Fleet Financial Group and BankAmerica Corp. have started making small commercial real estate loans, entering a business some say is being neglected because of banking consolidation.
In May, Fleet started a partnership to make small real estate loans with Parallel Capital, a commercial mortgage conduit in which it has an equity stake. More recently Bank of America rolled out a small loan program of its own.
Both banks will generally lend up to $1 million, without recourse, to investors in small commercial properties, and eventually sell the loans in the commercial mortgage-backed securities market. Both say they are responding to demand from borrowers.
The Fleet joint venture "fills in a real need we find throughout the market," said Kenneth Witkin, managing director of Fleet Real Estate Finance. Fleet had focused on the upper tier of the real estate market, he said, but "there is a much larger market" throughout the bank's territory in the Northeast.
Fleet chose to enter the small-loan sector indirectly through Parallel because "it allowed us to be up and running immediately-no learning curve," Mr. Witkin said.
Parallel had already built a business specializing in loans between $150,000 and $3 million; last year it originated a $350 million. By teaming up with Fleet it expects its origination volume to grow to $1 billion per year.
Fleet's small-business banking group will refer clients to Parallel, and vice versa. "Banks that have a significant retail franchise are a logical place to source commercial real estate loan product," said Parallel president Kenneth Schechter.
Bank of America was inundated with requests for loans under $1 million without recourse, said Carmela Anderson, managing director of commercial real estate services.
Like Parallel and Fleet, Bank of America believes its extensive retail network will help it succeed in the small-loan niche.
"You have to do a sufficient amount of volume to justify the incremental cost of a small loan," Ms. Anderson said. "With multiple touch points we can provide it at a lower cost."
Once Bank of America merges with NationsBank, the new bank will have 4,800 branches in 22 states, Ms. Anderson said.
Richard Pergolis, principal at Pergolis Swartz, a Manhattan commercial real estate broker, says it's about time banks refocused on the small borrowers.
"We need more of the larger banks who are gobbling up smaller banks to set aside departments to do small loans," said Mr. Pergolis, who says that as the banking industry has become more concentrated, very small real estate borrowers are finding their options limited.
Mr. Pergolis says that for today's increasingly large banks, loans $2 million and under are not cost-effective unless they charge higher rates. "They can do a $20 million loan with as much manpower as a $2 million loan," he said.
Some Wall Street conduit lenders, such as Nomura and Daiwa, have special small-loan programs, but there "you start getting into higher spreads and the possibility of fees," Mr. Pergolis said.
The problem is especially acute for borrowers outside major metropolitan areas, he said. "In New York City we have more financial institutions, so we still have some opportunity to visit with different types of lenders." In smaller cities and suburban areas, "you don't have that breadth of financial institutions."
For borrowers in the $1 million to $10 million range there is no shortage of money, as Wall Street conduits compete for deals. But the borrowers' loans and properties must conform to the cookie-cutter standards of the CMBS market.
"It's less flexible for them but the rates are quite good," said Mark Edelstein, a partner at Milbank Tweed, Hadley & McCloy in New York.
"It's a question of service," said Tim Pakenham, a partner at Alston & Bird, an Atlanta law firm. "You don't have the local personal relationship with whoever's going to be in charge of your loan."