ORLANDO, Fla. – The idea of offering commercial real estate lending services is becoming increasingly appealing to credit unions, and will probably be more so after NCUA announces its proposed changes to the agency's member business lending act that will make it easier for CUs to provide business loans and other services. But despite the regulatory changes, CUs should have both eyes open and know what's involved with offering the service before they venture in to it. "Offering commercial real estate requires you to roll up your sleeves and get in to the process," advised James Devine. The co-founder of CEO of Hipereon, a provider of financial consulting and training services to financial institutions and trade associations, gave a group of credit union and CUSO representatives at a special workshop on "Evaluating Commercial Real Estate Lending Opportunities" held as part of the American Credit Union Mortgage Association's (ACUMA) conference sobering advice: "You can't get in to commercial real estate lending without doing your homework first. There's too much risk involved," he cautioned. Among the homework assignments is becoming a student of location issues – understanding property usage and values in the area; knowing what's happened in the area in the last year, in the last five years; finding out if the property will still be desirable in 15 to 20 years; are there any site issue. Beyond that, said Devine, you have to become acquainted with things like property zoning laws in the area and finding out if there are any property covenants, restrictions and conditions. "Get historical information on the site, be a student of location issues," Devine said. Does the borrower plan to make changes to the physical structure of the facility they're buying? Devine advises CUs to find out if any of the changes will "change the facility's operationally functional capacity and ultimately its cash flow and the borrower's ability to repay the loan," he says. "You are in the business of lending, not owning. You have to have cash flow and understand the cash flow of the business as it pertains to the commercial real estate," he says. Devine quoted his number one rule of commercial real estate lending: "If the cash don't flow, the loan don't go." "On paper everything can look nice, but you have to be able to kick the tires and go on-site to evaluate the physical condition of the building site and the surroundings," said Devine. "You have to stress test the process. Remember, commercial real estate is a cyclical business. Adverse economic developments and conditions can ultimately affect the borrower's cash flow and their ability to repay the loan." When it comes to calculating property income, property expenses, and property net operating cash flow, "you have to drill behind the numbers," he said. Rent concessions and sales discounts, for example, result in cash flow below projected levels. Among the member business lending regulatory changes NCUA will propose at its March 27th meeting is no longer requiring personal guarantees of all principals of the business. Devine though recommends credit unions weigh the value of a personal guaranty as a secondary source of repayment. "Why take ownership risk for loanership return?" he asked. "If you're going to get involved with commercial real estate lending, you have to recognize the imperfect nature of these deals," cautioned Devine. "The price of getting involved with commercial real estate lending is eternal vigilance. The service is an opportunity of consequence, and it's one you shouldn't be cavalier about doing," he said. But having demonstrated the do's and don'ts of commercial business lending, Devine emphasized that there is a need for credit unions' services among the small business market. "The key to successfully serving the small business market is offering a lending piece that's efficient from a cost and time of delivery perspective. If you can't do this, you will win the battle, but lose the war." He added that, "The small business market has always been below the radar screen, but credit unions have enormous potential to serve the small business market if they figure out a way to holistically help pull them in and develop their relationship value." [email protected]