Banks pull back from spec projects

Dr. Kevin Austin has something a lot of people would like to get their hands on right now.

The Nixa-based orthodontist isn’t holding a winning lottery ticket, but the commercial construction loan he secured to build a new office may seem just as elusive to some.

Springfield building permit numbers illustrate how dramatically commercial construction has slowed in the past year. New commercial building permits plunged to 49 in 2009 from 139 in 2008. While the six Springfield building permits issued through March 31 for new commercial buildings are less than half of the 17 permits issued through March 2008, they are an improvement compared to the two permits issued in the city for first-quarter 2009.

As Austin found out, there are loans available, but local bankers say the type of project that is likely to secure a loan has changed from previous years.

“There’s no way you can look at a loan without looking at the economy,” said Robert Berlin, senior vice president and commercial loan team leader at Empire Bank.

“Two or three years ago, you would look at a deal and it would seem like the borrowers had the wind at their backs. Now, it seems like businesses are sailing into the wind.”

The magic factor: owner occupancy
Each bank has its own loan policy and designs its loan portfolio to mitigate risk, but generally speaking, borrowers looking for funding for speculative development projects will have the hardest time securing loans, said Keran Lemons, senior vice president and loan manager at Arvest Bank.

Empire’s Berlin agreed.

“For the borrower that has an owner-occupied commercial property with an established business, we’re still seeing those types of deals,” he said. “Many speculative real estate loans are really stagnant right now.”

At least one local developer has felt that pinch. Sam Coryell of TLC Properties said his company is having difficulty finding financing for a $10 million apartment complex, partly due to unfavorable lender terms.

Austin’s building is reflective of the trend away from speculative development. His $840,000, 20-year loan through Arvest Bank and the U.S. Small Business Administration’s 504 program, is for an owner-occupied,  6,150-square-foot office for Austin Orthodontics at 733 W. Center Circle in Nixa. Austin’s interest rate from Arvest is 5.25 percent,  he said.

For speculative developments, Berlin said most banks are going to want to see preleased space.

But preleasing in this economic climate is difficult, said Dave Murray, executive vice president of R.B. Murray Co.

“For the most part, the demand is so weak that you’re not seeing that many projects going forward because without demand, there’s no need to build,” he said. “You’ve got a chicken or the egg thing going on here.”

That doesn’t mean all projects should be put on hold. Lemons said developments targeted toward certain industries might have better chances than others.

“Most banks would probably find it easer to loan to (a development housing) medical practices as opposed to a residential development,” he said.

Finding the right fit
For any loan, the right match between borrower and lender is essential.

Five years ago, when Austin built his first office space, he borrowed from Emeryville, Calif.-based Matsco, which specializes in lending for veterinary, vision care and dental offices. That fit was right for the time, since he was straight out of his residency program and had little business history to show, he said.

But finding the best fit may take some time, Arvest’s Lemons said.

“Just because a financial institution you applied to says no, doesn’t mean you aren’t creditworthy,” he said. “Every now and then, you may run into a bank that really likes to lend to orthodontists or printing presses.”

It doesn’t hurt to stop in and talk with a lender before getting financials together, Berlin added.

That especially holds true when potential borrowers already know the banker.

“If you already have an established relationship, it’s much easier to have a conversation and say, ‘Hey, I’m thinking about doing this,’ because you both have history and a backdrop to draw from,” Lemons said.

Equity and beyond
Banks are placing a lot of importance on equity right now, Berlin said, and true equity – either in cash or collateral – is key.

“A few years ago, a lot of banks were basing loans on appraised value. True equity is based off the purchase price,” he said, noting standard equity required for a loan would be between 20 percent and 25 percent.

Equity requirements may be even higher for speculative ventures, Murray said.

“I’ve seen two of late where owner-occupied were 25 percent equities. If they were not owner-occupied, they were 50 percent equities,” he said.

Borrowers also should be prepared to demonstrate their capacity to repay their loans, Lemons said.  Capacity and collateral are among the “five c’s” that Lemons said bankers look for when considering making a loan. The others are capital, economic conditions and character of the borrower.

Borrowers who are building new locations for existing businesses should be prepared to share three years of financial information and provide a projection for the next year, Berlin said.

A building with leased space, such as a strip mall, would require a list of tenants that already have signed on, and the amount and terms of their leases, he said.

“If you’re just getting started, we look for what we call 1.2 times debt service coverage,” he said, explaining that a property with loan payments of $100,000 per year would need to show cash flow for the property of $120,000 a year.

Hope of a shift
Murray believes the business owners who put projects on hold at the start of the recession due to lack of financing will start to move forward soon.

In the meantime, Murray said, it’s business as usual, which for his company includes finding tenants for 60/65 Partnership LLC’s 600-acre development at highways 60 and 65. That development is designed to include places to shop, work and live, as well as up to 200 acres for public use such as park space or a community garden.

The first order of business, Murray said, is that retailers will need to commit to filling about 600,000 square feet in the development.

“What we have to do is secure the retailers that will say, ‘Yes, we’ll participate,’ and that will allow us to take the next step which is to secure the bonding in order to do the financing to build the infrastructure.”

Still, he knows that development isn’t alone in the waiting game.

“This credit crunch (has) taken projects all across the country and put them basically in a hold. But it doesn’t mean that we’re not working. It doesn’t mean that we’re not trying to position it so that we’re in the best possible shape when the opportunity presents itself (and) the market straightens itself out again,” he said.[[In-content Ad]]