Since I miss-typed last night the "E" for experience rather than expense I will spend tonight’s blog on experience. Experience today is more important than ever before. Experience used to only pertain to SBA Loans and not to commercial loans at all. Well all that has really changed. NON-SBA Loans are now requiring the experience factor as well now.
What am I talking about?
Well for example you want financing on an apartment, if you have never owned an apartment that is now a major flaw in your application. Lenders want to make sure that you have the experience in the investment that you are trying to finance. Another example is for a development deal, it used to be sufficient if the master developer had a team of sophisticated professionals, and they would be able to procure financing for their development.
Today if the master developer has not done many similar projects the lenders are not interested in talking with them, at all. Another example was that Self-Storage facilities were being bought by anyone who had the capital to put down and lenders were financing them one after another with no experience.
Today without direct Self-Storage facility ownership experience it is very difficult to get a loan approved. My last example is that we have a client that owns a mobile home park and was looking for additional financing. The lender came back and asked what other experience in mobile home parks the client has. I know by now you are seeing the picture.
I apologize about the previous version that went out. Microsoft updated the computer and somehow remembered the draft copy of this e-mail.
Friday, July 11, 2008
Wednesday, July 9, 2008
Daily Obserations - There are no Exceptions
I heard this statement today from two bankers that we regularly deal with.
The very short but powerful lesson today is that there are no exceptions, if a lender can find any fault with a loan they will decline it immediately. In this economic environment the lenders that are still committing their funds to new projects have their pick of the litter so to say. Lenders are Cherry Picking not bottom feeding.
So what does this mean to you? It means that you must have all your ducks in a row before you submit a loan. You need to make sure that you loan meets all the 5C's +E test. Collateral, Credit, Contribution, Capacity, Character and Experience.
If any of the five are not there the likelihood of the loan being approved is minimal. If two are missing the likelihood is Nil. Can you qualify?
The very short but powerful lesson today is that there are no exceptions, if a lender can find any fault with a loan they will decline it immediately. In this economic environment the lenders that are still committing their funds to new projects have their pick of the litter so to say. Lenders are Cherry Picking not bottom feeding.
So what does this mean to you? It means that you must have all your ducks in a row before you submit a loan. You need to make sure that you loan meets all the 5C's +E test. Collateral, Credit, Contribution, Capacity, Character and Experience.
If any of the five are not there the likelihood of the loan being approved is minimal. If two are missing the likelihood is Nil. Can you qualify?
Tuesday, July 8, 2008
Daily Observation - Other Municipal Financing Methods
Yesterday I talked about Public financing of infrastructure, today I want to continue the thought and get a little more specific.
The issuance of municipal bonds only occurs when the public agency known as the issuing agency offers their support to the project, By support they are the sponsor of the project, that does not necessarily mean that they are putting up their bonding authority, no they are just sponsoring the bond financing. The bonds that we are discussing in this blog are not general obligation bonds which would be supported by the full faith and credit of the sponsoring agency, nor are they revenue bonds, but they are bonds issued for a specific purpose.
In the state of California for example they are are known as either Assessment Districts or Community Facilities Districts or as they are affectionately known as CFD's. These two type of bonding districts are a developers best friend. They allow the developer to finance all their public infrastructure such as public streets, sewers, lighting, water, maintenance for the streets, drainage, public utilities and even school, police and fire fees.
In addition to the above there are also bonds that can be issued by an RDA or Redevelopment Agency known as tax increment bond financing. There the property tax base is frozen and the increment, which represents the difference between the frozen tax base and the new tax base is pledged and bonds are sold against that increment.
Lastly there are public and private joint ventures. This occurs where a private developer creates a participation venture with the public agency and they share in the income stream of the project and at the end of the lease term the developer is able to buy the property back, For more on Public Financing
The issuance of municipal bonds only occurs when the public agency known as the issuing agency offers their support to the project, By support they are the sponsor of the project, that does not necessarily mean that they are putting up their bonding authority, no they are just sponsoring the bond financing. The bonds that we are discussing in this blog are not general obligation bonds which would be supported by the full faith and credit of the sponsoring agency, nor are they revenue bonds, but they are bonds issued for a specific purpose.
