In this week’s Schelin Uldricks & Co. Insights series, we explore credit unions and how they fit into the capital markets world. What is a credit union, you ask? From a high level, credit unions are member-owned financial cooperatives that provide traditional banking services. Among these services include checking accounts, savings accounts, certificates of deposit, auto loans, business loans, and real estate loans; both residential and commercial. In order to open an account at a credit union, one must become a member. Many credit unions allow consumers to become members by keeping a small continual balance in their account.
Credit unions can be a great place for real estate investors and owners to tap for their real estate financing needs. Credit unions typically offer competitive interest rates and higher leverage but also tend to focus on smaller balance loans in their local markets so not every real estate deal is a fit for them. It is also very common for credit unions to lend to borrowers that have an existing relationship with the credit union, like a business checking account or a home loan.
It is also important to note that credit unions are sometimes restricted in the types of assets they can lend on or may be limited to lending in certain geographical areas; depending on their charter and always evolving lending criteria. We have noticed that it is almost always the case that any real estate related debt will be recourse to the borrower so this is a consideration that every investor needs to make before exploring this type of financing.
Key Considerations:
- Community Oriented: Many credit unions are deeply rooted in their local communities, potentially providing more personalized services or favorable terms to local investors.
- Conservative Risk Management: Due to their smaller scale and limited capital, credit unions usually focus on smaller, less risky projects. They generally tend to avoid speculative ventures or high-risk investments, favoring stable, reliable borrowers and projects within their community.
- Flexible Lending Criteria: While they are conservative, credit unions can offer more flexible lending criteria compared to traditional banks. This can include considering non-traditional income sources or working with borrowers who have less-than-perfect credit histories.
- Member Benefits: Profits generated by credit unions are frequently redistributed to investors in the form of lower interest rates.
- Special Asset Types: The adaptable lending policies of credit unions can facilitate access to financing for unique project profiles, however, with the choppy markets of late, many credit unions are slowing down or eliminating their allocations to special use property such as gas stations, car washes, senior housing, or land.
- Interest Rate Discounts: Credit unions can also offer discounts on their real estate loan pricing if borrowers bring over larger deposits to the credit union. These can range anywhere from 5bps – 20bps in total discount for the life of the loan depending on the size of the new deposit relationship.
- No Pre-Payment Penalty: For federally-chartered credit unions, they do not charge a pre-payment penalty on the real estate loan. For state-chartered credit unions, there is a pre-payment feature.
Our Perspective:
- Investors seeking capital may encounter challenges due to imposed geographic limitations, risk tolerances, and the nature of recourse loans.
- Interest rates can be very attractive but it is key to look closely at amortization periods to make sure the lower rate pencils on overall cash flow.
- Outsized benefit to real estate borrowers that have existing relationship with the credit union.
- Excellent financing option for the right property type, risk profile, and borrower with quicker closing timelines and less retrade risk due to relationship style lending platform.
- Consider bringing deposits from other institutions to credit union to garner the best interest rate possible. It’s also worthwhile to consider using other lending products like home loans to deepen the relationship and garner additional discounts to rates.
- In a volatile credit market, it’s key to work with a federally chartered credit union for maximum flexibility on pre-payment