Small borrowers gain favor

San Diego – With competition for large and mid-size loans at a fever pitch, more lenders are trying to tap into the small-loan market to expand their customer base.

Small-loan borrowers stand to benefit from tapping these new sources of finance beyond their traditional partners in local banks or private equity, but as speakers at Apartment Finance Today’s Developer Conference noted in March, the borrowers need to understand the different parameters of the various programs (see table belowfor detailed financing comparisons).

“Everybody has their own definition of a small deal,” noted R. Lee Harris, president of Cohen-Esrey Real Estate Services, Inc. In general, small loans are no larger than $3 million or $5 million, said Harris’ fellow panelists at a conference session on Finding the Right Financing for Your Small Loan. Though those borrowers may not get the same flexibility in their financing deals as larger borrowers receive, they may still benefit from a wider range of loan terms than they have previously been able to get.

A small loan brings a lender smaller profits, and the lender must still cover the costs for underwriting and servicing the loans. Some lenders have said they are looking forward to increasing standardization of small loans to enable them to handle the deals quickly and with a minimization of specialization.

Loan size will affect the terms of the deal. For example, multifamily loans of less than $3 million are not likely to get the interest-only financing that has become increasingly popular lately, said Gary Bechtel, managing director of corporate initiatives and strategies at Meridian Capital Group.

Also, the lower you get in the loan amount, the more you can expect to pay, said Chip Hudson, Greystone Servicing Corp.’s vice president for small Fannie Mae loans.

Developer Todd Sears, director of finance for Herman & Kittle Properties in Indianapolis, compared two different small loans this spring and said borrowers have to watch their pricing. “It’s not unusual at all to see an 8-basis point spread between two deals,” said Sears, adding that a 25 basis point spread is common. In fact, in the deals he compared, a $2 million loan had an interest rate 25 basis points higher than a $5 million loan.

The way to get the best interest rate with a small loan is to decrease your loan-to-value (LTV) ratio, said Hudson. "If you are not sensitive to loan amounts and you like low rates, your cheapest interest rate is at 50% LTV," he said.

John Barbie, a Fannine Mae small-loan expert with ARCS Commercial mortgage Co., L.P., agreed. "For an agency and also for the capital markets, the yield on any loan note is a reflection of its risk and profit" potential for the lender, he said.