In the state of California for example they are are known as either Assessment Districts or Community Facilities Districts or as they are affectionately known as CFD's. These two type of bonding districts are a developers best friend. They allow the developer to finance all their public infrastructure such as public streets, sewers, lighting, water, maintenance for the streets, drainage, public utilities and even school, police and fire fees.
In addition to the above there are also bonds that can be issued by an RDA or Redevelopment Agency known as tax increment bond financing. There the property tax base is frozen and the increment, which represents the difference between the frozen tax base and the new tax base is pledged and bonds are sold against that increment.
Lastly there are public and private joint ventures. This occurs where a private developer creates a participation venture with the public agency and they share in the income stream of the project and at the end of the lease term the developer is able to buy the property back, For more on Public Financing
Monday, July 7, 2008
Daily Observations - Public Financing for Infrastructure
As more and more lenders tighten their lending criteria, especially for construction projects alternative financing is becoming once again in vogue. Most people are aware of the hedge funds, and the conduit lenders and the mezzanine lenders, but are you aware of bond financing?
As an expert in the field of municipal finance for the last twenty five years I have seen many different variations of bond financing being used throughout the United States for different types of construction projects. But in the nutshell bond financing allows the developer to float a bond and have the infrastructure built for the project and paid for by an underwriter. The tax that supports the debts service is then passed through to the ultimate user of the property.
The purpose of this blog is not to teach you how to do bond financing, but to make you aware of its existence. Any large project that has public infrastructure needs over a couple million of dollars should be examining the possibility of utilizing bond financing for this cost. Also banks love bond financing because it becomes part of the exit strategy to pay off the construction debt.
For more on bond financing and how it benefits the developer check out my article that was published in the Scotsmen Guide Going to the Public, Understanding Public Financing.
As an expert in the field of municipal finance for the last twenty five years I have seen many different variations of bond financing being used throughout the United States for different types of construction projects. But in the nutshell bond financing allows the developer to float a bond and have the infrastructure built for the project and paid for by an underwriter. The tax that supports the debts service is then passed through to the ultimate user of the property.
The purpose of this blog is not to teach you how to do bond financing, but to make you aware of its existence. Any large project that has public infrastructure needs over a couple million of dollars should be examining the possibility of utilizing bond financing for this cost. Also banks love bond financing because it becomes part of the exit strategy to pay off the construction debt.
For more on bond financing and how it benefits the developer check out my article that was published in the Scotsmen Guide Going to the Public, Understanding Public Financing.
Sunday, July 6, 2008
Daily Observation - Conversation with a Sr. VP
I had a conversation on Thursday before the holiday with a Sr. VP of a National Real Estate Company and I thought it was quite eye-opening so I wanted to share the gist with you.
His firm is considering going into commercial real estate in a "BIG" way. He told me that the hardest transition for him was to get the agents to understand the financing aspect to the deal. Not that they did not understand loans, they did, what they did not understand is that all deals are not able to get financing.
We discussed the fact that at least 85% of all the real estate commercial deals will never get financing, and therefore will never close. His concern is that his agents will spend so much time on deals that will never close that they lose focus on the deals that should close.
Think about this thought as we start the month of July. Take advantage of our No Obligation Professional Loan Analysis today to make sure this does not happen to you.
His firm is considering going into commercial real estate in a "BIG" way. He told me that the hardest transition for him was to get the agents to understand the financing aspect to the deal. Not that they did not understand loans, they did, what they did not understand is that all deals are not able to get financing.
We discussed the fact that at least 85% of all the real estate commercial deals will never get financing, and therefore will never close. His concern is that his agents will spend so much time on deals that will never close that they lose focus on the deals that should close.
Think about this thought as we start the month of July. Take advantage of our No Obligation Professional Loan Analysis today to make sure this does not happen to you.
Wednesday, July 2, 2008
Daily Observations - SBA & Leases
One of the most important aspects of a new or existing business is their lease. A proper lease can increase the value of a business and an improper lease can cause a business valuation to be significantly lower. It all depends on the type of business, the location of the business and the current landlord.
