Establishing a good relationship with your banker is beneficial to your business because a bank can be a source of ideas to improve your company.
“Think of your banker as an extension of your team, just as your CPA or attorney is part of your advisory team,” says Susan D. Steiger, vice president, commercial loans for Lorain National Bank.
“When we come out to see you, we don’t have the meter running. It’s part of our job to spend good quality time with our clients. We don’t send you a bill at the end of a meeting, so it’s something you should take advantage of,” she says.
And if your banker understands your business, he or she can bring you ideas that make your life easier.
Smart Business spoke with Steiger about how to establish a better working relationship with your lending partner.
How should business owners get their bank involved as they consider making investments?
Get your banker involved early when you’re weighing any kind of investment. Ideally, we’d like to be the first call when you have a major strategic move to consider. Whether an acquisition, buying out a partner or making a capital investment, it’s always better to start the discussion sooner rather than later.
Use us as a sounding board, bounce ideas off of us. We may have advice on structuring the deal or may have seen similar situations with other clients, so use that experience to your advantage.
On the other hand, you may be a nonborrowing client who doesn’t anticipate a need to borrow; maybe you’re just using the bank’s treasury services. It still is wise to begin a regular dialogue with your banker; the relationship ideally should be established before you have a borrowing request. Invest the time to educate your banker about your business, your markets and your industry — it will pay dividends down the road.
What else should a business owner expect from a banking relationship?
You should expect to have access to multiple levels in the organization. Make sure your banker is introducing you to others, especially top management. Your banker is your primary point of contact, but he or she is only one person and no one person is calling all the shots. Others at the bank are part of your team too, and you’ll benefit from everyone’s experience. Interaction with all the bank’s decision makers will pay dividends when your next credit request goes before committee.
We can also connect you with other valuable advisors. It’s our responsibility to introduce you to others, both inside and outside the bank, who have relevant experience. It might be for treasury management, investments or estate planning solutions, or tax advice — we can give you access to those professionals.
When is it a good time to talk with your banker about problems?
From the get-go, be forthcoming with information, both good and bad. It just is not a good practice to surprise your banker. When something happens seemingly out of nowhere, it raises red flags. We need to know if you’ve just lost a major customer, your new product launch is delayed or you’re in danger of tripping a loan covenant.
It’s a banker’s job to understand your business, and we know things don’t always go as planned. It is much better to deal with it as soon as you know about it because then we can help plan and strategize the next steps. Remember, we’re your advocate inside our organization.
Positive news often requires advance planning, as well. So let us know if you have just landed a major contract or are in negotiations for the purchase of a new warehouse.
How often should you be talking with your bank?
Your banker should be scheduling annual reviews with you. If not, then ask for it. This annual review is part of keeping the lines of communication open, but it also serves as a more formal process to review your year-end financials and the outlook for the coming year as well as to discuss any other needs you might have. But certainly meet with your banker quarterly, if not more frequently, on a more informal basis.
Also, get the other key people at your company involved in these meetings. Banks like to see that you have bench strength on your team and that the whole business isn’t being carried on your shoulders alone.
How crucial is it to negotiate rates?
Price isn’t everything. It is not necessarily the best strategy to negotiate every rate and price down as low as you can go. In the long run, if your banker is forced into that kind of relationship, when things get tough, he or she may not have the staying power to maintain the relationship. The financial relationship has to be a win-win. If the company is doing all of these things to foster a good relationship, it is going to get competitive pricing over the long haul.
I think it’s often frustrating for owners or managers to deal with the bank. They just would rather not do it or would rather delegate it to someone else, perhaps their controller. But that interaction is too important to ignore. The success of any relationship — personal or professional — always comes down to communication; it is the most important variable.
We are people and we are in a people business. Communication over time builds trust, and mutual trust is at the core of any good relationship. Everyone pays lip service to it, but it really is the key.
