S.E.C. Real Estate Observer

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Most of us in the commercial real estate business today know that we have some major banking issues to deal with. We have all heard the following regularly:

• I can’t get a loan!
• My loan ballooned and is not being renewed!
• No one is making development loans and that is what I do!
• I cannot get a decision from my long time banker!
• The rules seem to have changed!

As a commercial broker I hear these comments with clients and friends. However, I have also served on a commercial community bank Board of Directors for over 15 years, so I will give you my perspective on the WHY!

Bank owners and managers are very skittish right now. Since 1913, with the establishment of the Federal Reserve Act, there have been five major federal banking acts. The most comprehensive was the 1999 Gramm-Lease-Bliley Act, which had a total of 145 pages.

The 2010 Dodd-Frank Act just passed has 2,319 pages. A recent Office of Comptroller and Currency (OCC) contractor training our Board of Directors indicated that there are an estimated 23,000 new pages of rules and regulations yet to be written under this law. How passing legislation before our Senators and Representatives read it became the norm is totally beyond my comprehension, but that seems to be the case here too.

This Act, plus the general real estate and banking problems around the U. S., have made regulators start enforcing a whole list of new standards and requirements for banks. These include:

• Tier One Capital, which used to be considered adequate at 8%, is being pushed to 10% as a goal that needs to be achieved.
• Banks cannot lend more than 300% of Capital in Commercial Real Estate Loans (CRE). Many banks exceed this even in strong areas.
• Reserves for Loan losses need to be increased over what was always considered acceptable, even for banks with minimal problems.

Therefore, many banks are in the process of restructuring their balance sheets to meet new guidelines. For instance, there are three ways to increase Tier One capital:

1. Shrink the size of the bank. (i.e. sell off loans, don’t renew loans, don’t make loans, etc.)
2. Use all earnings to grow capital.
3. Inject new outside capital into the bank.*

*As with most businesses, #3 isn’t a very attractive option.

The result of all this is that providing loans is sometimes not the primary goal for a bank. In theory, every $1M dollars that has to go into capital is $10M of new loans the bank cannot make.

In addition, the regulator demands for documentation, appraisal requirements, third party reviews and rule compliance work for the typical community bank is staggering compared to a decade ago. Banks have to hire documentation specialists and compliance officers instead of building their lending staff, forcing more fee-driven services on the customer.

How do you combat this and still do business in this environment?

• Compile comprehensive loan packages so that little analysis or research is required by your loan officer. You may need to hire an experienced consultant for this. Bank officers may not have time to help you. They are trying to comply with new rules and regulations thrust upon the bank and their superiors.
• Understand the new reality and if you badly need the loan do not fight the request for Global Cash Flows, three years’ tax returns, personal guarantees, new appraisal, etc. If your loan request is optional and you can afford to buy a fancy but cheap vacation home in Phoenix to sit this economy out for a few years, that is always a consideration.
• Get as high up the decision tree at the bank as possible. A lot of officers are being told to talk to loan customers and act like nothing has changed. However, they don’t have approval authority. The bank may continue to ask for more requirements hoping you will get frustrated and quit. Then the bank didn’t really turn down your loan, you failed to provide the information they requested.
• Check the FDIC website and look up Uniform Bank Performance Reports (UPBR). These quarterly-filed reports will give you a true picture of the financial condition of your bank. If Tier One Capital is under 8%, it has over 300% of Commercial (CRE) loans, has a negative earnings trend, or owns considerable amount of Other Real Estate Owned (OREO), you may need to try another bank. Your bank might not be in a position to help you even if you are a blue chip customer.

Above all be patient, focused, and don’t get frustrated easily. We all know that the best deals are made when it is difficult to do business! Banks are still your valued partners, but they have their problems too.