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PROBLEM: High Loan To Value, Being Over Leveraged



Many borrowers are over-leveraged due to the general national drop in property

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values.  This is a major problem and often a tough issue for the individual to get over.  The challenge itself has been compounded by 1.  That virtually all banks have lowered their Loan To Value (LTV) standards and at the same time 2.  property values have dropped across the nation…  This has resulted in an almost over-leveraged “perfect storm.”    


(This is just one page of the report, scroll below to see other SOLUTIONS)

For example, most banks in 2006 use to offer 80% loan to value financing on purchases and 75% on refinances, on conventional commercial loans (meaning that they kept the loans in house and did not sell them or get a government guarantee on the loan).   Now, virtually all banks have lowered their standards to 65% on purchases and 55% on refinances.    At the same time, property values have declined (in virtually every market in the US).  So if your LTV was 70% two years ago, it might be at 95% today. 

Another component of this is the quality and type of property itself.  In other words, if the property is reaching the end of its useful life, its value will be greatly reduced, proportionately, by the funding bank and more so than usual.  If the property is special purpose, such as a hotel, gas station or restaurant, the value will be even more beat up.  For example, we have seen a drop in value on hotels by 40% -  50% or more, across the nation.  This happened virtually overnight.  The few banks that are still considering hotel financing have changed how they calculate that assets value (from a 3.5 multiplier of the gross revenue, to a 12 -14% cap rate on the NOI).  Which, as mentioned has resulted in a shocking drop in value. 

Definition:  Loan to Value or LTV refers to the total loan amount as compared (or divided) by the assets value.  For example, if your property is worth $1,000,000 and your loan amount is $700,000, your loan to value is 70%. 

Why is LTV so important?  It's a collateral issue.  Banks look at Loan to Value with the assumption that borrowers will default and that they will have to sell the property to get their money back (and pay for the costs to maintain and auction off the property).  This is one of the most important criteria for banks as they try to minimizes their losses.  They also have internal reserve ratio’s that they have to maintain in order to avoid getting in trouble with the FDIC.

SOLUTIONS to Being Over Leveraged 

Below are the major solution to high loan to value properties:

  1. Go for government guaranteed type financing.  Programs such as the SBA, USDA B & I, Fannie Mae or Freddie Mac will go up to 90%, 80%, 80% and 85% respectively.  So if your local banks will only go up to 60%, find a lender that works with the government guaranteed programs and you might have found your solution.  Note, with SBA financingyou can at times go above 100% LTV, so if your business occupies your building, this should be your main focus.
  2. If you have already talked to a few SBA lenders (or any type of lender), and they have been cold to your request, often you just have to keep looking to find a more aggressive source.  Go here to learn more about researching banks.  
  3. Cross collateralize to other assets you may own.  You may have other real estate or equipment that can bring you into the required LTV standards.  Nobody likes doing this, but it maybe your only option.  Keep in mind you can often do this in second or third lien position. 
  4. Consider offering your inventory and receivables as additional collateral for a factoring loan. 
  5. Pay down loan balances with cash.
  6. Bring on a partner that can either pay down balances or bring on other assets that you can use to cross collateralize too.  Nobody likes this option either, but this is often the most realistic option out there.  Especially if you don't already have a lot os asset to work with. 
  7. Have the existing bank reduce the balance and refinance them out with a new loan.  A few years ago this would have been laughable.  Now however, we are seeing banks doing this.  It is often because they themselves are in violation with the FDIC and have no choice but to get loans off of their books.   So do research on your existing bank to see if they are in trouble (Go here to see our list of online bank research tools).  Here are a couple of other strategies with this.

    a.     You can have a third party buy your note from the existing bank (the buyer will want a reduction in the note balance) and you can create a new agreement with them on a reduced balance.  So if you owe $1,000,000, have the note buyer purchase it from the existing bank at say $850,000 and rewrite it you for $900,000.  If you can arrange the note purchase yourself, you could avoid the mark up.   

    b.   If you have seller financing you may have a lot of flexibility with this.  They maybe very willing to take a reduced payoff to get cash and or to sell the note to a 3rd party at a reduce amount.  So you would line up a new loan and refinance them out for a reduced balance. 

    c.   Or just refinance the existing debt with a new bank loan with a reduced balance.  Perhaps you can get a longer amortization schedule and lower interest rate as well. 
  8. Be willing to buy CD’s or open a savings account from the potential new bank.  Though they will likely want to have control of the cash, it maybe a better solution than paying down the balance as you might be able to negotiate shorter release clauses and or make a better return on your money.   Smaller banks will often increase their LTV standards if you have a decent amount of money tied in with them.
  9. Rely on you other more general strengths as well.  Do you have good trends, liquidity, cash flow, etc?  If so these strengths, even though unrelated to your LTV position may help them get over this issue and offer you higher loan to value standards than normal.   
  10. Examine how the lenders attributes value.  For example, on equipment many banks will use 50% of the market value as the eligible collateral value.  While others will only use the liquidation value or 10-20% of the value as the collateral...  Also, look at the appraisals, mistakes happen all the time, like getting the square footage wrong, or not including additional property lots, etc.    

If you get creative, you may just figure out a solid solution for your loan to value issues.    



Continuation of Report:  Other Common Causes of Small Business Loan Decline and Their SOLUTIONS 
  • Small Business Loan Help Beginning of Report
  • Dealing With Bankers An overview of how an imperfect loan submission process works, and strategies on how to overcome it. 
  • Commercial Loan Solutions General Overview of most of the Solutions.
  • How To Research Banks & avoid working with SICK banks.
  • High Loan To Value How to deal with being over leveraged.
  • Declining Gross Revenue Get over declining gross sales.
  • Disadvantages & Advantages of Partnerships Specifically related to loan requests.

  • Low Business Cash Flow AKA low debt coverage ratio's & what potential solution are.
  • Low Liquidity or to little cash, relative to the loan request.
  • High Personal Debt your personal expenses have a big impact on your cash flow, see some solutions here.
  • Bad Personal Credit Scores Best solutions to getting over low credit scores.
  • Business Debt Consolidation Loans have their own set of issues, learn best solutions here.
  •  Problems With Other Sources of Income also referred to as Affiliates
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