Between the sellers, buyers, agents, brokers, landlords and tenants lies the middleman: the bank and the lender. It’s about time we give the middleman a voice. We got Arizona’s finest commercial finance group together to discuss the money matters of commercial real estate.
The experts in our commercial lender’s roundtable have found bright spots in the Phoenix and national commercial markets. In this roundtable, they explored issues including the current commercial environment, liquidity, new regulations and the bright future for the commercial industry.
Richard Hubbard – What is your assessment of the market for commercial real estate lending? Are you actively making loans?
Brenda Bevilacqua – We’re actively making SBA loans up to a total project of $5 million on owner-occupied properties. Our conventional group lends on other types of projects and larger loan amounts.
Richard Hubbard – Are you doing franchise or mom and pops?
Brenda Bevilacqua – Almost entirely franchise, but we can do some independent projects that meet certain criteria.
Steve Jarosh – Midfirst is actively loaning — we see business banking as a growth business, and are working with owner-occupied real estate as well as SBA. We’ve grown quite a lot in the SBA area and expect to grow larger. Our SBA loans are for owner occupied real estate and operating companies and our bread and butter loan size is $500,000 to $1M for Business Banking.
Jim Cooper – Our lenders are lending, but are looking closely at property location and borrower strength. Sixteen of my 21 lenders have money to lend and more will be in the market this year. Our loan requests are spilt between refinance and acquisition. Loan amounts range from $1M - $100M, with $5M - $25M as an average.
Ann McCartney – We’re looking for distressed debt or opportunities in this market at $10M and under, mostly between $2 and $5M.
Richard Hubbard – Any discrepancy on use?
Ann McCartney – Retail and office are the hardest right now because we’re underwriting under the new guidelines. Our leverage is about 70% LTV maximum, 60% LTV is more comfortable.
Ward Hickey – Alerus Bank and Trust is a bank branch of Alerus Financial, N.A. In Arizona, we are focused on lending to the small and mid-market business segment. We make many SBA loans along with commercial and equipment loans, and lines of credit.
Curt Hansen – We’re active, but it is difficult to lend because part of your assessment is projecting net operating income and the borrower’s ability to repay debt over the next five years. Underwriting will be dependent on the quality of property and the quality of sponsorship, with an increased emphasis on global cash flow analysis. We’ll be choosey.
William Spart – We are making loans but the marketplace is still challenging and that will impact loan requests and appraised values.
Richard Hubbard – Are you making any construction loans on raw dirt?
William Spart – Yes, only when we are going to do a build-to-suit building immediately following the land loan. For example, an owner-occupied building or a fully leased project to a major tenant.
Curt – It doesn’t make sense to build anything right now, too much available… why develop anything when you can buy existing product for less than cost?
Brenda – Yes - we're loaning on new construction if it's an owner occupied project.
Richard – A significant amount of loans are about to come due; are your banks prepared to refinance and what will it take for borrowers to refinance?
Curt Hansen – Our banks are ready to refinance some of that debt. The issue is that there’s a huge amount of debt. We’ve had 70% of the debt market go away, and the banking industry as a whole is not ready to take on the sheer number of refinances.
Richard – What is the maturity rate?
Curt – It starts this year, but it will be at its worst in 2016-2017. Look at the volume of transactions that were done in 2005 – 2007 and add ten years and that’s your breaking point. By that time, hopefully someone will have figured out how to handle the gap in traditional debt markets… it can’t all come from the commercial banking industry.
Bryce Lloyd – There’s not enough capital… banks can’t finance what is coming due right now, even if we wanted to.
Richard – Are you faced with an 18-month crunch?
Jim – The refinance balloon starts taking off in 2012. The sophisticated borrowers who can present a good business plan to lenders should be able to get their loans extended. Unsophisticated borrowers will have more difficulties.
Curt – I don’t think the number matters, it’s still a huge amount of money that will impact us in the next five years. We’re all going to have to deal with it.
Richard – Anybody have any good news?
Bryce – I think that the banks represented at this roundtable are holding up pretty well, considering the circumstances. FirstBank had strong earnings last year and should surpass that number this year.
Richard – If you look at sectors, is there one that’s better or worse?
William – Office is the toughest because of the amount of vacancies that are available due to job loss and over-building.