Susan D. Steiger is vice president, commercial loans for Lorain National Bank. Reach her at (330) 655-1824 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by Lorain National Bank
Borrowers often assume that because they have made all their payments in a timely manner, renewing their line of credit will be as easy as it has been in the past. However, this is not the case, says Kenneth R. Cookson, attorney with Kegler, Brown, Hill & Ritter.
“The lending environment is different now and the conditions that allowed some borrowers to run the lines up to the maximum amount and simply pay the interest have passed,” says Cookson. “While in earlier years, it was almost automatic that timely payment of the monthly interest alone would make renewal easy, today, being a ‘loyal customer’ is nearly irrelevant to the renewal process.”
Smart Business spoke with Cookson about the lending environment and how changing conditions have affected it.
What challenges are banks currently facing?
In the post-Great Recession regulatory environment, banks are facing a combination of focused regulations and declining values in real estate portfolios and borrowers. They have pressure on their capital requirements and reserve requirements. When a loan is classified as less than perfect, there has to be a reserve established from a bank’s capital to offset the portion of the loan that is in jeopardy, which can eat into capital reserves quickly.
Banks are being subjected to a loan-by-loan analysis by regulators and they are trying to get ahead of that by going through their own portfolios to figure out which loans are speculative and which are not.
Further, a bank may feel regulatory pressure when it has a high concentration of loans in one industry with similar borrowers, so it may hedge its risk. The borrower may be surprised that the line of credit is not extended because the business has made payments on time, but the bank may feel that it is too exposed in that particular area.
How are banks coping with these regulatory requirements?
They are certainly increasing their lending standards. The ratio of loan-to-value has come down, particularly in the real estate market, where a 70 percent loan-to-value ratio is not an unusual request. When you couple that with a decline in real estate values, it really amplifies the state of the conditions and the difficulties for both lenders and borrowers.
What is happening to borrowers?
Borrowers, in many cases, are being caught unaware. They have had a line of credit with a bank for many years and don’t deal with a commercial banker very often. They will send in financial statements annually, the revolver is generally renewed and the rate goes up or down according to market conditions.
Now, bankers are having trouble renewing those lines of credit and are reducing them, or imposing other requirements that have not been enforced previously, such as not allowing borrowers to take out the maximum on their line and just pay the interest for a full year. The borrowers express surprise, asking, ‘Why shouldn’t making timely payments make the renewal of that loan automatic?’
The answer begins with the regulatory requirements on banks and concentration issues, the value of the portfolio of the collateral supporting the loan, an increase in loan-to-value ratios and cash flows.
If it is a real estate loan or one backed by accounts receivable, and the value of either or both has gone down, leading to the appropriate ratios established in the loan document to not be in line, the loan could be classified downward. Borrowers need to understand a bank’s regulation reviews, internal reviews and lending policies, and be prepared for that.
What can borrowers do to help themselves through this?
Borrowers should make sure that their financial statements are current, accurate and complete. Look at your internal records and make sure that your accounts receivable are all good, and if they are not, work to discover the problems before the bank does.
Also, know your business plan and what your five or 10 largest customers are doing. If you learn that of your two lines of business, only one is profitable, you should shift your resources to the more profitable of the two.
Companies can get weighed down by the history of their operations and not take a critical look at their business model, business plan, customer array and pricing policies. Examine your business model as if you were starting fresh.
There is no shortage of examples of businesses that hypothetically have grown but their profits have not gone up proportionally. Increasing sales doesn’t necessarily mean higher profits because of other factors, such as margins and collectability issues. You have to scrub the numbers to see what you are doing right. You may have to cut back sales to better serve customers at higher margins in order to make more money.
How can banks and borrowers each adjust during this period of transition?
You have to assume that we are going to come out of this Great Recession and that the economy will be back in growth mode. This takes patience and understanding from both lenders and borrowers.
Lenders want to make loans. They need to lend money because that is how they get a return on the capital that has been invested. And borrowers need to be granted loans in order to make that happen.
