, making their members feel valued and respected.
Considering Borrower Experience for Optimal Loan Terms
Finally, CBS incorporates the borrower's experience into the overall loan assessment. Borrowers with proven track records in managing and improving properties, especially in sectors like multifamily housing, are rewarded with more favorable loan terms, including lower interest rates and higher LTV ratios. In contrast, first-time investors may face more stringent conditions. By considering tenant risk and borrower experience, CBS ensures that credit unions make well-informed lending decisions that balance risk and reward.
Conclusion
At CBS, we are dedicated to empowering credit unions with the tools, insights, and strategies they need to enter the CRE lending market confidently. From evaluating tenant creditworthiness to customizing loan structures based on risk profiles, CBS is committed to providing credit unions with the expertise necessary to create profitable and secure CRE lending portfolios. We are here to support and encourage credit unions in their journey into the CRE lending market.
Ready to learn more about the essentials of Commercial Real Estate Lending? CBS is here to guide your credit union through every stage of the process. From evaluating tenant risk to tailoring loan structures, we provide the expertise to build secure, profitable lending portfolios. Contact us today to learn how we can help your institution succeed in the CRE market.
Disclaimer. The information and data contained in this multimedia content (the “Content”) are provided for informational purposes only, and do not necessarily represent the views or opinions of Cooperative Business Services, LLC (“CBS”). The Content, and the appearance of the Content on, by or through CBS’ website, email, or technological infrastructure does not constitute an endorsement by CBS, its affiliates, owners, officers, directors, or employees (or their successors and/or assigns). Information in the Content cannot be relied upon by any recipient for any business, legal or financial decisions.