Richard – Are you taking property back through foreclosures, deeds and lieu, or negotiation; or all of the above?
Curt Hansen – All of the above. You’d rather have the owner run the asset – but it depends on the asset and borrower. I wish there was a magic formula, but there’s not. Banks are notoriously bad at owning assets.
Mandy Purcell, Publisher: Ward, what motivated you to start another bank?
Ward – I have spent my entire 24-year banking career in Arizona and I have always enjoyed working with small business owners. I have been involved in the SBA lending industry since 1993 and have enjoyed that too. I was very involved in starting GE Capital’s SBA Lending office, Bank of Arizona’s SBA lending department, Sunrise Bank of Arizona, and First National Bank of Arizona’s lending department. In early 2007, I saw an opportunity for a small community bank to be created to focus on the needs of small businesses here in Maricopa County and decided to partner with Alerus Financial and start another bank. The economic environment changed suddenly and after extensive regulatory consultation, we decided to branch here to Arizona instead of starting a new bank. The economic environment has continued to change drastically here and I think commercial banking will be a different business for the rest of my career.
Bryce – There are about 8,000 banks in the country today. Some have estimated that 4,000 banks may be left when all of the consolidation is done.
Ward – The FDIC is assisting some banks in acquiring other banks. The result of this kind of activity will be a smaller banking industry.
Richard – Are the federal government programs working to help commercial lenders… are they effective, are they there? Robert Sarver has gotten $70M… is there another wave of loans?
Steve – SBA loan programs have waived all of the fees in Feb 2009 and that’s spurred activity. Those programs are now competing with conventional loans because they have better terms and fewer fees.
Brenda – The government program has helped lenders assist borrowers by waiving the SBA guaranty fee through the end of the year. That is a big savings to the borrower. For example, on a $2 million loan, the guaranty fee would be over $50,000 (currently waived).
Jim – Most life insurance companies haven’t felt the need to take the money — but that doesn’t mean that it won’t happen if they see their portfolios begin to decline.
William – Globally, it helped stabilize the banking industry — and, overall it’s built confidence in the marketplace.
Curt – At the time, it was completely necessary. It was a free-for-all in the markets last year. It has brought stability to the banking system and has greased the skids for banks to make acquisitions, as well as make loans that should be made… and it’s worked.
Richard – There’s the public comment that you’re not lending to the public.
Ward – Alerus Bank and Trust is actively making loans to small business men and women in Arizona. We have also seen loan requests with competing banks offering loan proposals to our customers, so there is commerce being conducted in Arizona. Some of the population thought that the government bailout dollars would go to the bank, then right to the public. The U.S. Government interceded and provided bailout funding for several U.S. banks for lots of reasons and stabilizing the U.S. banking system was a top one. That money was there so banks didn’t have liquidity issues that impacted the ability to survive and make loans in the future.
Bryce – It’s interesting because here, everyone is pro-active in making loans. But at the same times if you’re getting loans, FDIC is regulating how the banks make loans. They have two separate messages from Washington.
William – In general, we as an industry have to communicate to the public and let them know what lending has been done. For example Wells Fargo has been an industry leader in green initiatives ranging from energy saving techniques that we’ve employed in our own facilities to lending on LEED certified buildings.
Richard – You and I talked about that with Wachovia, how restricted are you to distributing info to media?
William – Wells Fargo releases our global results publicly on a periodic basis.
Richard – Some people are reluctant to advertise…
Curt – It’s like when you put up a sign, ‘financed by” on development projects – if everyone knows the project is in trouble, you take down the sign “financed by.”
Richard – As bankers, how much do you feel that the FDIC is looking over your shoulder?
Curt – These guys are running the same playbook as in the early 90's, and it hasn't changed much. I don't think it fits these times. Everyone is impacted by what a regulator thinks, and they have gotten tougher on banks. We all have to figure out these things together and getting more consistent communication out of regulators as to how to re-structure these loans will be helpful.
Richard – Are you confident in making loans to the right borrower?
Steve – There are businesses that are doing well in this economy. Medical and other professional groups, to name just a few, are still real strong.
Richard – Who are you looking for to finance?
Steve – I am open to any industry that is stable and profitable, however the pool of those companies is relatively small right now.
Brenda – In our SBA division, we will lend in almost any industry. If a business shows downward trends in revenue we are looking to see that they have stabilized comparing to the previous year.