Kenneth R. Cookson is an attorney at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5445 or email@example.com.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA
The commercial real estate market has been hard hit the last several years. While the residential market has suffered equally, commercial real estate typically falls the hardest and climbs the fastest. It has seen higher highs and lower lows than many other components of the market, but lenders are beginning to loosen their belts as things begin to slowly improve, says Andrea Bucey-Tikkanen, vice president of commercial real estate lending for Lorain National Bank.
“That many commercial lenders feel cautiously encouraged could be an indicator of improvements to the economy as a whole,” says Bucey.
Smart Business spoke with Bucey about the commercial real estate market and how banks’ lending practices have begun to thaw.
How has the overall commercial real estate industry been performing?
This year has brought the beginning of a recovery within the commercial real estate industry. There is more activity than there has been in some time, and more banks, insurance companies and other financing conduits are back at the table and proactively looking to lend. Since mid-2008, the industry has been fraught with frightened lenders and floundering borrowers. This year, there is more confidence and optimism on both sides of the table.
What has been the effect on commercial real estate developers?
Commercial real estate developers are a strong and resilient breed. The recession caused many within the industry to fail —some previously solid, good developers are out of business. However, the survivors are exceptionally creative and nimble and have less competition. That said, the role of government in the banking world is serving as a buffer; banks continue to be closely monitored, which prevents the pendulum from swinging too rapidly. The pace of recovery is measured and slow.
How have current market conditions impacted interest rates?
Many banks have been absent from the lending arena for a protracted period of time, either because they chose to sit on the sidelines or because their own poor performance forced them to do so. Banks with money to lend have had less competition and a borrowing base that needed capital. Simple supply and demand drove cost, and while the overall interest rate indexes have been exceptionally low for years, banks could — and did — pay little heed to the indexes themselves. Base rates may have been low, but spreads were thick. In recent months, that has changed dramatically. Spreads are greatly reduced from where they were as recently as late 2011.
Banks lending on commercial real estate consistently during the recession were doing so in a challenging and cautious market. The spreads applied during the worst of times reflected the level of risk inherent in the transaction. Interest rates are the way in which a bank is compensated for the risks it is taking. A riskier, more challenging market equals a higher price for the end user which, in this case, is the commercial real estate developer.
Has lenders’ behavior helped or hindered the market?
There have been bad cops and good cops in the lending arena. A number of lenders were so panicked by the economic downturn that they looked for ways to decrease any and all real estate assets within their portfolios, whether they were performing or not. To encourage their borrowers to refinance elsewhere, bad cops used any and all efforts, including applying punitive interest rates and failing to extend maturity dates on otherwise performing loans. The good cops were the lenders that provided capital consistently, in many cases helping to resurrect a challenged asset by providing the dollars needed to refinance. A good cop in this recent environment had numerous lending opportunities on good assets that were simply the victim of circumstance.
Have economic times influenced the types of real estate deals being done?
Absolutely. There are developers that have not only succeeded in recent years but thrived. They responded to challenges by adapting and using the market to their advantage. This can be seen in the number of ‘value add’ projects being financed, which is the purchase — oftentimes for a markedly reduced price — of a floundering project, be it with high vacancy, a failed owner, or a lender desperate to dump an asset. These low prices have provided the developer that has had capital with a unique opportunity to cheaply buy an asset, provide it with a heightened level of attention, affect its turnaround and vastly increase its end value. These types of projects continue to be popular.
Is the recovery sustainable?
There is a ripple effect brought about by the ‘value add’ concept. A landlord who has paid less for his or her asset can charge his or her tenants less rent, which forces neighboring properties to adjust their rental rates downward to maintain tenancy, regardless of the price they paid and the level of debt upon their particular asset. This downward pressure on rents will serve as an ongoing challenge — some would call it a correction — for the foreseeable future.
What actions can a developer take to help improve their odds of success?
