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Real Estate Cycling: Banking Real Estate in the 80s, 90s and the New Millennium

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Title: Real Estate Cycling: Banking Real Estate in the 80s, 90s and the New Millennium


1
Real Estate Cycling Banking Real Estate in the
80s, 90s and the New Millennium
  • Laurie Griffith
  • March 31, 2008
  • For The University of Texas at San Antonio

2
Real Estate Cycling Banking Real Estate In the
80s, 90s and New Millennium
  • 6 Cs of Credit Knowing the impact of the
    Economic Cycle being one of them
  • Real Estate Lending and Firrea Coming out of
    the 80s Cycle
  • Real Estate Loan Structuring The cycle of
    asking yourself if this is an investment you
    would make yourself and assessing the risk
  • Case study Loan analysis and remembering cycle
    trends

3
The 6 Cs of Credit
  • Character. Trustworthiness is the first thing
    that a bank looks at. In addition, banks will
    rely heavily on credit history.
  • Capability to Manage the Business. Banks need to
    be sure that the person/people making the
    business decisions know what they are doing.
  • Capacity. The Bank needs to determine the
    capability of your business and/or real estate
    transaction to turn a profit.
  • Collateral and Guarantees. Collateral is
    important, especially in real estate transactions
    because it is all about location, location,
    location. The bank wants to get paid back either
    through profitability of the business/real
    estate proposal, a secondary source of repayment
    and/or the liquidation of the collateral.
  • Context of the Business. Banks look at a number
    of factors that may potentially impact your
    business/real estate project. They will pay
    particular attention to potential economic (real
    estate cycles), legal, employee,
    supplier/contractor, tenant, or environmental
    problems/impacts.
  • Conditions or Terms of Loans.  The nature of the
    loan request is an important factor. Banks will
    want to know three important things "How much
    money are you requesting? What will it be used
    for? and For how long will it be needed?

4
Real Estate Lending and Firrea
  • The Financial Institutions Reform Recovery and
    Enforcement Act of 1989(FIRREA) is a United
    States federal law enacted in the wake of the
    savings and loan crisis of the 1980s.
  • Appraisals - The major impact for real estate
    lending was that the law established new
    regulations for real estate appraisals. Title XI
    of FIRREA empowered federal regulators to adopt
    standards for real estate appraisal and
    promulgate licensing requirements to the states.
  • LTV Ratios - Additionally, FIRREA specifies
    maximum advance rates that banks can lend on
    against different classes of real estate as shown
    below (For acquisitions, advance rates refer to
    the higher of loan-to-cost or loan-to-value.
    For construction loans, re-financings, and other
    transactions except acquisition loans, advance
    rates refer to loan-to-appraised value. )
  • Property Type Loan To Value
  • Raw Land 65
  • Land Development 75
  • Construction
  • Commercial, Multifamily1 Other
    Non-residential 80
  • 1- 4 Family Residential (Builders) 85
  • Improved property 85
  • Owner Occupied 1-4 Family
  • Construction 90
  • Mortgages 90
  • 1 Multi-family construction includes
    condominiums and cooperatives.

5
Real Estate Loan Structuring
  • Desirable Types of Real Estate Loans
  • Interim construction or mini-perm financing for
    owner-occupied commercial real estate,
  • Interim construction financing for well-located
    multi-purpose commercial buildings or
    multi-family residential buildings with take-out
    commitments and/or substantial borrower equity
    and/or substantial pre-sales or pre-leasing.
  • Owner-occupied residential mortgages and interim
    construction loans
  • Interim construction financing for single-family
    home builders.
  • Land development loans for either single-family
    or commercial usage.
  • Land and property acquisition loans for specific
    use.

6
Real Estate Loan Structuring
  • Undesirable Real Estate Loans
  • Non-recourse Financing and Loans Secured by
    Inferior Liens in Real Estate
  • Speculative Land Loans
  • High Risk Income Properties
  • Mini warehouses
  • Mobile home parks
  • Resort properties
  • Nursing homes
  • Hotels/motels
  • Small retail strip shopping centers without
    anchor leases
  • Specialty retail properties such as discount
    malls or auto malls
  • Two-story retail centers
  • Marinas
  • Restaurants
  • Condominiums and townhouses
  • Churches
  • Schools

7
Real Estate Loan Structuring
  • All loans are created differently and structure
    will depend on the following
  • Financial (especially liquidity) and Cash Flow
    Analysis of Borrower and Guarantor
  • Experience and Track Record both the Borrower
    and Contractor
  • Collateral Property and Project Feasibility
    Location, Location, Location
  • Other Banking Relationships -aggregate financial
    situation
  • Assessing and Mitigating Risk Construction
    Risk, Lease-up Risk, Economic Risk

8
Case Study
  • Examples of Loan Requests and their Analysis

9
Real Estate Cycling Banking Real Estate In the
80s, 90s and New Millennium
  • It is easy to Lend in the Up Cycles and many
    bankers get careless in these cycles. What sets
    bankers apart is sticking to Basic Principles
    and not deviating from good sound lending
    practices.
  • Questions
  • Thank You
  • The University of Texas at San Antonio
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