Richard – What do you think it will take for the commercial real estate market to turn around? And when do you think that will happen?
William – Values must be stabilized and we must have job creation; it’s a supply and demand issue.
Richard – Do buyers have to get realistic, or do sellers have to get realistic?
Curt – Sellers will be forced to get realistic; it's the same thing that's happened in residential-you eventually get to the point that people are forced to sell, and new bases and values get set. You can’t have a turnaround until you hit bottom and we haven’t hit bottom. We need to have real recovery with stable job creation. No segment of commercial real estate can reverse itself without this happening.
Steve – It took us two to three years to get into this mess, it will take us at least that amount of time to get out of it and we’re at year one.
Richard – We’ve stopped building, is that a good sign?
Steve – It has to happen for the market to correct itself.
Ann – It’s bigger than just supply and demand; it’s global. We have to work together to get out of this mess.
Jim – Job loss — when that finds bottom, then maybe we can work our way back to stabilization.
Ann – The year 2014 is what’s predicted, led by the Texas market to recover first… they’ll be the first to build and they’re close to recovery.
Curt – You’ve got to find some kind of functional debt and capital markets… do the math… if there’s no one to fill the gap, the cost of debt gets very high. If no one else has come to the table, then we’ll possibly have a cost of debt at 9% –10% with inflation… there are a number of obstacles for values to get back to normal.
Ward – Banking is bigger that just making loans based on supply and demand. Banking goes hand-in-hand with economics and politics, and a lot of today’s challenges are economic and political issues. If Washington doesn’t address the country’s biggest issues correctly, then we may burden our national economy in the future. Banking is on the cusp of significant change. In the early 1970s, savings accounts were the same from Seattle to Miami but then the banking industry was deregulated. Today, there are some voices in Washington that suggest we go back to heavy bank regulations, which will create more change in the banking industry.
Richard – Taking your national perspective then drill it down… are banks looking to participate in solar bill, tax incentives and other political issues? Or are you worried day to day looking at loans?
Ann – The recovery will depend on how soon the state can recover with job creation. Metro Phoenix has lost 143,000 jobs during the last 12 months. This has never happened before.
Curt – It’s a different time today. Before, it was pretty easy to make a loan and let politics take care of themselves. Now, we need to be involved in a political agenda that spurs economic growth and protects our industry. As bankers, we need to get involved in the Arizona Banker’s Association, American Banker’s Association and make sure that we have a voice in Washington.
Richard – What is the distinction between regulations that you face in private money?
Ann – We are regulated by state banking and the SEC, and it’s a public reporting entity. Our biggest regulators are the auditors.
Jim – You asked the question about what will stabilize property values. It’s hard enough to get a loan on an occupied property, but if property is distressed and 50% occupied, then the value is further diminished because it cannot be financed in today’s market.
Bryce – Americans have had their net worth greatly reduced in the past year, mostly due to declining home values. Commercial property investors will also experience significantly reduced asset values.
Brenda – I agree – the deals have to underwrite, but that’s where the property values need to adjust to a more realistic level.
Steve – Underwriting was so loose for those two to three years.
Richard – What made it so?
Steve – There was too much money chasing too few deals. There needs to be a happy medium…. We need to underwrite on basic conservative underwriting principles…you may not do as many loans as you’d like to do, but you won’t do nearly as many bad loans either.
Richard – What is the future of commercial banking and lending?
Brenda – Commercial banking and lending will continue. It’s what we all talked about. Valuations of properties will change and it will take some time, but I think the outlook for Arizona is good.
Jim – I think next year will be tough, but Arizona has a lot of attractive features, and will continue to have population growth. At some point job growth will come back. In the meantime there will be some adjustments in loan underwriting and real estate values.
Ann – The future for private lending is good… investors will take advantage of distressed properties… Our funds are raised through broker-dealer relationships (stockbrokers), and there are still people who want to put money into real estate expecting to get a good return.
William – Long term good, but it will be rough over the next couple of years, if migration of new people coming to the state is good long-term. I think we still have a couple of years for commercial real estate to turn around, as we haven’t seen foreclosures yet.
