What Factors Do You Use To Down-Select Your Small Regional Bank Partners?

Question

I have pretty much called every known viable bank or credit union in the greater Austin area in the past year and we now have 15 solid lenders that will loan on specs or our rehab projects.  This presents an interesting "problem" of needing to keep our relationship active with them or to down-select and bracket them into the most desirable camp and the other camp.

If anyone has experience with this or thoughts on how to categorize them it would be helpful.  These are the main items I am thinking of using:

1.  Who will loan the most.  Believe it or not 85% LTC with traditional lenders is available from a few lenders and as much as 95% LTC is available with what are closer to asset-based lenders

2.  Who will offer guidance lines.  $500k guidance lines seem to be fashionable currently to start out with

3.  Who has the best service and is responsive to emails

4.  Rates are currently 4th on my list, but are certainly important.  Everyone is within 1-2% though and for short-term money this doesn't matter a lot.  Points are more important and most folks want a 1% origination fee; although some will go lower or to 0% for certain scenarios

What else would you want to know?  Item 2 kind of ties in with how many loans they'll issue once the first set rolls out.  Some folks will loan several to start out with.  Many times this seems to be because they're getting less static from regulators or are more liquid at the time of the loan request.

Any guidance or commentary is appreciated.  Note that this discussion is separate from equity raises and private lending.  This is just about small regional bank financing.  This financing is frequently superior to using other kinds for many projects we're working on.

Bryan Hancock · Answer

Yes...I know all of this Bill.  Thanks for your thoughts though.

We are doing business with 5 banks and 14 others (went up since this thread was started) will now loan to us on specs.  I have talked to 46 in the last 9 months and 19 are doing spec loans.  The question is how to down-select the 19.  Most lenders will do 1-2 specs because they are bounded by what their regulators will allow them to loan on specs.  After we blow through those bullets we have to find a new lender for the next batch of projects.

LTC = Loan to cost (sticks, bricks, etc.)
LTV = "Loan to value" (appraised after built)

LTC is always our bounding factor with 30-40% gross unlevered margins in our infill projects.

This is bank nomenclature for building and development projects that is completely dumb to me.  The worst part is that the "C" in LTC varies based on the lender.

Guidance line means they are allocating that capital for my projects annually.  Some will do it and some won't.  Out of the 19 we're talking to 3 are prepared to start out with guidance lines.

It seems like there really isn't an efficient way to figure out which lenders will be best for us without just "dating" them prior to a full-blown depository relationship where we move all or a large portion of our cash on had to them.

Bill Gulley · Answer

A guidance line????????
LTC??? = LTV

Seems you found 15 lenders to lend in your area of RE, not that you have a banking relationship with all 15, so they are making the offer so to speak.

Selecting a bank to do business with takes some time as well as investigation.

Understand that all banks will have a "lending area" generally no more than 30miles from a bank location, that's why they spread out in smaller communities to enlarge the service area.

If you'fe going to be doing business west of Austin, I'd say a bank that is close by and not on the east side of Austin. Male sure the bank is willing to lend in the area.

You really don't have to be concerned with a loan size if you ask them who their affiliate lenders are and who they may partner with on a larger loan amount. Banks will have a concentration of loans issue not only by the amount but also with any one borrower exceed ten per cent of their portfolio, I doubt you'll get that big knowing there are some large banks in Austin. So, It's not so much if they are big enough as it is can you swing a larger loan on a participation basis in dealing with a small bank. If they don't have affiliate lenders, the chance of you getting cut off later on as they get loaned up.

Banks are usually known for the types of business they do, small business, real estate development, government banking, or primarily an investment bank, while they may not see them selves as such, they tend to do more business in one area than others.

I suggest you personally visit with the sr. vp. of lending or the president of a small bank, while these mid ans small banks will have a loan committee, that committee is usually swayed entirely by the head guy, it's an opportunity to pass the buck. Knowing what that person like's to see is where you need to be.