With an SBA Loan assuming the loan is for the purchase of a biz op (business opportunity) the lender will not lend unless there is a long term lease in place. The length of the lease has to be commensurate with the term of the loan. For example, a seven year working capital loan must have a lease the equivalent of seven years. The lease can be a five year with a five year option. Therefore the current lease term does not have be the length of the lease but the current term plus written options to renew must be at least the length of the term of the loan.
For a purchase of a biz op the average length is ten years therefore the length of the lease should be ten years as well. There are however exceptions and they have to do with, is it crucial that the business be at this particular location. This caveat mainly affects retail businesses that are established and a move if required would surely mean diminished cash flow.
The other main point about leases as it relates to SBA Loans is the requirement that the current landlord must sign a waiver known as the landlord waiver. This agreement gives the lender the right to be in first position over the landlord so in the event of a default the SBA lender gets to grab whatever collateral there is before the landlord can perfect their legal rights.
It is my recommendation from years of experience that the discussion of the landlord waiver should happen early in the transaction and do not wait till the end of the loan approval process to discuss this. SBA will not close a loan unless the landlord waiver is signed and executed. Read on for more Eligibility Requirementsfor an SBA Loan.
With an SBA Loan assuming the loan is for the purchase of a biz op (business opportunity) the lender will not lend unless there is a long term lease in place. The length of the lease has to be commensurate with the term of the loan. For example, a seven year working capital loan must have a lease the equivalent of seven years. The lease can be a five year with a five year option. Therefore the current lease term does not have be the length of the lease but the current term plus written options to renew must be at least the length of the term of the loan.
For a purchase of a biz op the average length is ten years therefore the length of the lease should be ten years as well. There are however exceptions and they have to do with, is it crucial that the business be at this particular location. This caveat mainly affects retail businesses that are established and a move if required would surely mean diminished cash flow.
The other main point about leases as it relates to SBA Loans is the requirement that the current landlord must sign a waiver known as the landlord waiver. This agreement gives the lender the right to be in first position over the landlord so in the event of a default the SBA lender gets to grab whatever collateral there is before the landlord can perfect their legal rights.
It is my recommendation from years of experience that the discussion of the landlord waiver should happen early in the transaction and do not wait till the end of the loan approval process to discuss this. SBA will not close a loan unless the landlord waiver is signed and executed. Read on for more Eligibility Requirementsfor an SBA Loan.
Tuesday, July 1, 2008
Daily Observation - Negotiate Today More than Ever
I have a client that due to the poor economy is in a position where he may lose his property to the Second Trust Deed holder. He has been trying to develop the property for over five years and the lenders which approved him for his construction loan at the last minute declined it. He is down to his last "nickle" so to speak and he is concerned that he may lose the property.
Here's a hint tonight.
No one wants to take back a raw piece of dirt even though it has a map approved, at least not today. Also for the Second Trust Deed holder to take the property he has to pay the first(which is current). Do you think he wants to pay off the first to protect his position when the First Trust Deed is ten time the amount of the second?
Not a Chance!
What I shared with him this evening is that he has to Negotiate from a position of strength. Use the facts that I just alluded to in this blog, Renegotiate the amount of the loan and increase the loan amount to make up for the back payments that are due as well as buy himself another years worth of payments by increasing the note another 100K for example.
Now is the time to stand up to the trust deed holders and not let them push you around!
For other services and to see What Makes Us Different read on.
Here's a hint tonight.
No one wants to take back a raw piece of dirt even though it has a map approved, at least not today. Also for the Second Trust Deed holder to take the property he has to pay the first(which is current). Do you think he wants to pay off the first to protect his position when the First Trust Deed is ten time the amount of the second?
Not a Chance!
What I shared with him this evening is that he has to Negotiate from a position of strength. Use the facts that I just alluded to in this blog, Renegotiate the amount of the loan and increase the loan amount to make up for the back payments that are due as well as buy himself another years worth of payments by increasing the note another 100K for example.
Now is the time to stand up to the trust deed holders and not let them push you around!
For other services and to see What Makes Us Different read on.
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