Credit unions get busy with commercial lending

July 12, 2011

WASHINGTON – July 12, 2011 – Muhammad Abdullah needed a line of credit to fill large orders from customers of his safety and medical-supplies business, but he couldn’t get help from a bank. So he turned to a credit union.

He got the line of credit, and now he’s taking orders he wouldn’t be able to otherwise.

“It’s not the normal way, but I guess I’ve been doing business with credit unions personally for a good while,” said Abdullah, who owns Legacy Business Group in Des Moines.

Credit unions are expanding to fill a void in business lending left by banks since the financial crisis. As banks have been slow to start lending again, credit unions have gotten a head start.

Banks still carry about 12 times as much in loans as credit unions in America, according to Federal Deposit Insurance Corp. statistics. But over the past two years, those numbers have trended in opposite directions, and officials at major credit unions say they are more interested than ever in commercial lending, not traditionally the core function of a credit union.

From March 2009 to March 2011, total loans by banks declined by more than $500 billion, according to FDIC data. Over the past year, credit union business lending is up 5 percent, while bank business lending is down 3 percent a decline of about $95 billion, according to the Credit Union National Association. Pat Keefe, a spokesman for the association, said credit unions are pushing into business lending in part because of slow demand for consumer credit auto and home loans, for instance.

“Businesses are looking for new sources of credit; credit unions are looking for new sources of borrowers,” he said. “They’re improvising strategies to do business lending.”

In January, Abdullah’s company took a $60,000 order for fire extinguishers, fire extinguisher cabinets, white boards, bike racks and other things needed for an Armed Forces Readiness Center in Middletown, Iowa. Legacy Business Group suffered in 2009 and 2010, and Abdullah couldn’t get a bank to extend him a line of credit, he said. Then he saw an article about Veridian Credit Union.

“They said they want to work with small business, and so we called them,” he said.

Veridian offered him a $25,000 line of credit, and he said it has helped him deliver on the big jobs that pay the bills.

Competing with the big boys

In Iowa, Veridian is now a larger financial institution by assets than all but three of Iowa’s banks. John Poley, who was a banker for 20 years, has been head of commercial lending for Veridian since 2008. He said the credit union’s business lending was up 80 percent from 2009 to 2010, with most of the growth coming in metro Des Moines.

“We do everything. We’ll do your little mom-and-pop start-ups, manufacturing, industrial,” he said. “If we had to pick the one that we have the most exposure in, it would be real estate, I suppose.”

Poley said credit unions avoided the bad loans in commercial real estate that have plagued many banks since the financial crisis, and credit unions have been freer to lend.

“We’re still doing everything we’ve ever done. We just so happen to be able to now step into a void in that lending space that they’ve created,” he said.

Credit unions are pushing federal legislation that would lift a regulatory cap on their business lending. They are allowed to make loans equaling up to 12.25 percent of their total assets. Bills in both the U.S. Senate and House of Representatives would raise the cap to 27.5 percent. Both bills have been referred to committee.

The American Bankers Association opposes the legislation. Chairman Stephen Wilson testified at a Senate hearing in June that the bill is “nothing less than legislation that would allow a credit union to look and act just like a bank, without the obligation to pay taxes or have bank-like regulatory requirements applied to them.”

Banking executives believe credit unions’ non-profit status and exemption from federal income tax is already an unfair advantage, and they argue the increased emphasis on commercial lending calls the advantage further into question.

Copyright © 2011 USA TODAY, a division of Gannett Co. Inc., Adam Belz, USA TODAY. Belz also reports for the Des Moines Register.

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South Florida real estate paradox: High volume cuts inventory but prices stay low

June 23, 2011

New data released on home sales looks at trends that shouldn't co-exist: rising sales/falling inventory and plunging prices. Fort Lauderdale Realtor Michael Elliott puts a SOLD sign on the shingle outside a home in Wilton Manors that sold recently after a short time on the market, June 21, 2011.

South Florida’s logic-defying housing market continued to embrace peculiar trend lines in May — sales soared, slashing down the inventory even further, but overall prices fell once again.

Market trends in Miami-Dade and Broward counties diverge from the national housing story, for better and for worse. Local sales are increasing while the national market slumps, but local prices are falling faster than the national average.

The region’s real estate narrative is also at odds with traditional market economics. The coexistence of shrinking supply, rising demand and falling prices has left analysts with a number of questions: How long can this frenzied sales pace —fueled by Latin American and cash investors’ appetite for discounted real estate — continue? With inventory shrinking rapidly, when will the strong sales activity translate into price stability and appreciation, as market economics dictate? How large is the “shadow inventory,” and how will those unlisted bank-owned homes affect the recovery?

“It’s an odd time,” said Ron Shuffield, president of Esslinger-Wooten-Maxwell Realty. “ We’re able to say we’re selling more homes and condos than we’ve ever sold in history, but at the same time 61 percent of our sales are short sales and foreclosures.”

In May, home sales continued to rise, keeping South Florida on track to have its best year on record, according to data released Tuesday by the Miami Association of Realtors.

In Miami-Dade, there were 875 sales of existing single-family homes and 1,420 condo sales, increases of 20 percent and 46 percent from last May, respectively. Compared to April, home sales were up 5.4 percent and condo sales were up 1.1 percent.

In Broward County, 1,142 single-family sales and 1,537 condo sales represented increases of 6 percent and 14 percent over last May, respectively.

In the first five months of the year, more than 23,000 homes and condos have traded hands in South Florida, one of the strongest five-month runs on record. Nationally, 2011 has been a poor year for sales, with double-digit declines nearly each month.

South Florida’s rapid sales pace has helped reduce the region’s housing inventory, which has gone from severely bloated to suddenly lean over the last couple of years.