There is nothing a banker likes better than an honest borrower. Surviving these past few years has taken talent, perseverance and luck, but it has also forced a level of brutal disclosure. Successful developers have proactively worked with their lenders, disclosing early and regularly fears they have or problems they’re facing. A good lender will listen and help work creatively toward a solution. The end result is mutual success and a healthier market.
Andrea Bucey-Tikkanen is vice president of commercial real estate lending for Lorain National Bank. Reach her at (216) 520-7310 or abucey@4LNB.com.
Insights Banking & Finance is brought to you by Lorain National Bank
In Sept. 2008, the lending world shut down. In 2011, it started to claw its way back.
Toward the end of 2011 and the beginning of 2012, money began to flow more freely.
“There are clearly loans that are happening from multiple lenders at rate and loan values that are as good as if not better than they were before,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “The ability to get money is real and you can get great interest rates and terms.”
Smart Business spoke with Coyne about how the lending market has changed and how to secure financing for a real estate deal.
What does today’s lending market look like?
Large national banks are still at the stage in which they are dipping a toe in the pool, but the local banks, which lend to the people they know in their communities, are making loans.
Not only are they making loans, but you are seeing interest rates of less than 5 percent and amortizations of 20 years if not 25. The key is there are multiple banks bidding on deals.
Why does having multiple banks bidding change the picture?
Leasing is a form of financing, and so the leasing market for real estate was very hot because you couldn’t get loans to make purchases. Typically our market is 60 percent owner-occupied, user buildings and 40 percent leasing. That ratio flip-flopped over the last two or three years where 70 percent of deals were leases and 30 percent were purchases.
One bright spot through this period: President Obama did make the U.S. Small Business Administration give loans. The SBA used to have a limit of $1 million per loan; the new limit has been raised to $5 million. Most loans that have happened in the past two or three years are SBA, government-backed loans. You are still seeing SBA loans, but you are also seeing lenders keep the whole loan on their balance sheet and assume all of the risk. The government involvement was a good bridge for a year or two, because, while the leasing market was great, the sales market was horrible. Now with loans being made, the sales market is coming back in a hurry.
With interest rates low, this should be a great time to buy. You now can get loans to buy in a market where buying has been so slow for the last few years.
What should potential buyers do to maximize their chances of getting financing?
The local banks in your area would be the first logical call. Don’t be afraid to approach your lender and ask for a loan. In the past, ‘loan’ was a four-letter word. Some people have been so worried about loans they’ve stopped thinking about it all together.
Why are local banks better bets for financing than large national banks?
The local banks didn’t have the exposure to the broader market like some of the national banks did. These local banks stuck to what they do: make loans to local businesses that they know. A lot of the larger banks were making loans on larger portfolios in markets that they didn’t know.
Banks that didn’t do that are doing well.
Right now, banks need to get money out the door. Deposits are a liability to banks, not an asset. They take your $10,000 deposit and pay you 0.5 percent. Then they have to loan it out to someone else at a number higher than that. Because deposit rates are low, interest rates on loans are very low. I’ve seen interest rates in the 4 percent range for investor-owned industrial buildings. It’s not just the owner/user market; investors are able to get loans as well.
How has the lending environment affected the real estate market?
In the past two years it made it hard to sell properties because buyers had trouble getting loans. It was a good time to be a landlord, because there was more action for leasing than there was for selling. Now, I’m seeing a great deal of pent-up demand from the last two years. You’re seeing this pent-up demand being released at the same time that loans are easier to get. Together those two things are creating a situation where there are a lot of buildings going off market and being sold.
From 2008 to 2011, the number of sales has gone up every year — from $452 million in sales in 2008 for an eight-county region to $724 million in 2011. That’s an increase of more than 60 percent.
Will there be any changes in the future?
What you will see at the end of 2012 and the beginning of 2013 is a normalized lending environment. Right now, it is a novelty and people are excited about it. Soon, it will be back to normal.
You need loans; they are the oxygen of business. When lending stops it becomes hard for these companies to breathe.
