What candidates do commercial banks hire for in terms of degree and grades?
I would say that the commercial banking sector assesses candidates from a fairly diverse background in terms of undergraduate degrees. That being said, a deeper understanding of business concepts, economics, accounting, and/or mathematics goes a long way in terms of “getting your foot in the door” and the majority of successful individuals have a solid understanding of financial concepts. In terms of grades, these do not necessarily translate into success or failure when applying for a position within the commercial bank as broader considerations are taken into account with respect to extra-curricular activities, prior roles, and overall fit with the group.
What is the day to day work of a junior level commercial banking employee?
A junior level commercial banking employee would be mainly expected to assist with underwriting new transactions and complete annual reviews for existing credit facilities. The tasks involved with this process would include, but not be limited to, market research; financial statement analysis; financial assessment for new projects; assessing the risk parameters of the proposed credit facility; running transaction return models in order to assess the bank’s Risk Adjusted Return on Capital (“RAROC”).
In order to obtain information the individual would have to be comfortable liaising with not only the client, but also external parties such as third party consultants and legal counsel.
In addition, the junior employee would be required to monitor covenant / reporting compliance of existing loans on a regular basis; complete ad hoc requests that are primarily related to assessing specific details about the loan portfolio; maintain syndicate deal site database information; and attend client meetings with senior bankers.
Once the individual has shown an attention for detail and a thorough understanding of transaction mechanics they may be asked to assist with the preparation/review of initial discussion papers and formal credit agreements.
How is real estate lending different from general commercial banking?
General commercial banking caters towards a wide variety of clients and industry sectors where real estate may not be the client’s main focus, but more of a side aspect of operating their business, whereas real estate lending is a specialized subset of commercial banking that caters towards real estate developers/operators.
Within real estate lending the main variability mainly resides in the nuances between asset classes (i.e. office, industrial, multi-family, single family, office, retail, etc.), stages of development (pre-development, site servicing, construction, stabilization, operation), and types of clients (private companies, public companies, pension funds, private equity funds, etc.).
What are some common contractual provisions in a real estate loan contract?
It truly depends on the type of real estate loan you may see and whether the facility in question is structured as a demand loan (whereby you can demand repayment of the loan at any time) or a committed loan (whereby the loan is guaranteed to remain in place so long as the borrower and guarantors remain in compliance with certain requirements set out in the loan document).
For a committed loan, you will see positive, negative, and financial covenants along with standard events of default. A short sampling of common covenants under each category are detailed below:
- Positive covenants:
- Year-end / quarter-end financial reporting
- Operating budgets
- Compliance with all laws
- Payment of interest
- Maintaining insurance / payment of taxes
- Negative covenants:
- Limitations on additional indebtedness
- Limitations on disposition of assets
- Restrictions on payments/distributions
- Financial covenants:
- Minimum equity
- Maximum debt-to-assets ratio
- Minimum debt service coverage ratio
For demand loans the covenants are typically less restrictive given that the lender is able to demand repayment of the loan at any time at its sole discretion.
What are the most common real estate loans and what is the usual tenor on a loan? What is amortization like?
|Loan Type||Typical Tenor||Typical Amortization|
|Pre-Development||Demand or 1-Yr Committed||Interest only|
|Bridge / Acquisition||Demand or up to 2-Yr Committed||Interest only|
|Servicing||Demand or 1-Yr Committed||Interest only|
|Construction||Depends on the asset class and geography but you may see a demand loan for single family construction up to a 4 year committed loan for high-rise condo||Interest only|
|Term||5-Yr to 10-Yr Committed||20 – 30 Year Amortization
Depends on the asset class, strength of the underlying property/cash flow, sponsorship, and/or external insurance (i.e. CMHC)
Do bankers have different preferences for what real estate asset class to lend to?
I would say that bankers are generally agnostic to most of the main real estate asset classes (office, industrial, retail, multi-family, single family) so long as the deal metrics support the transaction. That being said, there are a few asset classes that are typically more challenging to finance as a result of their specialty nature such as hospitality/resorts, seniors housing, and self-storage.
As a quick tangent, but along the line of preferences, I would say that you may find that there are institutions that particularly favour institutional grade large scale stabilized assets (be it retail, office, multi-family, etc.) and are willing to compete on price in order to win the business and build their balance sheet relationship with those clients. While there are other lenders who prefer to focus on slightly riskier projects that may have longer times to repayment, may include a factor of market risk (i.e. a project may not be sufficiently pre-sold or pre-leased to fully repay the entire construction loan at completion), and/or may contain stretched lending metrics (i.e. loan to value, debt service cover, etc.).
What asset class gets the lowest rates and highest rates?
Once again it really depends on the strength of the underlying asset, the lending metrics (i.e. LTV/DSCR), and the strength of the guarantor/amount of the guarantee, behind the transaction, but all else being equal you would typically find that the highest rates would likely be found for pre-development loans and the lowest rates would likely be found for stabilized multi-family assets that are CMHC insured. Ultimately, pricing is determined on a risk/return basis whereby lenders are attempting to assess the various risk factors such as equity in the transaction, repayment sources, time to repayment, ability to sell .
How do interest rates affect real estate prices and the bankers?
Generally speaking we would anticipate that real estate prices would likely decrease with an increase in interest rates as the purchasing power of individuals is likely impacted given the higher cost of funds. All else being equal, a higher debt obligation translates into a direct negative impact on your net income. Therefore, in order for an investor to be able to obtain the same return that they once had under a lower cost of funds environment the investor would need to pay a lower price for the property.
That being said, there may very well be markets whereby the supply of a specific real estate asset class is not sufficient to meet the current demand. In these instances you will almost certainly see continued real estate price increases even in the face of a rising interest rate market.
What are some trends in the market today for real estate bankers?
In terms of trends, we are seeing clients with existing portfolios focus on refinance existing assets in order to shore up their balance sheets and lock-in attractive pricing. Given general real estate price increases in major urban markets we’ve also witnessed clients place additional emphasis on new construction and capital expenditure programs rather than purchasing pre-existing stock as this allows the client to typically achieve stronger margins upon completion.
What are hot markets… Is Calgary still in decline?
Predominantly, I would say the hottest markets, across almost all asset classes, would continue to be Vancouver and Toronto.
In terms of Calgary, it ultimately depends on the asset class in question. We find that office space is still struggling, however there is still significant interest in industrial product and an increasing focus on purpose built Class-A multi-family apartments.
What are some perks to working in real estate commercial banking?
From my perspective, the three main perks come from the deeply passionate clients we work alongside, the incredible members of the industry who make funding transactions possible (i.e. appraisers, consultants, legal counsel, participating lenders, real estate brokers, etc.), and at the end of the day (for me at least) it comes down to the tangibility of the product. One of most fulfilling benefits is that you are able to interact with the buildings, witness the progress of development, and have a lasting impact on the skyline that shapes your city.