There are now 31,659 homes and condos for sale in South Florida, down from 61,755 in May 2009.

The crucial “months-of-inventory” figure has slimmed to 7.2 months in Miami-Dade and 5.5 months in Broward, both down to a fraction of their peaks. Economists say that six months of housing inventory is indicative of a healthy market.

So why hasn’t the shrinking supply of homes led to price stabilization?

“We have a whole bunch of pent-up supply,” said William Hardin, professor of real estate and finance at Florida International University . “There’s a squeeze play going on because no one is going to sell a house in today’s market unless they have to.”

The majority of homes that are selling are under distressed circumstances —either a foreclosure sale, or a short sale that doesn’t cover the cost of the mortgage. Those properties — popular among cash investors and foreign buyers — sell at deep discounts, dragging down overall prices in the market.



Landlord Concessions Complicate Appraisal Process in Tough Economic Times

May 26, 2011

Landlord Concessions Complicate Appraisal Process in Tough Economic Times

During more stable economic times, the technique for calculating vacancy rates for a commercial property appraisal was simple. For the most part, appraisers divided the number of vacant rental units at a property by the total number of rentable units to determine the vacancy rate.

But these are not stable economic times, and vacancy rates can be unintentionally deceptive. The commercial real estate market has become an aggressive playing field where competing landlords are scrambling to secure tenants for their properties.

Appraiser Games

“Some landlords are offering one year free rent, with tenants only paying CAM (common area maintenance) charges to sign long-term leases,” reports Justin Vogel, a property manager in the Boise, Idaho office of Colliers International.

Consider the example of a landlord who gives away six months of free rent as an incentive to attract tenants. That free-rent period is economically equivalent to a vacancy for that unit for half the year, yet the property is reported as 100% occupied in market vacancy reports.

Free rent isn’t the only consideration in calculating economic vacancy. Landlords are coming up with creative tactics to attract tenants these days, and almost any concession that reduces a property’s net operating income can affect value.

“We see landlords offering furniture, equipment and moving allowances on top of typical tenant improvements,” says Derek Hulse, senior associate at Colliers in San Diego.

“When the tenant eventually moves, the landlord of course retains the tenant improvements, but often the furniture and equipment go with the tenant,” adds Hulse.

Retailers have traditionally been recognized as experts in utilizing their right brain in developing creative methods for enticing customers through their front door. In these tough economic times, landlords are learning from their tactics.

Commercial brokers report that landlords are paying bonuses as high as 6% as incentives to steer tenants to their properties. This is up from the 3% commission of previous years.

“Fear is certainly the dominant emotion that is driving most real estate decisions and causing landlords to do almost whatever it takes to rent their properties,” says Fred Sheats, senior vice president in Colliers’ Atlanta office.

How does an appraiser account for what seems like an endless array of tenant concessions in the rental marketplace, and should these incentives be included somehow in our vacancy calculations?

Market vacancy versus economic vacancy

The calculation for vacancy used in the income approach to valuing commercial real estate can vary widely depending on whether the appraiser is using market vacancy or economic vacancy. Herein lies the problem for real estate professionals.

Which approach should an appraiser use? Due to the changing economic environment and landlord incentives, this question has become increasingly difficult to answer.

As appraisers, our favorite answer to this question is, “It depends.” In calculating economic vacancy, the appraiser must compare actual performance to an ideal performance.

Columbus, Ohio-based real estate research and consulting firm Danter Co. sums up the difference in an article titled “What Constitutes a Vacancy?” The author writes, “Market vacancy is easily discernable, while on the other hand calculating economic vacancy is a measure of dollar loss against ideal financial performance of a property.” (The article can be found at

Real-world application

Here is how the calculation works. Assume an appraiser is appraising a 25-unit apartment complex with 15 apartments measuring 900 sq. ft. and 10 apartments measuring 1,800 sq. ft. for a total square footage of 31,500.

Next, assume that each 900 sq. ft. unit rents for $1,000 per month while each 1,800 sq. ft. unit rents for $1,700 per month. At 100% occupancy, the potential monthly income would be $32,000 ($15,000 + $17,000), or $384,000 annually.

Now, assuming that five of the smaller units (900 sq. ft.) are vacant, physical vacancy would be approximately 14%. Using the property’s physical vacancy in the income approach to estimate the value of the property, the appraiser could conclude that the property is suffering a $53,760 loss in annual rental income.

Capitalizing the rental loss at 8%, the value of the property could be diminished by approximately $672,000 due to the physical vacancy.

On the other hand, economic vacancy focuses on the loss of income rather than vacant physical space. Considering that the rental loss should also include incentives provided by the landlord, the loss of $60,000 annual income illustrated in the example above divided by gross potential of $384,000 annually produces an economic vacancy rate of approximately 16%.

That economic vacancy is two percentage points higher than the physical or market vacancy rate. Using the same 8% cap rate to determine value would cause an additional loss in value of approximately $78,000.

The appraiser must include those factors, which may affect income and include income loss from sources beyond vacant units. This income loss potentially includes collection loss, model units, moving allowances, rental concessions, tenant improvements, tenant perks, furniture, rental commissions and anything else that landlords are dreaming-up these days to attract tenants.

Through reworking the figures in the example above, the appraiser would deduct loss of income beyond vacant units and include these other losses as well.

Which method is best to calculate vacancy during these tough economic times? The answer is, “It depends.”

Kenneth Scholz is a partner at Advanced Valuations & Consulting in Boise, Idaho. He is a certified general appraiser and appraiser educator who also serves as the chairman of the planning and zoning department for the City of Caldwell. He can be reached at





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