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Fledgling State-Owned Bank Movement Could Muster Needed CRE Credit

April 19, 2010

With banks large and small still reluctant to increase their exposure to commercial real estate debt, small-balance property investors in some states could soon be calling on potentially formidable new lending sources.

Proposals for state-owned banks have surfaced recently in some sizable states on both coasts and the Midwest. Modeled to a great degree on the nation's sole such institution - Bank of North Dakota (BND) - the proposed state banks would (among numerous functions) lend out deposited public-sector revenues to owners and developers of small-business properties and other tough-to-finance economic development ventures.

Given daunting economic and political challenges, it's too early to say whether the budding movement will indeed cultivate attractive new small-balance commercial real estate capital sources. However, there's little doubt several of the proposed state-controlled banks boast considerable momentum.

Bills establishing state banks have recently been introduced to state legislatures in Illinois and Michigan, and the president of Massachusetts' Senate is sponsoring a just-proposed job creation bill that includes studying the viability of a state-owned bank.

Meanwhile, candidates for Governor and other high offices in Florida, Vermont, California, Oregon and Idaho have included support for state-owned banks in their platforms.

As much of the opposition to date pertains to concerns about a public entity competing directly with private-sector lenders, other state banks would emulate BND's profitable core lending strategy focused on loan participations originated by the state's community banks and other homegrown lenders.

Indeed, legislation pending in the Washington State Legislature describes the proposed state-owned bank as "a funding resource in partnership with other financial institutions, economic development groups, and guaranty agencies."

And like BND, Washington's bank would use the state's tax revenues and other public funds to finance job-generating investments within the state, rather than depositing state revenues in giant banks that could invest funds pretty much anywhere.

Given the difficulties small businesses face securing credit, investing public dollars as debt supporting targeted private ventures would be a more productive approach than providing incentives to still-skittish commercial lenders, says Washington State Rep. Bob Hasegawa, the primary sponsor of the enabling legislation.

"Imagine providing access to capital for small businesses, or otherwise leveraging our resources instead of having to do it with tax incentives," he says.

As illustrated by data BND marketing director James Barnhardt prepared for SmallBalance.com, loans secured by small commercial properties are a substantial component of the North Dakota state bank's activities. Founded in 1919, the bank's lending is characterized by:


  • An average loan participation of 59 percent. The average size of loans secured by non-owner-occupied business properties is $1.375 million, while loans against owner-occupied commercial properties average $970,000.

  • Non-residential construction and land development loans average $2 million. The overall average-sized business loan in which BND participates is roughly $2.5 million.

  • First mortgages against commercial buildings are a common form of security for the bank's credits - although borrower principals are also expected to guarantee repayment. Loan proceeds can be used to purchase, construct, expand, convert or otherwise improve business structures.

  • CRE-secured loan terms typically run 12 to 20 years. Rates, terms and fees are determined on a case-by-case basis, but tend to be borrower-friendly relative to other lenders.

  • As of year-end, BND's participations in outstanding permanent and construction loans secured by non-residential real estate (about $435 million), were roughly equal to participations in other commercial and industrial loans not secured by real property (approximately $432 million).

  • The institution's overall outstanding loan/lease portfolio stood at a bit over $2.7 billion at year-end. Non-performers are minimal.

Although applications are down amid the tough economy, BND, working through its 100-plus partner institutions, still closed nearly 270 commercial and business loans last year.

While BND is a significant resource for North Dakota's business community and perennially provides profits to the state government's general fund, supporters of such institutions in other states do face formidable challenges.

Start-up funding, whether from bond sales or other sources, diverts scarce public capital from other needs.

Private-sector lenders might still gripe that state-owned banks have a competitive advantage as they’re exempt from paying taxes - or FDIC premiums for that matter.

Prohibitions against state bodies lending directly might require adjustments via voter-approved constitutional amendments - as appears to be the case in Washington.

Also, there's no guarantee a state-owned bank's interest and fee income will offset the lost interest from funds now deposited in commercial banks - not to mention the negative impact on community banks that now hold those deposits.

BND's track record notwithstanding, skeptics also have safety and soundness concerns about lending public funds to enterprises that might not survive.

And, amid all the tea partying, the leadership of one of the country's two major political parties generally sees public-sector participation in the economy as nothing short of abhorrent.

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