The down side of a small bank is that they reach their loan limits quickly and if that one guy doesn't like you for some reason, you're done, so politics and making friends is important. What makes friends with any bank is deposits, the more the better.

You need to build a banking relationshipthat is a two way street, having 6 loans with a bank is not much of a banking relationship with a grand on deposit!

If you are working with investors, open an escrow account and throw investor funds in that account, even if you're paying 2 or 3 % and getting nothing out of the escrow, it can build that relationship, if your account is big enough you begin to have leverage for a loan. Better rate, terms, etc.

IMO, no matter how big you get, you'll do fine having a bank relationship with 3 main banks and one main depository. You should have a mild relationship with maybe 3 more that you can referr clients/buyers to, a secondary market broker is also a good one to know for those that fall through the cracks. You certainly don't need to try and maintain a relationship with 15 banks!

And, I'd suggest you get in with a bank that has a good investment bank dept. as they get to know you, they may "introduce" you to qualified investors and assist you in raising partnership funding.

There's much more toit, IMO but that should get you started...Goodluck!

Bryan Hancock · Answer

Yeah....many lenders get concentrated in development loans and they go out of the market for a while.  Some of the small ones seems to run out of funds too.

That is why I am planning to keep a number in the hopper at the end of the down-select.  A 2nd tier would be used only in the unlikely event that none of the top tier lenders could lend on frothy terms.  85%+ LTC seems likely from some lenders I have been speaking with.  Competition is always a good thing when trying to get what you want.

Bill Gulley · Answer

LOL, yes, lots of terminology, and it didn't register these were construction loans and your  loan concentration and limit.

Bryan, all lenders will have these issues, as I mentioned, see whoyou can really work with. So long as you're selling them off and staying under your loan limit, it won't be a problem.

BTW, regulators do not tell a bank what kind of loans they can make, they classify according to risk and prudent lending practices, but don't tell them that as that is a good excuse to say no or not do certain types of loan. You might ask what % of their RE loans are construction, the higher probably the better as they are obviously good at it and have the expertise, some banks don't have the management capabilities and verification process to adequately do construction.

Bryan Hancock · Answer

Spec = A house you are building that does not have an end-buyer.  Many banks want "pre sales" for projects.  This presumably decreases their risk in deals, but I think this is bank-think in many scenarios.  Our group is far more solid than end-buyers we'd have to rely on to perform for pre-sales.

Small regionals get static from their regulators about loaning on specs in the current environment.  There is a game you have to play with them to determine how many they'll loan on and how much money they have to put to work at any given time.  Thus you have to keep your bank pipeline full because you never know what the real story will be when you put a project in front of them.  One week they may bend over backwards to write you the loan and the next week they won't return your calls.

Many small regionals will loan on rehab projects too.  It is just more of a hassle than hard money is and they are less aggressive.  You also need to stuff more equity in the project and thus your cost of capital may be higher using the "cheaper" money if the yield on your equity is high.  That is our scenario right now.

Since I posted this original thread I have also called 105 hard money lenders from my old list.  Of those only 50 are still in business and only 8 will loan on SFR construction projects in Austin.  The best one I found was ironically in Seattle.

This speaks to the carnage during the repression.  If anyone is thinking hard money loans are without risk you're wrong!  The numbers above speak for themselves.  One of our "experts" on the board was giving hard money lenders a hard time about being greedy in a separate thread earlier this week.  It seems like the money is priced correctly to me given these stats.  This is especially true in markets with wild asset value swings where their collateral can be destroyed in a few weeks.

I've also found some more small regionals this week.  We now have 21 lenders and I'm going into down-select mode instead of farming for new relationships.  Advice here is still appreciated if anyone has any.

Greg S. · Answer

Bryan,
    I'm still picking up the terminology of this business...Is "spec" just another way of saying "rehab"?

Thanks,
Greg

What Factors Do You Use To Down-Select Your Small Regional Bank Partners?

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