Appraisal costs, higher interest rates make commercial loans tougher sell

While lower interest rates have sent homeowners into a mortgage refinancing frenzy, the number of businesses that have seized the opportunity to improve the status of their commercial loans isn’t as large.

“We have seen it where people are trying to take advantage of lower interest rates,´ said Todd Peyok, Boulder branch president of Horizon Banks. “With the decline in interest rates most businesses have tried to take advantage of it and refinance, however, with the slowing economic conditions, it’s been a little more difficult for businesses to refinance. It’s more difficult for banks to approve some businesses because of the decline in the economy. When business is down, it makes it harder to demonstrate the ability to repay the loan.”

Bob Sinton, vice president of First National Bank of Colorado in Boulder, said he has seen an increase in the refinance business. “We have seen some increase in businesses refinancing their owner-occupied real estate,” he said. “We haven’t seen as many businesses expanding into new buildings. Some businesses are hesitating to purchase new buildings because of the down economy.”

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“A lot of the refinancing we have done is with our own customers,´ said Tim Perkins, regional president of Lafayette-based Heritage Bank. “With the current economic conditions, there hasn’t been the demand for new loans.”

Peyok said commercial loan rates today range from 5 percent to 6 percent compared with 7 percent last year. “Loan requests in the past year to refinance have gone up 20 to 25 percent,” he said. First National and Heritage declined to quantify their business increase by percentages.

Business owners, who are refinancing for the first time, learn the differences between a commercial loan compared with a refinance deal on a home mortgage.

“The biggest misnomer is rates,” Peyok said. “They expect the commercial rate to be fixed for as long a period as a residential mortgage. They also are surprised about the difference in cost between a commercial appraisal and residential appraisal.”

Peyok said the commercial loan process begins with a business supplying the bank information on the company’s tax returns, the capacity to repay the loan and setting up an appraisal. The process of filling out an application to funding a new loan can take between 30 to 45 days. An appraisal, costing from $3,000 to $5,000, averages about four to six weeks to complete.

The appraisal takes into account the building’s age and whether any renovation is necessary. “If it’s an older building, the bank may require some reserves set aside for improvements,” Peyok said.

“Every commercial property is unique or specialized, “Sinton said. “There is more variety than residential. A commercial appraisal is considerably more complicated.”

Sinton said the appraisal also takes into account vacancy factors, operating expenses and whether the building is specialized such as an office complex or warehouse. Some older buildings that have been remodeled can be treated like new buildings.

If the older building hasn’t been remodeled, the company may have a shorter time period to pay off the loan, which increases the payment.

Commercial loan payments are based on 15 to 25 years, but the loan balloons in three to five years when a rate adjustment occurs. Peyok said if a business lowered its interest rate from 7 percent to 6 percent on a million dollar loan, the company would save $625 per month and recoup refinancing expenses within two years. About half of Horizon Banks’ loans are more than a million dollars, and half are below that amount.

“The higher the loan, the more sense it would make to refinance,” Peyok said. “Every bank has experienced some denials due to the slowing economy. Significantly more loans get approved than turned down. It’s improving the borrower’s cash flow.”

With the combination for new loan requests and refinancing, Horizon has added five new employees — two in Boulder and three in Longmont.

Peyok said most business loan customers tend to stay with their own bank. Depending on the loan, a customer refinancing with the same bank may save on appraisal and origination fees. But Peyok recommends checking with other banks if a business’ current bank is unable to refinance a loan.

“If your bank is unwilling to refinance, check two to three banks,” he said. “Each bank’s underwriting criteria is slightly different.”

Bank officials say most businesses already have refinanced, but if interest rates stay low, the near-term future for commercial lending will be positive.

“I don’t know how much lower rates will go,” Perkins said. “On the commercial side, most people have refinanced or talked to their bank about it.”