The bank said no to your commercial loan: what the decline means and where to go next

What one bank's no actually tells you

A commercial real estate loan is usually declined because the deal, as presented, did not fit that bank's box at that moment: the income did not cover the payment at today's rates, the leverage request was too high, the property was not stabilized, the sponsor's liquidity or experience fell short, or the bank simply did not want more of that property type. A decline is rarely the final word. Get the specific reason, fix what can be fixed, and take the deal to lenders whose criteria match it.

Before I moved into commercial mortgage banking in 2012, I worked in real estate finance and servicing, including loss mitigation on troubled loans. Seeing deals from the lender's side taught me that most declines are about fit and presentation, not about whether a property deserves financing. At Terrydale Capital, a deal another lender turned down is one of the most common files we see.

The reasons behind most commercial loan declines

Banks often give a short, polite reason. The real reason usually falls into one of these categories, and more than one can apply at once.

• Thin coverage: the property's net operating income does not cover the new payment with the margin the bank requires, often because rates have risen since you modeled the deal.
• Too much leverage: the loan requested is too large relative to the appraised value, or the appraisal came in below the price.
• Not stabilized: occupancy is low, units are down, or deferred maintenance means the trailing income does not reflect what the property can earn.
• Sponsor concerns: liquidity, net worth, credit history, or limited experience with this property type.
• Messy financials: incomplete operating statements, commingled accounts or a prior owner's records the bank cannot rely on.
• Appetite: the bank is already heavy on that property type or that market, or is trimming commercial real estate exposure overall.
• Diligence problems: title exceptions, survey issues, environmental findings or zoning questions.

Why a deal that worked two years ago can fail today

Owners are often confused when a property that was financed easily a few years ago is turned down now, even though the building is running as well as ever. The explanation is in how lenders size loans. They start from the net operating income, apply the current interest rate and require the income to exceed the payment by a set margin. When rates rise, the same income supports a smaller payment, and therefore a smaller loan. Nothing about the property got worse, but the loan you asked for no longer fits the math.

Expenses play the same role. If your insurance premium or your Dallas County or Collin County tax bill has risen since your last loan, every dollar of added expense comes straight out of the income a lender underwrites. If you requested a loan based on last year's expense numbers or on the seller's projections, the bank may have quietly sized the deal at a lower figure and found that it no longer worked. Before you assume the bank was unreasonable, rerun your own numbers with current rates and current expenses. Often the decline makes sense, and the fix is a smaller loan or a different structure rather than a different argument.

Ask these questions before you leave the bank's office

Loan officers are usually willing to tell you more than the decline letter says, if you ask directly and without arguing. Write the answers down, because they become the roadmap for the next attempt.

• Was this a credit decision about the deal, or a policy decision about the property type or market?
• At what loan amount would the deal have worked?
• What coverage ratio and rate did you underwrite, and what income figure did you use?
• Was there anything in the sponsor review, such as liquidity or experience, that was a deciding factor?
• Did the appraisal or any third-party report raise an issue?
• Would you reconsider with more equity, a guarantor or a different structure?

Problems you can fix, and problems you route around

Some decline reasons can be solved before the next lender sees the file. Messy financials can be rebuilt into a clean trailing twelve-month statement and rent roll. A sponsor with thin liquidity can add a partner or a guarantor with a stronger balance sheet. A leverage gap can be closed with more equity or a renegotiated price. Partnership and operating agreement questions, such as who has authority to sign and guarantee, can be resolved with the help of a business attorney like Steven Besly before they surface in underwriting again.

Other reasons cannot be fixed quickly, and the answer is a different kind of lender. A property in lease-up will not grow two years of stabilized income in a month. A bank that is full on self-storage or office will not change its policy for one deal. In those cases, the work is finding the lender whose criteria already fit the deal as it stands, rather than reshaping the deal to fit a lender that does not want it.

How a storage deal went from declined to approved

One example appears in a client review on our self-storage page. The borrower was buying a storage facility, and the prior owner's accounting made the banks they approached reluctant. Our team underwrote the deal and presented it to several banks, and it was approved. The property had not changed. What changed was how clearly the income was documented and explained, and how many lenders saw it.

That pattern repeats across property types. Lenders approve what they can understand and defend to their credit committee. A deal with a real story, such as an owner who self-managed with poor bookkeeping or a property mid-way through a renovation, needs that story told with numbers, not left for an underwriter to guess at.

If your bank has already passed and you are not sure which reason applies, that is a good moment for a second set of eyes.

Matching the reason for the decline to the next lender

The lender universe is much wider than the bank down the street. Our loan programs page lists the channels we work with, from banks and credit unions to agency lenders, HUD and FHA, CMBS, life insurance companies, debt funds and family offices. Here is roughly how decline reasons map to them.

• Policy or appetite decline at one bank: another bank or credit union that is actively lending on that property type.
• Stabilized apartments that need longer terms or non-recourse: Fannie Mae or Freddie Mac agency lenders, or CMBS.
• Lease-up, renovation or a timeline too short for a bank: a bridge lender or debt fund.
• An unusual sponsor or situation that institutions pass on: a family office.
• No conventional option on the needed timeline: hard money, as a fallback with a clear exit.

When short-term money is the right next step

If the problem is that the property is not yet what a permanent lender needs, a bridge loan can carry it until it is. The plan should be dated and specific: the occupancy, income and coverage the property must reach, and the permanent loan that will take out the bridge. Bridge debt costs more than permanent debt because the lender is taking more risk, so the business plan has to justify that cost.

Hard money sits one step further out. In a post on our site about hard money in Texas, we note that it closes faster and asks for less documentation, at a higher rate and lower leverage than conventional loans. It can rescue a deal with a deadline, but it is a tool for a short, defined period, not a home for a long-term hold. I go through the costs and the common misconceptions in what hard money really costs on commercial property.

Mistakes that make the second attempt harder

The worst reaction to a decline is sending the same package to every lender you can find. The commercial lending community talks, and a file that has been shopped widely without changes starts to look like a file nobody wants. Fix the problem first, then go to the right lenders, in a controlled way.

The second mistake is hiding the decline or quietly adjusting the numbers. Underwriters ask, and inconsistencies between versions of your operating statement destroy credibility quickly. Be upfront about what happened and what has changed since. The third is giving up on a good deal because one lender said no. And the fourth, on the other side, is chasing a deal that genuinely does not work. Sometimes the honest answer is that the price is too high for the income, and the right move is to renegotiate or walk away.

Bringing a declined deal to Terrydale

Send us what the bank saw: the operating statement, rent roll, purchase contract or current loan documents, sponsor information and the decline reason as you understand it. We underwrite the deal ourselves, identify what caused the decline, and tell you whether it is fixable, which lenders are likely to fit and what structure makes sense. If you want a head start, my guide to the loan package lenders want lists what to gather, and if you are weighing whether to keep working with your bank, I compare the two routes in broker or bank for a commercial loan.

We are based in Dallas and close loans across Texas and other states, mostly on apartments and self-storage, along with retail, industrial, office, land and other commercial property. You can submit the deal through Terrydale Live or schedule a call with me to talk it through. The first step is simply finding out why the answer was no, because that tells us where the yes is likely to be.

Questions people ask me