If you are looking to buy and use it yourself, don’t wait. The market still favors the buyer, but it won’t for long. If you wait you will see price increases, and it will become a seller’s market shortly. It’s not there yet, but it’s getting there.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at firstname.lastname@example.org or (216) 453-3001.
If you have ever read “A Tale of Two Cities,” you may recall the opening line of that book: “It was the best of times, it was the worst of times … ” And if you were seeking a commercial mortgage in 2006, it may well have seemed like the best of times. No guarantee. No problem. There were institutions seeking your business that were willing to offer non-recourse credit.
“It seemed like there were folks lining up to lend you money: the local bank, the regional bank, the multinational bank, the life insurance company, the finance company — each one had a hitch to make its deal enticing,” says John Guarini, second vice president, commercial lending, First State Bank.
Smart Business spoke with Guarini and Michelle L. Smith, first vice president, commercial lending, about how the real estate lending climate has changed over the past five years and the new realities of the commercial mortgage market.
How would you describe the real estate lending climate in 2006?
Guarini: Money was flowing from Wall Street to Main Street, and your local banker may have brought someone from the investment side of the bank to show you how to use an interest rate swap to obtain a payment lower than that on a standard bank-offered, fixed-rate deal. You signed that commitment letter, then all you had to do was pay your commitment fee — or maybe not — and an appraisal fee. Your loan was subject to the findings that would be set forth in that appraisal, but there was no way a 100-page report would hinder your loan because your building was fully occupied and rental rates were climbing.
After six weeks, your lender notified you that your appraisal had arrived, and the value indicated was even higher than he or she had thought, allowing you to borrow more money than you requested, and you said yes. Now, if you have to refinance, it may seem like the worst of times. You return to the institution that made the loan five years ago, and you may find it no longer wants to be in the commercial mortgage business.
How should a business go about refinancing in today’s climate?
Guarini: Get an early start, especially if the property you seek to refinance tends toward the more unique or single purpose. Occupied properties that fit this definition include restaurants, gas stations, car washes and hotels.
That means initiating a dialogue with your existing lender. A lender may want to exit a market segment or geographic area, so much so that a borrower may be able to obtain a discounted payoff without further recourse. Much depends on where your existing loan balance is in relation to the current property value. If your loan balance is 75 percent or less of the value of the property, you stand a better chance of refinancing.
Smith: It can take two to three months to navigate through the loan/appraisal processes, which starts all over if the first bank says no. We can’t emphasize enough — start early.
How is a property’s value determined?
Guarini: If you paid for an appraisal when your loan was written, contact the appraiser and update him or her on the status of the property. The appraiser may be able to give you a rough estimate of value based on current rental rates in the area and sales of comparable properties. Know your property, and the rental rates and prices area properties are commanding. What are vacancy rates? Are other property owners poaching your tenants? Are you willing to ask your tenants to sign early extensions of their leases to satisfy a possible requirement of your new lender?
Why is it important to understand the market?
Smith: Appraisal valuations are still driving loan transactions. However, many loans are limited by the sales and income approaches. Sales comparables reflect discounted and foreclosed sales, depressing price-per-square-foot values. Appraisers will mark the square footage of your property to average market rental rates to determine gross rent on an income approach. The higher of market or actual vacancy is then subtracted, less expenses, to determine net operating income. Appraisers are applying 9 to 10 percent-plus capitalization rates to net operating income to derive appraised value, and loan advances are more conservative, generally 75 percent maximum.
What else should you consider?
Smith: Cash flow is still king. Besides loan-to-value ratio, the lender will review the historical cash flow of the property based upon the last three years of tax returns. Be sure to explain why income was inconsistent or expenses spiked. Did you reduce rent to retain a good tenant? Are your taxes being reassessed? Minimum cash flow coverage is 1.2 times after factoring in a 10 percent or market vacancy factor, 5 percent management fee and possibly a structural reserve. Rates are low, a big advantage when calculating cash flow coverage. Use a maximum 20-year amortization when you pro forma the new loan payment; 30-year amortizations are a thing of the past.
