Creative financing Featured

8:00pm EDT April 25, 2008

In the Federal Reserve’s latest survey of senior loan officers, 80 percent of domestic banks tightened their lending on commercial loans from October 2007 through January 2008, the highest level ever.

“Given the capital crunch in the market today, options exist whereby companies can continue to grow their businesses through alternative financing of their real estate,” says Geoff Hill, senior vice president for Grubb & Ellis Company’s Industrial Group.

Smart Business asked Hill for more information about a few tools that are available in today’s market.

What current market dynamics make creative financing a viable option for purchasing corporate real estate?

The capital markets and banks in general are becoming more stringent with their lending policies. Most banks now require down payments of 25 percent to 40 percent.

Even though rates for Treasury bills are dropping, banks are increasing their spreads. A couple of years ago, the spread between Treasuries and what they were lending on was 185 to 225 basis points. Today, it’s 250 to 300-plus points, meaning that when Treasuries are at 4.75 percent, the loans are around 7.75 percent.

Finally, some banks are putting a minimum on loan rates, varying from bank to bank, with 6 percent to 6.5 percent as a floor.

Please provide an overview and definitions of some of the available options.

Some alternatives to traditional bank financing are sale/leasebacks, Small Business Administration (SBA) loans and industrial revenue bonds (IRBs).

A sale/leaseback is an arrangement whereby one party sells a property to a buyer and the buyer immediately leases the property back to the seller. Sale/leasebacks most commonly occur when the owner is trying to pull equity out of a building. Most sale/leasebacks will have a 10-year to 20-year leaseback term, to be reinvested back into its core business.

With an SBA loan, a borrower can finance up to 90 percent of the purchase price of a building. The SBA will lend up to 40 percent of the project cost in a subordinate position to a bank or finance company, which will typically lend 50 percent in the primary position. Thus, the borrower puts down just 10 percent in equity. The SBA portion cannot exceed $4 million if you’re a manufacturer or $2 million if you’re not a manufacturer. The SBA portion, which can also be used to purchase new equipment, is loaned at a 20-year fixed rate; the bank portion is 15 years to 20 years rolling every five or 10 years, varying from bank to bank. Upfront fees for an SBA loan are a little higher, but the interest rate is lower than conventional financing.

IRBs can only be purchased by manufacturing companies. They are typically tied to short-term borrowing rates, about 25 to 50 basis points above the LIBOR (London Interbank Offered Rate), which is much lower than any other type of financing. Those rates adjust on a monthly basis. The program is administered through a bank, which sells the bonds, requiring an irrevocable letter of credit from the borrower. Typically, the cost for a letter of credit is a percentage of the loan amount.

Under what circumstances might a buyer consider each of the aforementioned alternatives?

For an SBA loan, generally speaking, the target size of a business starts at the level of $1 million in annual revenue and ends at companies pushing $100 million a year. Incidentally, the SBA portion of your loan is assumable to give you some flexibility.

A sale/leaseback is also a good tool for medium-sized to Fortune 500 corporations that are finding it tougher to find traditional lenders. For instance, one of our clients was looking to consolidate engineering facilities now located all over the country into one building because it had entered into bankruptcy proceedings. After agreeable terms were worked out, an investor bought that building and our client signed a long-term lease. The investor got the return he was looking for and the client didn’t have to tie up working capital, so the situation worked out well for everybody.

IRBs only make sense if the total project cost is more than $2 million, because upfront fees may be in the neighborhood of $100,000. If you purchase IRBs, you are required to put 15 percent of the total project cost back into the building and/or by purchasing new equipment. The only other restriction — which rules out a lot of tier-one suppliers and original equipment manufacturers — is a limit of $10 million on capital expenditures over two years. Medium-sized manufacturing companies — like a tier-two supplier — are ideally suited for IRBs, as long as their total revenue is not more than $100 million per year.

GEOFF HILL, SIOR, CCIM, is senior vice president for Grubb & Ellis Company’s Industrial Group. Reach him at (248) 350-1492 or