For Borrowers Searching For A Small Balance Loan Partner, Banks Are No Longer The Only Option

Over the last few years, many banks have begun to tighten their minimum loan requirements, which has limited the number of small balance commercial loans they can fund. This has left a class of borrowers and brokers who relied on banks for these smaller loans searching for alternatives.

In response, agency lenders have stepped in and are providing small balance solutions to bring liquidity back to the market for smaller projects. Bisnow recently sat down with Sabal Capital Partners CEO and founder Pat Jackson to learn more about the state of small balance loans in 2019 and why borrowers do not need to rely on banks, especially if they want a partner for the life of their small balance loan.

Bisnow: Where are borrowers looking for small balance loans now?

Jackson: Freddie Mac launched its Small Balance Loan Program, which serves multifamily properties nationwide, in 2014 and it has seen exponential growth. It has been able to really ramp that business up because it provides a credible, reliable solution for small balance loans that banks no longer can underwrite. 

People have liked working with banks for small balance loans because these types of loans don’t always get treated well in a commercial mortgage-backed security. The cost of origination is high, the servicing and the B-piece get sold away and borrowers are left not knowing who their long-term loan partner will be.

This is why companies like Sabal have stepped in to marry parts of what people like about bank lending with aspects of a CMBS. We keep the servicing for the entire life of a loan and we keep the B-piece, which makes us comparable to a balance lender, but we offer all this with no recourse, giving borrowers the best of both worlds. 

Bisnow: Is the industry informed about small balance loans?

Jackson: There are many misconceptions around small balance loans, the greatest of which is that small balance necessarily means bad credit. That’s not true.  

At the end of the day, we are a commercial real estate investment company. So when we approach a loan, we make sure the asset can support the loan terms we have put in place and use that as our main deciding factor. We rarely see the credit for small balance loans perform differently than the credit for larger deals. 

Bisnow: Why would investors want small balance loans in their portfolio? 

Jackson:  I think the main benefit of a small balance loan is granularity. We have thousands of small balance loans averaging $5M or less in our servicing portfolio, and while I’m happy to say that not one of those loans are currently delinquent, if one were to fail it would not sink our entire portfolio.  

Granularity creates diversity. Sabal has loans from 46 states across the U.S., and when you don’t have to rely on the success of one large loan or one specific part of the country for your success, you can more easily build a strong, diverse portfolio.

Bisnow: What are some of the challenges that borrowers face when looking for small balance loans?

Jackson: The biggest challenge of small balance loans is figuring out how to have growth without scale. It’s hard to make money off of a $3M loan, and if you don’t have access to a platform that can help you do that efficiently, it ends up being expensive and inconsistent for both the lender and the borrower. Sabal has the scale to provide an efficient, cost-competitive solution. 

Bisnow: In what ways do you think the process of funding small balance loans could be more efficient? 

Jackson:  The loan funding process is time-consuming not just for borrowers, but brokers as well. Two of the main values brokers bring to their clients are the ability to provide a smooth loan process and give them access to capital. At Sabal, we want to help brokers maximize both these values with our SNAP platform, which connects them to all our product options and allows them to streamline the entire funding process. 

Brokers can enter their deal into SNAP, and the entire life of the loan, from initial sizing all the way through to the underwriting, servicing and accounting will be handled within the system without the need to re-enter data.  

Technology like this does not replace the decision-making experts involved in funding a small balance loan. Instead, it focuses on eliminating busywork and helping brokers provide borrowers with more options from our comprehensive suite of lending solutions.  

Historically, small balance loans have been serviced by regional and community banks. Now, companies like Sabal are taking up the mantle and filling the commercial real estate lending void these banks can no longer fill.  

This feature was produced by Bisnow Branded Content in collaboration with Sabal Capital Partners. Bisnow news staff was not involved in the production of this content.