| Is It Time to Refinance Your Business? |
Very informative article from Business NH Magazine that should be mandatory reading for business and commercial property owners. I am sending this to my entire commercial database. ~bf |
| Published Tuesday, November 2, 2010 7:00 am |
The ads are ubiquitous: With rates in the low fours, there has never been a better time to refinance. There has also never been a more critical time. Between 2010 and 2014 nearly $1.4 trillion in commercial real estate loans nationally will come up for renewal, and about half of them are "underwater," with borrowers owing more than the property is worth, according to a Congressional Oversight Panel report.
Commercial real estate loans must be renegotiated about every five years-a problem for businesses that find themselves underwater and facing this deadline. The U.S. Senate is now considering a bill that could help by extending the U.S. Small Business Administration (SBA) 504 loan program to cover refinancing of small business owner-occupied real estate. That would dramatically reduce a bank's exposure as the SBA guarantees 40 percent of that loan.
In the meantime, NH lenders say they are working with their customers-the last thing they want is to own commercial property-but businesses must bring more equity to the deal and prove they have the cash flow to pay back any loans. However, bankers say that cash flow can be a challenge during these lean times.
"To be honest and realistic, those underwater on commercial real estate will have to bring more equity into the deal," says Jerry Little, president of the NH Bankers Association, referring to bonds, securities and other property owned outright. "I think there is going to be more of those sorts of challenges in the next year or two."
Making a Deal
Berlin-based Northway Bank, which has 18 branches statewide, is a top SBA lender in NH, and its experiences speak to those faced by banks and businesses statewide. "Refinancing options are more challenging because of the economy. If someone is coming in to [refinance] their brick and mortar, they may qualify on paper, but because all banks lend on a percentage of value, the asset has to be appraised by an independent appraiser and values are depressed," says Vic Levesque, Northway's senior vice president of commercial banking.
Lower asset values create a challenge for those looking to refinance not only because their loan-to-value ratio is reduced, but because banks are still struggling too, he says. And it's not just the brick and mortar assets that cause concern.
"Commercial property gets valued on a basis of the income it generates, so if income is lower, the value of the asset is lower," Levesque says. "My general point is the value of underlying collateral is generally lower than it was in the past, and secondarily, the banking industry [also took a hit.] It's a more depressed market overall."
Levesque says the bank is working with customers, but it's sometimes being forced to get more creative. For businesses with one owner, that can mean taking a loan against a residential property with more equity and using it as collateral for the business. He says while that is a valid option and one being exercised, he notes residential values have also fallen.
Louis Guevin Jr., executive vice president of commercial services at Laconia Savings Bank, also a top SBA lender in the state, says in his 41 years in the banking business, these are the worst of times for small businesses. He believes the market is in the beginning of a cycle where commercial real estate loans are coming up for renewal for properties with values that have dropped 15 to 25 percent. Still, he stresses that the bank is working with existing customers, and has lent more than $100 million to NH businesses in the past year.
The good news is where commercial real estate rates were in the 7 to 8 percent range three to five years ago, they are now down to about 4 percent. The bad news is getting those rates requires cash flow, and profits and sales for many businesses are down.
"We're not in the business of shutting someone down because the value of their real estate diminished in the last five years," Guevin says, but "cash flow is king" as that is what pays back the loan. The bank has not changed its lending standards; it instead looks to other types of collateral. For instance, he says, the bank will look to re-amortize other debts from 20 years to 25 or 30 years to increase current cash flow.
"People are always thinking things will be better next year. Problem is, things aren't turning around fast enough," Guevin says.
The federal government realizes that fact. That's why the Senate is taking up the Small Business Jobs Act, which includes a proposal to extend the SBA 504 lending program to refinancing of eligible real estate. While existing SBA lending programs provide funding for refinancing, they only guarantee up to 75 percent for loans over $150,000. Under this proposal, businesses could use the 504 program to refinance long-term fixed-rate loans of up to as much as $5 million that are backed 100 percent by SBA. Banks provide financing for 50 percent of the project, with the SBA and the business owner splitting the rest 40/10 percent.
Rates on SBA 504 loans are currently at prime plus 2.75 percent, says Wit Jones, district director for the NH Small Business Administration in Concord. The interest rates are fixed and change monthly, and were at 4.73 percent as of mid-September.
