Wednesday, June 9, 2010

Lessons Learned: Options exist, communication is key.

The following is an article published by the Greater Wilmington Business Journal on June 11th:

Our company is in the construction and real estate business but that’s the least of my worries right now; I am also dealing with 14 different local banks.

Each bank has its own set of challenges, FDIC mandates, balance sheet issues or management and decision-making structure. For years I assumed that my traditional lending sources would always want to do business with me, however, times have changed and in the process I’ve learned a few things along the way.

I share the following in the event you too are surviving the storm only to be faced with cleaning up the financial aftermath within your own business and banking relationships.

1. Rate reductions and interest only. Asking for a concession with your existing loans or during a renewal is not easy but it can be a lifesaver (or at a minimum, a life-extender). If you can honestly prove that you need the relief, don’t take no for an answer. Unfortunately, unless you have been paying late (or not at all) it’s hard to get their attention. Begging helps. Be persistent, realistic and focus on the big picture – reducing your cash outflow by whatever means possible.

2. Share your plan. It’s natural to want to be viewed in a healthy, positive manner – but you’re not fooling anyone. Your better approach may be to share your “work plan” with your lender so they see how you are effectively managing your problems (along with your cashflow). It shouldn’t be a surprise when they ask more questions about your loans with other banks over their own. (Your lender is more afraid of the stuff they can’t see.) Prepare accordingly and update your plan often.

3. As my dear friend Warren Buffett once told me, “You can always tell them to go to Hell tomorrow.” At some point, some guy you’ve never met is going to call and demand something completely irrational. He will ask ridiculous questions like “why don’t you just refinance our loan with another bank?” or worse, he’ll recommend you liquidate your kids college account so you can make an “equity contribution toward your loan balance” (because their new appraisal shows a decline in the value of your rental property even though you’ve never been late on a loan payment in the 3 years you’ve owned it).

Resist the temptation to tell them how you really feel about their request and instead focus on viable solutions. Suggest they use the tax value of the property as their valuation; ask if they can provide a lower rate allowing you to apply the interest savings toward a monthly principal pay down.

Fortunately banks have become more creative and better problem solvers than they were in the winter of ’09. Sensible lenders know how to make a deal work if they have a borrower willing to do the same.

4. The value of private resources. Early in my career the risk of losing someone else’s money would have levied too much guilt, later, the value of giving someone a percentage of a project or a significant return for their cash appeared unwarranted. With a stable track record and a large pool of capable lenders I neglected to create private funding relationships or equity partnerships. In light of the past two years, my perception has changed dramatically.

5. It takes money to borrow money. We have been one of the few fortunate companies to receive construction and real estate loans over the past 12 months. It hasn’t been easy but I make sure our requests are so solid they can’t be ignored. I’ve also learned to provide a good exit strategy (or three) for my lender as she needs all the ammunition she can get for her credit guy (who hates everything – especially real estate.)

Not only am I borrowing at a lower loan-to-value than in the past, I am likely bringing a year or two of interest carry to the bank in the form of a secured CD. Cash is so hard to come by that it’s painful to watch $25,000 earn 1% but the alternative would have some of our smaller, more worthy projects sitting idle right now.

6. Communicate often and maintain relationships. Every other month I take the time to hand deliver our loan payments. I go inside the local branch office, smile, say hello and remind my bankers that I’m still alive. Most of the time the lender is not only available to speak but appears to be glad to have some company!

We talk about what we are seeing “out there”, we vent to each other and quite often I feel better about our local future and my own personal circumstances. Most importantly we get the opportunity to catch up, after all, these folks are also my friends who are dealing with their own set of challenges and I can certainly empathize.

Let’s face it, banks will need to start lending again and competition among lenders will re-emerge. Real estate loans are the current sore thumb but in a growing market like Wilmington, it will return to a highly profitable line of business for most banks.

Things are going to get better but they are also going to be different, so pay attention, ask questions, share information and adapt accordingly. Look on the bright side; you’re already getting smarter – you’re learning from the experience of others…

Dave Spetrino is the President of Plantation Building Corp. He’s been signing the front of paychecks for 20 years and looks for every opportunity to help other business owners succeed. It should be noted that Warren Buffett isn’t aware that he is a dear friend of Dave Spetrino’s.

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