POSTED: Thursday, Jan. 28, 2010

Credit climate remains difficult for commercial lending in Whatcom County

When Jill Holmes was looking for financing to transform the former KFC building in the Fountain District into a bistro last year, she believed she had the credit history and a good business plan to get loan approval.

Banks were interested at first; one decided to finance the remodel. However, this was a time of worsening economic conditions and the bank backed out of the project before giving formal approval, Holmes said.

"We had to scramble to find other financing, which was very difficult because of the economic climate," said Holmes, who also owned the building.

She was eventually able to get financing through North Coast Credit Union, as well as some funding through the Small Business Administration. She opened The Fountain Coffee & Wine Bistro earlier this month, and in the first few weeks sales have exceeded expectations.

The struggles with getting financing for commercial projects is not new; businesses across the country have been struggling to get access to credit since the financial meltdown in the fall of 2008. As banks, particularly community financial institutions, continue to struggling with loan portfolios, the expectation is this economic climate will remain in place throughout much of 2010.

With Bellingham-based Horizon Bank being shut down by Washington state government regulators on Friday, Jan. 8 and taken over by Washington Federal Inc., there was a clear signal sent to community banks that the Federal Deposit Insurance Corp. is paying attention to Washington banks struggling with non-performing commercial and residential loans.

"There is so much uncertainty out there; banks don't know what the rules are and if they will change," said Brian Finnegan, a commercial real estate agent and owner of WestCom Properties Inc. "Right now it is much easier to say no (to a commercial loan application) because they are deathly afraid of the FDIC."

The message to Washington state banks by regulators is to reduce activity in projects such as building new retail centers, offices and apartments. However, commercial lenders are lending for other things, such as loans for equipment or establishing lines of credit, said Bruce Clawson, senior vice president and division manager at Banner Bank.

"There are two worlds developing in commercial lending; one is business borrowing, which is still being done. The other is investor and real estate loans, which is seeing continued regulatory pressure," Clawson said.

For the financial institutions, lending is requiring some creativity. With Holmes' project, North Coast Credit Union looked at it as more of a commercial remodel project and focused on the project itself rather than solely on a predetermined formula, said Dave Trott, chief lending officer at the Bellingham-based credit union.

"They had a great business plan and did a lot of work showing how invested they were," Trott said. "They really sold me on the project."

Since North Coast Credit Union is relatively small, it still doesn't have a lot of flexibility and sticks to a few projects that are under $1 million.

"I fill a very small niche when it comes to lending," Trott said.

For bigger projects, it can become a chicken-or-the-egg circular issue; banks don't want to lend money unless there are indicators showing the economy is back on track, but the economy has trouble getting back on track when a major industry such as construction is lagging because of the lack of projects.

"What banks need to see are (commercial) rents stabilizing and vacancies reduced, which is good news for communities that haven't been hit as hard by retail closures, like Whatcom County," Finnegan said. "We are seeing increased activity in national retailers looking in this area; if leasing picks up, banks may become more confident about lending."