"With the bank only going in 50 percent of the value, they can give a much more attractive rate than they might otherwise give," Jones says.
However, even that change will not be enough to help businesses that are truly suffering. "I will say I have had a number of calls from small businesses that are looking to refinance their business and it really turns out they can't generate enough cash to back it," Jones says. "There is no program out there for the business trying to tread water hoping the economy will return to them."
Rise in Leasing
Another shift due to the tough economy is an increase in businesses leasing space instead of purchasing, says Jim DeStefano, vice president of sales and marketing with Grubb & Ellis in Bedford. "We're seeing the best leasing prices that we've seen in two decades right now. But I also believe there's a hesitancy among business owners to invest significant amounts of cash," DeStefano says.
While he used to see a 60/40 split in terms of leasing to sales, now he sees closer to 80/20. "For commercial real estate, the third quarter of 2008 was the end of the good times. There are still a lot of companies sitting on space that's vacant because they don't have the employment levels they used to have," he says. His office tracks vacancy rates in the Salem, Manchester and Nashua areas, as well as the Seacoast and Concord. He says office vacancy rates in the second quarter of 2010 were 17.3 percent up from 14 percent in the first quarter of 2007 before the recession. And that, he says, doesn't even tell you how many office tenants are behind in their rent.
"There's a lot of that dark space in the market right now-space that owners are paying on but that aren't productive," DeStefano says.
Looking Local
While two years ago banks with headquarters outside NH topped the list of SBA lenders in the Granite State, Jones says the top three are now community banks. And local bankers say that's good news for businesses looking to refinance their commercial real estate.
"We're a small community bank," says Levesque of Northway Bank. "We live in the community where we lend, and many of our customers we know; we have relationships with them. When they're having difficulty, we try to help as much as we can."
He says rates and options are not markedly different in this economy; what's changed is that everyone is looking for personalized service and attention to detail. "A few years ago, large banks pulled back quickly-they just weren't responding and so their business customers had to look elsewhere, and those are the customers we're gaining," Levesque says.
Guevin says local banks are ready and willing to help-and have a vested interest in doing so. He uses restructuring debt or re-amortization of loans in order to help create cash flow as one example. "[Those are solutions] to a temporary setback that allows a business to regroup after two or three years, but the relationship matters. That's the nice thing about community banks. It's all about local decision-making. They can work with customers," Guevin says.
Those kinds of relationships between bankers and business owners will be vital as more commercial real estate comes to term-and more assistance is needed to help businesses refinance their properties.
Commercial real estate loans must be renegotiated about every five years-a problem for businesses that find themselves underwater and facing this deadline. The U.S. Senate is now considering a bill that could help by extending the U.S. Small Business Administration (SBA) 504 loan program to cover refinancing of small business owner-occupied real estate. That would dramatically reduce a bank's exposure as the SBA guarantees 40 percent of that loan.
In the meantime, NH lenders say they are working with their customers-the last thing they want is to own commercial property-but businesses must bring more equity to the deal and prove they have the cash flow to pay back any loans. However, bankers say that cash flow can be a challenge during these lean times.
"To be honest and realistic, those underwater on commercial real estate will have to bring more equity into the deal," says Jerry Little, president of the NH Bankers Association, referring to bonds, securities and other property owned outright. "I think there is going to be more of those sorts of challenges in the next year or two."
Making a Deal
Berlin-based Northway Bank, which has 18 branches statewide, is a top SBA lender in NH, and its experiences speak to those faced by banks and businesses statewide. "Refinancing options are more challenging because of the economy. If someone is coming in to [refinance] their brick and mortar, they may qualify on paper, but because all banks lend on a percentage of value, the asset has to be appraised by an independent appraiser and values are depressed," says Vic Levesque, Northway's senior vice president of commercial banking.
Lower asset values create a challenge for those looking to refinance not only because their loan-to-value ratio is reduced, but because banks are still struggling too, he says. And it's not just the brick and mortar assets that cause concern.
"Commercial property gets valued on a basis of the income it generates, so if income is lower, the value of the asset is lower," Levesque says. "My general point is the value of underlying collateral is generally lower than it was in the past, and secondarily, the banking industry [also took a hit.] It's a more depressed market overall."
Levesque says the bank is working with customers, but it's sometimes being forced to get more creative. For businesses with one owner, that can mean taking a loan against a residential property with more equity and using it as collateral for the business. He says while that is a valid option and one being exercised, he notes residential values have also fallen.
