In the Federal Reserve’s latest survey
of senior loan officers, 80 percent of
domestic banks tightened their lending on commercial loans from October
2007 through January 2008, the highest
level ever.
“Given the capital crunch in the market
today, options exist whereby companies
can continue to grow their businesses
through alternative financing of their
real estate,” says Geoff Hill, senior vice
president for Grubb & Ellis Company’s
Industrial Group.
Smart Business asked Hill for more
information about a few tools that are
available in today’s market.
What current market dynamics make creative financing a viable option for purchasing corporate real estate?
The capital markets and banks in general are becoming more stringent with
their lending policies. Most banks now
require down payments of 25 percent to
40 percent.
Even though rates for Treasury bills
are dropping, banks are increasing their
spreads. A couple of years ago, the
spread between Treasuries and what
they were lending on was 185 to 225
basis points. Today, it’s 250 to 300-plus
points, meaning that when Treasuries
are at 4.75 percent, the loans are around
7.75 percent.
Finally, some banks are putting a minimum on loan rates, varying from bank to
bank, with 6 percent to 6.5 percent as a
floor.
Please provide an overview and definitions
of some of the available options.
Some alternatives to traditional bank
financing are sale/leasebacks, Small
Business Administration (SBA) loans
and industrial revenue bonds (IRBs).
A sale/leaseback is an arrangement
whereby one party sells a property to a
buyer and the buyer immediately leases
the property back to the seller.
Sale/leasebacks most commonly occur
when the owner is trying to pull equity
out of a building. Most sale/leasebacks will have a 10-year to 20-year leaseback
term, to be reinvested back into its core
business.
With an SBA loan, a borrower can
finance up to 90 percent of the purchase
price of a building. The SBA will lend up
to 40 percent of the project cost in a subordinate position to a bank or finance
company, which will typically lend 50
percent in the primary position. Thus,
the borrower puts down just 10 percent
in equity. The SBA portion cannot
exceed $4 million if you’re a manufacturer or $2 million if you’re not a manufacturer. The SBA portion, which can
also be used to purchase new equipment, is loaned at a 20-year fixed rate;
the bank portion is 15 years to 20 years
rolling every five or 10 years, varying
from bank to bank. Upfront fees for an
SBA loan are a little higher, but the interest rate is lower than conventional
financing.
IRBs can only be purchased by manufacturing companies. They are typically
tied to short-term borrowing rates,
about 25 to 50 basis points above the
LIBOR (London Interbank Offered
Rate), which is much lower than any other type of financing. Those rates
adjust on a monthly basis. The program
is administered through a bank, which
sells the bonds, requiring an irrevocable
letter of credit from the borrower.
Typically, the cost for a letter of credit is
a percentage of the loan amount.
Under what circumstances might a buyer
consider each of the aforementioned alternatives?
For an SBA loan, generally speaking,
the target size of a business starts at the
level of $1 million in annual revenue and
ends at companies pushing $100 million
a year. Incidentally, the SBA portion of
your loan is assumable to give you some
flexibility.
A sale/leaseback is also a good tool for
medium-sized to Fortune 500 corporations that are finding it tougher to find
traditional lenders. For instance, one of
our clients was looking to consolidate
engineering facilities now located all
over the country into one building
because it had entered into bankruptcy
proceedings. After agreeable terms were
worked out, an investor bought that
building and our client signed a long-term lease. The investor got the return
he was looking for and the client didn’t
have to tie up working capital, so the situation worked out well for everybody.
IRBs only make sense if the total project cost is more than $2 million, because
upfront fees may be in the neighborhood
of $100,000. If you purchase IRBs, you
are required to put 15 percent of the
total project cost back into the building
and/or by purchasing new equipment.
The only other restriction — which rules
out a lot of tier-one suppliers and original equipment manufacturers — is a
limit of $10 million on capital expenditures over two years. Medium-sized
manufacturing companies — like a tier-two supplier — are ideally suited for
IRBs, as long as their total revenue is not
more than $100 million per year.
GEOFF HILL, SIOR, CCIM, is senior vice president for Grubb & Ellis Company’s Industrial Group. Reach him at (248) 350-1492 or
[email protected].