MONEY 9 - BANKING #1

THIS IS MY NINTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING

Money! Money! Money!  We’ll cover this complex area in two or three separate parts.  So far with my writings some friends have said, “boring”,  “boring”!  I wish I could make them more exciting.  I am intending to be educational and helpful, quick and not at a very academic level so most people can get some good from them. Don’t repeat the mistakes I’ve made in my business life.  I’ll sight more life examples of what has happened to me in my 42 years in the business world.

Almost every business has three key ingredients; a product or service, management or employees and money/capitalization/funding. I believe money is probably the most important. Most people fail in business because they start out under funded, and/or the start up takes longer than expected in most cases and they run short of money.

Let’s start with real estate funding.  If it is residential, commercial or industrial interview banks and select a bank where policies in place will meet your needs for a long term investment in real estate.  Don’t forget banks look out for themselves!  In the last few years banking regulations have become tough.  The paper work and documentation for the loans is incredible.  We went from easy lending to overly restrictive lending practices, and it is greatly hurting the economic recovery in this country. If the loan isn’t right for you it is best to turn it down rather than get into a miserable situation later on.  Ask the bank if they will retain the note and deed of trust or mortgage, or will they sell the loan. You might end up with a bank you never wanted as a “partner”.

For residential loans go to your bank or mortgage broker and get “pre-qualified”. What if you need more assistance and money?

For commercial/industrial do banks require a pro-forma or budget analysis?  If so, for one year or up to three years?  Pro-formas give you a discipline to work through project income and expenses, and force you to focus, but I’ve never seen one right on the money for accuracy.

From my personal experience, here are examples of the good, the bad and the ugly. Let’s start with the best.  I was living in Denver, owned various real estate and the economy deteriorated because of the oil and gas industry going down from about 1985 until the early 1990s, a long recession with significant devaluations.  I had to sell a property at a loss in 1989 and it was “upside down” to the mortgage.  I hope this never happens to you. I had to borrow money from my bank to close on the property and payoff the loan; I owed money at closing.  I owned other real estate but it was not salable for enough money to pay off this loan.  This “wonderful bank” knew my circumstances, worked nicely with me on money and it was a “win, win” situation until 1993 when the economy recovered and I could liquidate real estate and pay the loan plus interest back to the bank. This is an example of a good bank that was willing to work with a person. This was Mid-State Bank in Denver, Colorado, and 2 years ago.  I am not sure if they have the same working policies in place today.

Now, let’s look at the bad.  I had a high-end rental property in Arizona.  The property had appreciated significantly so I took a second loan on the property with a 5 year note and deed of trust.  I had the loan on auto-deduct with the bank, as well as with my first note and deed of trust, so I was never one day late on payment. The loan was coming due so I went to the bank and asked for a short term renewal as I couldn’t come up with that amount of money at the time. The bank said they would not do anything for me and stated that “within 90 days you will no longer own the property as we will foreclose”.  I have never been treated over those few weeks so rudely in all my business life. I would have preferred dealing with the Mafia as that is how I was treated.  This bank is Meridian Bank out of Minneapolis and has offices around the Phoenix area. I knew other developers who had loans with this banking institution and they said similar things to me.  It is my subjective opinion, but I would never deal with them! The outcome in this situation was that the appraisal was quite a bit higher than the loans and I did come up with the payment to satisfy them.  This is a prime example that no matter how high a credit score, no matter how heavy a balance sheet, no matter how good an income statement the bank did not want to work with customers.

Now, let’s take a look at the ugly.  I have been involved in three major master planned communities in real estate. One being a very large tract of land on 3,350 acres with all water rights started in 2001 in Chino, AZ.  Over an 8 year period we were annexed into the town, approved for 6,600 units plus a huge new downtown area, hotel site, golf courses, etc. We had accomplished a great deal, but only had preliminary approval on our first quarter acre lots.  We paid cash for the ranch and structured a working line of credit for a significant amount of money, an adequate amount to reach final approval to sell lots to home builders.

Our line of credit was with CITI Bank.  In 2008 they informed us that financially they were in trouble and our line of credit, not near its high, was due and payable.  Please note that in these lines of credit there is wording that states that if a property should decrease in value, if the note holders financial positions should change or for just about any other reason they want, they can call a loan due and payable. This is a good example where a person did a good job, was near their financial projections, however beyond the person’s control the outside financial environment changed; the banking system was collapsing and banking regulations and parameters totally changed.

Remember that the banks’ lawyers draft the wording very one-sided to protect only on party, the bank.  In this case, we filed Chapter 11 against creditors and won the case for an extension to obtain new financing.  Our debt on the property was only 12% to the appraised market value, or net assets of about $150 million. During the 9 month reprieve period we were allotted we were not able to obtain a new loan, as banking and financing has changed.  We lost the property, all our money in the property and of course the 8 years we put into working on the project.  That is why I am referring to this as an ugly experience; hard to believe.  Loans now need to be “performing loans” which essentially means there needs to be enough positive cash flow from the property to service the loan, interest payments and reduction of principle.  When developing land for lots this is impossible as you run negative cash flow until you can sell final lots.

This is why there is little land development happening.  What real estate development there is today is with large companies that can work with Wall Street on bonds and other debt instruments, or pledge their public stock for loans. Most new building now is on lots that have been taken over in bank foreclosures, or lots owned by small builders needing to sell their holdings mandated by banks.

For the Arizona development go to Google and search for the Bond Ranch, Del Rio Springs, LLC, Chino, AZ.

For my Wisconsin project that is on the market, please go to www. premierewisconsinland.com.

Next we will talk more about banking, business credit cards, private fianancing and real situations.