Louis Guevin Jr., executive vice president of commercial services at Laconia Savings Bank, also a top SBA lender in the state, says in his 41 years in the banking business, these are the worst of times for small businesses. He believes the market is in the beginning of a cycle where commercial real estate loans are coming up for renewal for properties with values that have dropped 15 to 25 percent. Still, he stresses that the bank is working with existing customers, and has lent more than $100 million to NH businesses in the past year.
The good news is where commercial real estate rates were in the 7 to 8 percent range three to five years ago, they are now down to about 4 percent. The bad news is getting those rates requires cash flow, and profits and sales for many businesses are down.
"We're not in the business of shutting someone down because the value of their real estate diminished in the last five years," Guevin says, but "cash flow is king" as that is what pays back the loan. The bank has not changed its lending standards; it instead looks to other types of collateral. For instance, he says, the bank will look to re-amortize other debts from 20 years to 25 or 30 years to increase current cash flow.
"People are always thinking things will be better next year. Problem is, things aren't turning around fast enough," Guevin says.
The federal government realizes that fact. That's why the Senate is taking up the Small Business Jobs Act, which includes a proposal to extend the SBA 504 lending program to refinancing of eligible real estate. While existing SBA lending programs provide funding for refinancing, they only guarantee up to 75 percent for loans over $150,000. Under this proposal, businesses could use the 504 program to refinance long-term fixed-rate loans of up to as much as $5 million that are backed 100 percent by SBA. Banks provide financing for 50 percent of the project, with the SBA and the business owner splitting the rest 40/10 percent.
Rates on SBA 504 loans are currently at prime plus 2.75 percent, says Wit Jones, district director for the NH Small Business Administration in Concord. The interest rates are fixed and change monthly, and were at 4.73 percent as of mid-September.
"With the bank only going in 50 percent of the value, they can give a much more attractive rate than they might otherwise give," Jones says.
However, even that change will not be enough to help businesses that are truly suffering. "I will say I have had a number of calls from small businesses that are looking to refinance their business and it really turns out they can't generate enough cash to back it," Jones says. "There is no program out there for the business trying to tread water hoping the economy will return to them."
Rise in Leasing
Another shift due to the tough economy is an increase in businesses leasing space instead of purchasing, says Jim DeStefano, vice president of sales and marketing with Grubb & Ellis in Bedford. "We're seeing the best leasing prices that we've seen in two decades right now. But I also believe there's a hesitancy among business owners to invest significant amounts of cash," DeStefano says.
While he used to see a 60/40 split in terms of leasing to sales, now he sees closer to 80/20. "For commercial real estate, the third quarter of 2008 was the end of the good times. There are still a lot of companies sitting on space that's vacant because they don't have the employment levels they used to have," he says. His office tracks vacancy rates in the Salem, Manchester and Nashua areas, as well as the Seacoast and Concord. He says office vacancy rates in the second quarter of 2010 were 17.3 percent up from 14 percent in the first quarter of 2007 before the recession. And that, he says, doesn't even tell you how many office tenants are behind in their rent.
"There's a lot of that dark space in the market right now-space that owners are paying on but that aren't productive," DeStefano says.
Looking Local
While two years ago banks with headquarters outside NH topped the list of SBA lenders in the Granite State, Jones says the top three are now community banks. And local bankers say that's good news for businesses looking to refinance their commercial real estate.
"We're a small community bank," says Levesque of Northway Bank. "We live in the community where we lend, and many of our customers we know; we have relationships with them. When they're having difficulty, we try to help as much as we can."
He says rates and options are not markedly different in this economy; what's changed is that everyone is looking for personalized service and attention to detail. "A few years ago, large banks pulled back quickly-they just weren't responding and so their business customers had to look elsewhere, and those are the customers we're gaining," Levesque says.
Guevin says local banks are ready and willing to help-and have a vested interest in doing so. He uses restructuring debt or re-amortization of loans in order to help create cash flow as one example. "[Those are solutions] to a temporary setback that allows a business to regroup after two or three years, but the relationship matters. That's the nice thing about community banks. It's all about local decision-making. They can work with customers," Guevin says.
Those kinds of relationships between bankers and business owners will be vital as more commercial real estate comes to term-and more assistance is needed to help businesses refinance their properties.
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