By Brad Donnell
Despite the increase in construction activity in some markets and property types, finding bank debt these days is becoming increasingly difficult. The stratification of borrowers able to source debt is becoming quite rarified. To use an over-used term, it feels like those pesky top one-percenters are about the only ones able to incentivize a bank to return their phone calls. Those good borrowers that fall below the high bar are subjected in many instances to long, drawn out “No’s” after providing 10 years of tax returns, first born children, an accounting of every dime or nickel you have ever seen in the past 20 years and where it went and why. What is your son’s real basis in his piggy bank that he received in 2001? Can you quantify his earning potential in the year 2028? When you found that quarter in the middle of Knox Street in June 1984, can you provide written documentation of its investment history on a monthly basis through August of this year and what your inflation adjusted basis is today? Often, in order to simply receive a term sheet these days, much less an approved deal, these are the sorts of gyrations you can expect to go through for 3-4 weeks before you are told “No.”
It is not uncommon anymore to sift through 50-60 banks these days in search of financing for a “normal” borrower with no legacy issues and a good deal on their hands. What might have taken a week to source in the past may very well now take several frustrating and demoralizing months. The actual real estate asset you are seeking to finance is now very tertiary to the lending process these days. The best way to approach commercial real estate bank lending today is to forget that you have a real estate asset completely and go into the process with the understanding that you are asking for an unsecured loan, being prepared for the scrutiny and liquidity requirements that would entail.
This environment poses risks for third party vendors such as engineers, architects, general contractors, potential tenants, etc., as often they are asked to “spec” free time on transactions with recognition that once a financing is in place, they will be able to recoup their time spent at closing. They must carefully balance their time spent with how viable the sponsor is without the benefit of knowing the status of that quarter found in 1984 and how pivotal that one issue might be to a group of lenders.
While some of these examples are slightly extreme, they convey the still unhealthy banking environment present today. A running joke around here regarding one well known, national bank was that it would only loan to people who did not need the money. Now, most all banks have modeled themselves around that philosophy. The entrepreneurial banks have been chased away and beaten into submission with lending officers nervously warming their seats and hoping the phone does not ring with a deal on the other end of it.
Unfortunately, this is the best environment for banks to be lending into instead of cowering in the corner looking for reasons to pass on good deals. The bloodletting has already happened and the fear that it is just going to continue is a very economically restrictive reaction to the standard, cyclical nature of commercial real estate; it tends to happen about every twenty years or so. No one should be surprised by it, but continuing to punish ourselves indefinitely does no one any good.
All is not lost, however; Metropolitan Capital Advisors has been very active in the bank lending environment even in the depths of the despair of the past few years. Deep rooted relationships have helped us survive the carnage. Many old friends were put into hibernation, but many have bounced around and landed at banks with no legacy issues and are being cautiously cajoled out of loans. Of the $225mm MCA has closed through July, slightly over $80mm was closed with our banking relationships at very favorable rates and terms, including acquisition loans.
We have a full pipeline of prospective bank financings. Like coaxing a cat out of a tall tree, it takes a careful ear and the right mix of patience, begging, and a few plump field mice to crack the code to the safe. Thinking a well-placed bottle rocket will do the trick doesn’t take into account how spooked and nervous these cats are today.
Waving a fat bag of catnip around, though, seems to work best of all. Must be that the color is so similar to dollar bills which sends them scurrying down so fast…