Ward – I’m optimistic about Arizona and I think the long term outlook is good. The short term outlook has some challenges. We’ll see a smaller banking system and more prudent lending from banks. I’m optimistic about Arizona because it’s a pro-business environment with a good quality of living. We will attract population in-migration again, and we will eventually start creating jobs again. I think it will take a couple of years, and I think small businesses will assist in pulling the economy out of the doldrums. The SBA will continue to help small businesses.
Curt – I think the outlook is good, and I’m optimistic about Arizona. Better underwriting is important and values that are real instead of values that are inflated by euphoria. I think you’ll see better quality loan demand in the next five years. We all have a responsibility to be part of the solution… Some of the most resourceful, hardworking people I’ve ever met are here in Arizona… we’ll figure it out, pull ourselves up by the bootstraps, deal with it and move on.
Bryce – Look around the table – FirstBank has opened eight locations in the last two years and has seven more sites at this time. Obviously we are bullish on the long-term future of Phoenix. MidFirst is making the same play as FirstBank. Ward and Alerus obviously feel strongly enough about this area to start a new bank.
Steve – I’m optimistic, things will continue to improve and we’ll come out of it… and somewhere down the road we’ll go through another recession and come out of that one too. l
whickey@alerusmail.com
Steve.Jarosh@midfirst.com
brenda.bevilacqua@usbank.com
jcooper@kccmail.com
william.i.spart@wellsfargo.com
curt.hansen@nbarizona.com
MEET THE EXPERTS
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Richard Hubbard – Moderator – President and CEO of Valley Partnership since 2006, a non-profit that advocates responsible real estate development. In 2003, Governor Janet Napolitano appointed Richard as the Deputy State Land Commissioner. He is a licensed real estate agent and attorney practicing in the private sector and as an Assistant Attorney General for the state of Arizona. |
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Brenda Bevilacqua – Vice President/Business Development Officer with US Bank based in Phoenix, Arizona. Since 1992 Brenda has worked with National Bank of Arizona, GE Capital and BLX Capital where her roles included business development, underwriting and closing of commercial real estate projects. Brenda specializes in SBA guaranteed real estate and non-real estate loans. She assists buyers of commercial real estate accomplish their financing objectives, regardless of the market conditions. Brenda holds a Bachelor’s Degree from Arizona State University. |
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Jim Cooper – Partner in Keystone Commercial Capitol which represents property investors in meeting their financing needs by arranging long-term debt, short-term bridge loans and equity through one of Keystone’s 21 correspondent life insurance companies and other regional lenders. Jim has over 15 years of experience in commercial real. |
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Curt Hansen – National Bank of Arizona, Executive Vice President of Commercial Real Estate since 1998. He serves on the bank’s Executive, ALCO and Senior Loan committees. Curt is also a member of the Government Relations Committee of the Arizona Bankers Associates and past president of the Arizona Commercial Mortgage Lenders Association. |
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Ward Hickey III – President of Alerus Bank and Trust, has more than 24 years of banking experience. His prior executive management experience includes GE Capital, Bank of Arizona, Sunrise Bank of Arizona and First National Bank of Arizona. Ward has been named Southwestern Business Financing Corporation Banker of the Year and the U.S. SBA Advocate of the Year. In Arizona, Ward is responsible for the day to day operations of the bank. |
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Bryce Lloyd – President of First Bank of Arizona and has been with the bank for 20 years. FirstBank is headquartered in Denver and is the second largest bank in Colorado. Bryce is a member of Valley Partnership, a board member of the Boys and Girls Club of Scottsdale and a member of the Economic Development Advisory Committee. |
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Steve Jarosh – MidFirst Bank, Vice-President, East Valley Business Banking Manager since 2007. Steve is responsible for commercial lending and depository services to businesses in the East Valley and manages the East Valley Business Banking team. Steve graduated with his MBA from Drake University in Des Moines, Iowa.
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Ann McCartney – Formerly with IMH –Senior Vice President of Lending has over 20 years of experience in commercial real estate finance. She is a licensed real estate investment broker in Arizona and California. She holds positions with the Urban Estate Lenders Association and Social Venture Partners Arizona. |
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Bill Spart – Wells Fargo—Senior Vice President/Office Manager of Middle Market Real Estate Division for Arizona of Wells Fargo Bank since 2004. Bill began his career at Wells Fargo in 1982 after graduating from Arizona State University. He specializes in income property loans, including office, industrial, retail and various land transactions. |
