3.95% Like Putting Lipstick on a Pig
By Greg Warren, CMAC Managing Partner
Banks today are on the offensive. Borrowers are aware that rates have dropped substantially and are, or will soon be, seeking lower rates. In an effort to retain or improve profits, banks have become proactive. They are either approaching or responding to their borrowers with “substantial” rate reductions. The problem is defining “substantial”.
Last September, a surgical hospital in Arkansas renegotiated a “substantial” rate reduction for its real estate loan. The hospital’s administrative team had been timely in their negotiations and saved hundreds of thousands of dollars in interest expense over the remaining term. Four months later, however, CMAC negotiated a further reduction that nearly tripled the initial improvement, creating an additional savings of roughly $2 million. How did this happen?
In truth, banks are making greater profits than they have in decades. And they are depending upon the borrower’s lack of information and skewed perception of interest rates to do so.
The phrase “everything is relative” has never been truer. To those physician groups who own commercial real estate and have been paying interest rates of between 6% and 8%, a 4% rate is a vast improvement. But in today’s economy, a rate of 4% may well be leaving considerable money on the table.
How much lower?
In a sampling of 14 CMAC loans financed in 2012 where a benchmark had been established prior to CMAC’s engagement, the average difference in rates was 71 basis points, or 0.71%. If considering a $10MM loan, this difference would amount to a savings of over $500,000 in 10 years, a substantial difference.
There is only one way to be reasonably certain that you, as a borrower, are not making an excess contribution to fund the bank’s new courtyard fountain. You must completely test the market over a wide geographic footprint and then have a competent financial analyst compare all aspects of the various proposals (rate, fees, term, amortization, loan-to-value, debt service, etc). Without that ability, you are operating within a virtual vacuum and are more likely to accept a “substantial” reduction that is not nearly as substantial as it might appear.
If you would like to contact Greg with any questions, he can be reached at 407-264-7250