October 20, 2023
When your team is down one point in the NBA playoffs with three seconds left on the clock, to whom do you give the ball to win the game? If you’re the ’89 Chicago Bulls, that answer is easy: it’s Michael Jordan.
My point isn’t to praise MJ as the G.O.A.T. (though I’d argue he is), but rather to pose a question: Who do you turn to when you need debt but the financial markets are facing adversity? The recent collapse of regional lenders like SVB, First Republic, and Signature; a tightening cycle unheard of since the Volcker-led Fed of the 1980’s; and an anticipated global recession in the coming months have created an atmosphere of uncertainty among banks, making it hard to know where to turn for financing. The choice for you may not be as easy as it was for Phil Jackson (Bulls Head Coach, ’89).
Consider one of our clients, a leading multi-specialty practice with revenues exceeding $250 MM. Last year, they received an indicative fixed-rate offer of 3% for a 7-year term loan for a new building project. This year, that same lender proposed a bid of just over 9% on a similarly sized project. Another group specializing in orthopedics in the Pacific Northwest had a similar experience. They were accustomed to loan pricing at 0.95% over their floating rate index, only to be blindsided when their lender provided indicative pricing on their new project that had doubled.
These lenders, or rather their credit officers, were responding to adverse market conditions by increasing their portfolio returns, so they widened their loan spreads based on the bank’s pricing strategy. It is worth noting, however, that not all banks had this knee-jerk reaction. In fact, some lenders became more competitive with their pricing for higher quality credit sectors such as medical.
Our group, CMAC Partners, specializes in medical owner-occupied real estate and operates on the cutting edge of commercial real estate lending. We source approximately $500 million of commercial real estate loans a year and engage in constant negotiations with 100-150 bankers nationwide. If you find yourself facing sticker shock from your lender, don’t take it personally. Banks are large institutions driven by policy and will often overlook good credit opportunities. To help mitigate the impact of an adverse lending environment, we suggest the following strategies:
- “Sell” your loan (and your story) to the bank – A compelling pitch can improve your chances of securing a good deal. Write a detailed request for proposal (“RFP”) outlining your request, and include financials, tax returns, leases, and proformas. Anticipate the questions a credit officer might ask. Offer to meet with bankers in person and give them a tour of your property. Yes, applying the personal touch takes time, but it reaps dividends when your financing is on the verge of an increased credit rating.
- Offer a “relationship” – Most banks these days consider themselves “relationship lenders.” This means they don’t just want to have a loan with you; they want to have a depository and treasury management services agreement with you. The more of a “relationship” the bank can hold, instead of just a loan “transaction”, the higher the likelihood the lender will get their deal approved internally by credit at the most competitive terms.
- Offer additional security – Generally, banks will require either personal guarantees or the practice guarantee for a medical real estate loan. Most borrowers prefer the practice (tenant) to guarantee instead of requiring the doctors to personally guarantee. In the case of the former, a guarantee of an additional entity owned by the same doctors, like an ASC operating entity or equipment leasing company, could add value and improve the loan terms. Or, personal guarantees might be offered as additional security, with future burn-offs. And if the practice has some equipment owned free and clear, could that perhaps be provided as additional collateral? Think of what you have that you feel comfortable pledging which could help get you the best offers possible in this tight credit environment.
- Cast a wide net – Your financing RFP should go to as many banks as possible. You likely won’t know which banks are picky and which are competitive until you get your results. And don’t forget credit unions, which often have very different lending parameters than traditional banks. Use networks you may already have (Boards of Directors, club memberships, fellow alumni, neighbors) to form personal relationships with bankers who will advocate for you.
- Have an exit strategy – Begin with the end in mind. Economic downturns happen, but they’re a natural part of the cycle and they don’t last forever. If you find yourself with a loan proposal with unfavorable terms and don’t have any alternatives, think about your exit strategy. Focus on short-term financing to structure the loan with minimal or no prepayment penalty today and refinance tomorrow when the market conditions become more favorable.
It is likely that banks will continue to operate conservatively in the foreseeable future, at least until the Federal Reserve gets its arms around inflation and the pendulum swings back in favor of the borrower. We recently closed a $10 million refinance loan in the Southeast with rates in the mid-4% range. We are slated to close a $13 million new construction loan in the Midwest, with an indicative interest rate at the time of this writing in the high-4% range. In any lending environment, there is always someone willing to step up and deliver in the clutch. If you don’t have your own banking “Michael Jordan,” consider passing the ball to CMAC.