What you should consider while seeking commercial real estate financing

As mid-year 2016 approaches, the availability of debt and equity for commercial real estate (CRE) and financing has been much discussed.  It appears that the health of the banking sector and Northeast Ohio’s CRE market are both strong.  Vacancy is generally low or declining in many asset classes and submarkets, while rental rates are steady or increasing.

New development has generally been steady, while over-building — the cause of significant weakness in prior cycles — has not been apparent.

This environment has been largely positive, yet some borrowers are expressing increased difficulty in obtaining CRE financing for their project.  Several factors may be influencing the current market, so here are tips on how to best position your CRE opportunity to win financing.

Regulatory environment

There are several important developments that are impacting the macro-environment, including High Volatility Commercial Real Estate (HVCRE) capital regulations and CMBS risk sharing.  Without getting into too much detail, these are both new regulatory scenarios that, generally, require banks to hold more capital to buffer from potential risks on CRE loans.

These rules have been in planning and implementation stages for several years, so they are not a surprise, but their implementation and resulting impact is relatively new in 2016.  These capital rules are often causing lenders to consider amounts of loans, interest rates and fees, loan structures and other risk factors in new and different ways.

My experience in discussing with many CRE lenders is that the impact is subtle, yet real.  Loan terms appear to be slightly tighter and pricing has not been as aggressive in CRE as in other commercial lending segments or in prior CRE business cycles.

Relationships matter

Throughout my career in banking and CRE, relationships with financing sources have been critical for CRE developers.  Invest the time on a regular basis to develop and cultivate those relationships.  Waiting until your first choice has let you down is not an opportune time to explore alternatives.

Changes in personnel, organizations and appetite for certain types of loans or geographic concentrations can have an impact on lenders and developers.

These factors can change quickly, and a developer may find that their project is not desired by a particular lender, regardless of whether the developer has done anything right or wrong.

Communication is critical

Whether arranging a first meeting, discussing a potential loan opportunity or providing reporting on an existing loan, prompt and clear communication is critical.

The party that the lender will communicate with should be clearly identified and any timing expectations spelled out.

Additionally, any bad or negative news should be communicated as soon as possible and not buried in some other reporting.

Loan request

A financing request should contain all pertinent information: a description of location and expected product to be delivered (number of units or square footage), project budget in reasonable detail, estimated income assumptions and explanation of how developer equity is comprised.

In addition, information on all of the parties involved, their experience and financial capacity should be included, even if in summary form.  Finally, detailed maps, site plans, renderings and lists of tenants are critical to paint the picture and help the lender make a quick decision.

Reason for success

A former coach of mine instilled in members of our team that communicating early an absence from a meeting or practice gives you a reason, whereas communicating afterward is an excuse.Sowing the seeds of a banking relationship must be intentional and not haphazard.  Through market knowledge, relationship building, communication and clear loan requests, give your project a reason to succeed in financing, not an excuse.  Good luck!

Greg Ward is a senior vice president and senior relationship manager in Associated Bank’s Cleveland commercial real estate division. More information about Associated Bank, including commercial real estate services and financing solutions, is available at www.associatedbank.com. Email Greg at [email protected].

Royalty financing may be an option for entrepreneurs

While helping an average entrepreneur expand their company, Grenville Strategic Royalty Corp., a publicly traded royalty investment company, began testing out a form of financing that had historically worked well in oil and gas, mining, pharmaceuticals and film: “revenue” or “royalty” financing.

In short, Grenville found a structure that really worked — for entrepreneurs and investors!

What is Royalty Financing?

The premise behind Royalty Financing is simple: a company sells a negotiated percentage of its future revenues to an investor in exchange for a capital investment.

Today, this structure has been taken beyond oil and gas, mining, film production, pharmaceuticals and music to general small businesses (revenues up to $50 million) and it is quickly gaining considerable traction.

How does it work?

Rather than a company making fixed interest rate payments on a bank loan, Royalty Financing generates a return from a percentage of company revenues, over time. The structure is unsecured, subordinate and looks and feels a lot like good old fashioned equity — except it has a small monthly income stream to investors.

While bank loans seem less expensive and lower-risk, they can be difficult for small business owners to obtain and come with a lot of conditions like personal guarantees and pledging your business, to name a few. At the other end of the spectrum are equity investments which are about higher risk and higher return. Royalty Financing is more in the middle-ground, with a current cash stream reducing the risk as part of the structure.

An example of Royalty Financing

A basic example: A five-year old-company has $10 million of revenue. For a $1 million investment, the investment company would “purchase” 2.5 percent of the company’s revenue ($10 million of revenue times 2.5 percent = $250,000 of cash flow generated year). The net result is a stream of monthly royalties from a broad portfolio of companies and the investment company becomes the company’s champion to help them grow their revenues even higher, and the company doesn’t have $1 million to pay back.

Each Royalty Agreement is tailored according to the company’s unique business situation and the investment company works hand-in-hand with portfolio companies to collaborate in developing future buy downs and contract buyout strategies to reduce the royalty rate over time.

How is this source of capital different from other forms of financing?

This type of capital aligns with a company’s plans for growth. However, business owners retain clear control of their businesses; there are no onerous financial covenants, no board seats, and no dilution of ownership associated with the Royalty Financing investment.

Whereas traditional forms of financing, like equity and debt, can be expensive and dilutive, this model is about letting management stay in charge of their company. No security is demanded and no restrictive covenants are imposed.

Value for shareholders?

Put simply, Grenville has built up a portfolio of highly diversified cash-flow generating, long-term focused investments for its shareholders by investing in a mix of businesses which in turn, balances the portfolio and maintains stability. It’s also developed a source of capital for companies that often fits much better than traditional equity or debt, which works well for entrepreneurs, as shareholders and investors in their companies.

In Glenville’s history, fast forward almost three years and the company has found something that is working extremely well in a mix of businesses like financial services, software, health care, infrastructure, construction and various service sectors.


Bill Tharp, CEO and co-founder of Grenville Strategic Royalty Corp., has been building and investing in companies and select entrepreneurs for close to 20 years, after a successful 10 year investment banking career in both Canada and the United Kingdom. As CEO of Climate Change Infrastructure and a leadership focus on low-carbon, water-constrained, alternative energy and efficiency investments, he founded and launched Quantum Leap Asset Management, which successfully invested and exited E2 Venture Fund (the alternative energy and efficiency portion of the Covington Venture Fund), Venture Partners Balance and Equity Funds and also the Renewable Power Funds Series I, II and III, which became Sprott Power.