Commercial Real Estate as Collateral. DISADVANTAGES

Commercial Real Estate as Collateral. DISADVANTAGES

Commercial Real Estate Articles November 8, 2003

While the first part of the article dealt with the advantages of real estate as collateral, this one will deal at the disadvantages that the lender might perceive related to this type of facilities. I remind you again that the point of view of these articles is that of the lender, not of an investor. Most of you are either investors or thinking of becoming investors in this field the value on this for you is to understand how your friendly banker is looking at the request.

The disadvantages to using Real Estate as Collateral:

1 Large loans result on a concentration of risk. Banks are limited by regulations as to how much of their capital can be exposed to a single borrower. This amount is a percentage of the bank's capital and it varies a little depending on the type of charter that the bank has {national or state}, the state where the bank does business and the risk of the lending portfolio. Even if the bank can legally do the loan, executive management might not feel comfortable enough with a loan of that size to a single borrower.

2 High debt service relative to revenues. The single highest expense for a real estate loan will be the debt service. This should not be the case for your typical business loan.

3 Real Estate prices are cyclical. This is what the papers are talking about when they mention "Boom on real estate prices" or "Bubble in real estate prices". As you have probably guessed already, most people feel that the real estate market is either at the peak or that is already softening up.

Go back to advantages of real estate as collateral.

click here for the first part.


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