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Transcript of Real Estate Revealed Radio Show on AM560 from Sunday, October 31, 2021
I know my topic is “Scary Commercial Lending Stories”, and stories that actually stoke fear in commercial lending are rare. I do have one truly scare story I want to discuss though.
Right now, I am hearing from a lot of clients that are getting the phone call from their lender telling them they are not interested in renewing their loan when it matures. It may be a line of credit that renews annually, or a pending maturity on some sort of long-term debt like a commercial mortgage. I know these calls are very scary for the Borrower and often come as a shock. It is an unanticipated hassle.
We had a client a couple of months ago be notified that their lender was not going to renew their line of credit. The Bank gave them a very short window to move a substantial relationship. This is something that in the best of times does not happen overnight. And of course, the company was substantially negatively impacted by Covid in 2020. This presents a scary challenge for a Borrower. Now instead of focusing on just running their business they must also focus on finding new debt in a difficult time.
Why does this happen? There are several potential reasons.
- First, when Banks merge often the surviving institution will have a different credit appetite or credit box than the original lender. This will often cause the new lender to push credits out of the Bank that do not fit their new credit box.
- Secondly, when a Borrower has gone through a rough patch, some lenders prefer to cut the cord early and try to get out before things get too bad, versus sticking with the client and working through it. There is a commonly accepted concept in commercial lending that the “First loss / Early Loss is your best loss”, meaning lenders who act quickly tend to recover more than those who wait and work with a Borrower.
- Lastly, when Borrowers go through a rough patch often that means the lender will be required by the regulators to reserve more capital against the loan, making it a more expensive loan for the Bank. Rather than do that, lenders often prefer to start trying to exit the relationship.
When the credit zombies come from you, the key is not to panic. There are a lot of other solutions out there. Putting together a firm strategy and working with good partners is what you need to do. Not only are there other conventional loan options out there, but there are plenty of non-conventional lenders as well that will listen to a story and try to find a solution.
Now let’s switch gears and talk about a scary funny story. At least once a month I get a call from a client with a big business plan. It is never a short call. When we finally get down to discussing the capital stack – who is funding what in the transaction – I find out the client has no cash to put into the deal and is looking for 100% financing.
As a general rule 100% financing does not exist. There are a few cases where you can get 100% financing, but in every case you have to have a successful existing business. With such a business there is 100% financing in some circumstances for buying an owner-occupied property, buying equipment, or purchasing another similar business to add to your business. But these are all rare examples. Getting 100% financing for a new business concept or investment real estate is pretty much impossible.
The most recent call I received the client needed to rezone the property and were looking for initial funding to cover that cost, even before they had a contract on the property. Not only can you not rezone a property without the consent of the owner, but no lender is going to ever fund costs that might not even get approved.
We take every loan request that comes in seriously. Our goal is always to provide a professional service and to educate our clients on what is and what is not available and to explain to them why 100% financing is likely not available in their circumstance. But sometimes we even have to shrug our shoulders and laugh a little. If 100% financing was available for every great idea, everyone would be doing it.
If you are ever looking to understand what options you have, whether you are scared of your existing lender or whether you have some scary plans, I can be reached any time at 630-988-4852 or via email at email@example.com. We have over 350+ lending partners to help find you the right solution.