Also, know thyself. What is your credit score? What is your global cash flow? Know the total of your business and real estate property rental income, minus expenses and debt obligations. Are you positive or upside down? Look at your portfolio cash flow holistically. Banks want to know if there is a dog that will take down their new loan.
What are the new realities of the commercial mortgage market?
Smith: More information may be required. Be prepared with tax returns, not only for the project you wish to refinance but also others in your portfolio. The lender will look at your other properties; the global cash flow must demonstrate the ability to service related debt at a minimum of 1.2 times also. Have full copies of leases, along with a rent roll that ties back to the latest tax return on the property.
Navigating shifting financial tides can be challenging. By investing time and expertise, you can aid the lender in finding equitable solutions. Savvy real estate investors find a way to make it rain in good times, and bad.
John Guarini is second vice president, commercial lending, at First State Bank. Reach him at (586) 445-1022 or email@example.com. Michelle L. Smith is first vice president, commercial lending, at First State Bank. Reach her at (586) 445-4762 or firstname.lastname@example.org.
As leveraged buy-out professionals, debt (i.e. leverage) is fundamental to what we do. When used properly, it enables us to generate higher returns on invested equity. It also instills valuable disciplines and practices in the companies we have invested in or acquired.
Although often feared – particularly by entrepreneurs – properly used debt can provide business owners the same benefits. Some things to consider about debt are: How much is desired? How much can be supported? What type? What is the lending environment?
How much debt is desired? This depends on how the debt will be used. Most often, debt is used to fund growth or to bridge working-capital cycles. Debt also can be used to buy new facilities, fund acquisitions or provide partial realizations to business owners. Potentially, any capital needs of a business can be funded with some form of debt.
How much debt can be supported? This is the key question. For the answer, look at your company’s trailing 12-month cash flow – or earnings before interest, taxes, depreciation and amortization (EBITDA). The appropriate amount of debt typically is talked about as a multiple of EBITDA. For example, if your company is not expected to grow much but has a very high certainty of stable EBITDA, the right amount of total debt likely will range from 1.5 to 2.5 EBITDA. If your company is on a high-growth trajectory, then the right amount of debt might be as high as 4 or 4.5 times EBITDA.
However, when doing this calculation, BE CONSERVATIVE! The reason debt is feared by many business owners is that, if things go badly, the lender(s) can become very intrusive and expensive and potentially take your company. In our investing, we are far more conservative than most other professionals. It is very rare for our leverage to exceed 2.5 times EBITDA, regardless of the company’s projections. Things can go very differently than planned.
What type of debt? Essentially, there are three types of debt: senior term, senior revolver and sub.
Senior term is typically partially or completely unsecured, will have scheduled principal reduction payments, and often requires additional principal reduction based on cash flow. Because it is not wholly secured, lenders charge more for this debt (
usually at least a point or two) and want it paid off as quickly as possible.
Senior revolver, known as asset based lending (ABL) is the most commonly available debt. It is wholly secured – typically by receivables, inventory and other more liquid assets. Virtually all senior lenders offer and compete for this type of debt, and it is the most competitively priced.
Sub debt (or mezzanine debt) generally is not asset secured and is far more expensive than senior debt. Sub debt should be viewed as the middle ground between senior debt and equity.
What is the current lending environment? For the most part, lenders are cyclical “pack” actors. The availability of debt ranges from too much (like we experienced from 2004 to 2007, where debt was often more than five times EBITDA), to very little (like now, when most lenders struggle to lend over 2.5 times EBITDA). Regardless of where we are in the cycle, it will change. Because a number of lenders have done very well over the past year or so because of their low cost of funds, we are again starting to see more aggressive, competitively priced proposals.
The amount and type of debt you seek will dictate which lenders to approach.
Regardless, you probably should use some debt – but use it wisely!
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Ca. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney, and has lectured at prominent universities and business schools around the world. Reach him at email@example.com.