Top Ten Red Flags your lender doesn't want to see and hear!

Today, I'm going to focus on post loan closing aspects of your relationship with your lender - that's right you still have to deal with your lender after the money is in your account. This post might be more pointent to a business loan, but some red flags are not exclusive to only business loans and apply to real estate loans. Here are the top ten Red Flags your lender never wants to see our hear!!!

1. Late Payments. While one or so per year might not raise the hair on the back of your loan officer, a series of late payments will prompt a phone call by your lender to you asking if everything is ok. Why? Usually after a payment is five days late, the late payment shows up on your loan officer's boss's desk!! Remember everything falls downhill.
2. Overdrafts. There are two types of overdrafts a lender sees when he drinks his coffee in the morning. Uncollected Funds or just a plain old overdraft where there is not money in the account and no deposit in the system. Uncollected funds are deposits made to your company's DDA and are in the process of being cleared (this can take 3 to 7 business days). Uncollected funds overdraft are still bad, but not as significant as a bare naked overdraft. A banker will probably pay on the presented checks in a uncollected funds situation, but not on a true overdraft. A series of overdrafts are a serious problem that will need to be addresses by the Bank and you. An overdraft report and the number of days the acount has been overdrawn can go to the highest level of the bank.
3. Late Financial Statements. Late finanacial statemetns can be an alarm to the bank that there might be serious problems at your company. Loan agreements provide a period of time to get financial statements completed and submitted to the bank. Many borrowers don't even know that they owe the bank information, because at closing they are mostly worried that the rate and term is correct on the note. Create a tracking list of all documents required by the bank, seperated by monthly items, quarterly and annually. This may sound crazy but late statements is a default of your loan agreement and the Bank could call the loan.
4. No Communication with the Bank - No Returned Phone Calls. A series of phone calls not returned to your banker sends up a red flag that something is going on. The bank debt on your balance sheet is probably over 90% of your total funded liabilities. So this important creditor needs to keep in constant communication. Silence is worrisome for a banker. The banker could be thinking that your losing money, lost a key customer, or what ever else might pop up in their mind.
5. Frequent covenant defaults. Records are meant to be broken, but not loan covenants. A loan officer has to get waivers approved internally and face hundreds of questions about the state of your company and frankly your lack of respect to the loan agreement signed at the closing table.
6. Rumors. This one is harder to control but you must be aware of the impact of rumors about your company getting to your bank. Your bank might lend to your competitor, customers, and might even know your accountant and lawyer. A comment like "Hey, Tim Banker you might want to get over to Joe's Machine Shop ASAP! from your accountant might create a red flag.
7. Borrowing Base Over Advances. For those with lines of credit tied to borrowing bases - an overadvance sitiuation is an immediate alarm to a banker. An overadvance occurrs when you revolver balance exceeds the assets used to collaterialize your line of credit. If it can be cleared up quickly (days) then its not so bad, but if its a long term issues then there will be problems. See if your line balance, which should rise and fall with your current assets, exeeds you current assets, then most likely your losing money or the quality of your assets might be question - accounts receivable collectability for example.
8. That new beach house and Mercedes that you just bought. Believe it or not a dramatic change in your lifestyle would peak the interest of your banker. Your banker would begin to question you commitment to the business, would wonder if the loan proceeds when to buy the car and beach house, and if any other debt was issues to the owner to acquire such cool things.
9. The loss of a key employee, partner, or customer. This is an obvious one, but one aspect of this might lose your bankers trust. If you delay in telling your banker and worse your banker finds out from someone else would be disastorous.
10. We don't have money to fund payroll! This is one of the most debilitating call a banker can receive from a company - short of a call to let your banker your filing for bankcruptcy. Payroll is the most sensitive expenses a company faces each week or every other week. It also quickly sends a message that things are not right at your company. You also forced your banker into a corner - which no loan officer wants to be in. Avoid this one at all costs.

Lessons from the top and my old boss??!!!!!!

When pricing out a loan, my old boss would tell me that "pigs get fed and hogs get slaughtered". After reading several articles on Harry Macklowe's problems with his lenders, my old boss's voice echoed in my head. Ironically, Mr. Macklowe's issues can provide a lesson to all real estate investors: Don't get greedy.


For those who might not be following the situation, Mr. Macklowe - a very successful real estate investor - is tied in a knot with his Senior, Subordinated and Bridge Loan lenders over the $7.1 billion he borrowed (fifteen months ago) to buy seven Manhattan office buildings. To get the deal completed he offered his crown jewel as collateral to secure a $1.2 billion short term bridge loan from Fortress Investment Group. The crown jewel is the prestigous General Motors building on the southeast corner of Central Park. Mr. Macklowe purchased the General Motors building for $1.4 billion from Donald Trump, who bought the approximately 2.0 million s.f. office building for $800 million in 1998.


Well, last week, Mr. Macklowe turn over the property to Fortress, but kept the title to avoid expensive New York City transfer taxes. Yesterday, three bidders put forth term sheets to acquire the property for $3.0 billion. While the 114% appreciation is nice, the equity in the property is going to go to Fortress and the rest to Mr. Macklowe's other lenders.


Mr. Macklowe got greedy with his desire to purchase the seven Manhattan office building portfolio from the Blackstone Group. He put in less than 1% of his own money, and borrowed the rest on short term money. His assumption was that he could easily refinance the short term money after acquiring the property, but today's credit market felt differently as many of the banks were suffering from large write-downs on both their residential and commercial loan portfolios. What seemed as a safe bet in putting up his crown jewel as collateral is now in someone else's hands. So what can we learn about Mr. Macklowe's situation?

1. Don't stretch for a property. Evaluate every property on a stand alone basis. I know that real estate fortunes are framed by the Donald Trump's of the world, but leveraging everything for that big deal doesn't make sense. Also, leave emotion out of the buying equation.
2. Have a back up plan! Structuring the deal as Mr. Macklowe did is sometimes required especially when you have to put a deal together quickly. However, having your eggs in one basket isn't smart. Be prepared to bring partners into the deal if necessary. I know I said the "P" word, but the equity give up by bringing in a partner is less than the cost of a bank coming after you for their money.
3. Be aware of where you are in the Real Estate and Credit Cycles. If you are going to put your net worth at risk, make sure you are fully aware of where you are in both the real estate and credit cycles. Yes, that's right credit availability goes up and down just as the value of your building or house. Banks quickly adjust credit standards and availabilty overnight based on market developements. Usually the adjustments are to harsh and take time to settle out. Talk to commercial realtors, bankers and other real estate investor's before pulling the trigger.

So remember the words of my old boss: "Pigs get fed and Hog's get slaughtered" and you should be ok.

Are Commercial Loans the Next Subprime Mess??????

No, the commercial world isn't coming to an end, but credit is tight these days - but not for everyone. A recent Federal Reserve poll of its member federally chartered banks showed that 80% of the banks responded that they have tighted lending standards on Commercial Loans!!!
Also, some big name property owners are experiencing problems refinancing debt obligations as they come due. Lastly, the commercial debt obligation securtiziation market has been shut down since December.

But there's hope. The problems are at the top of the property food chain, meaning that big isn't necessariliy good right now. This means that there is still a great number of options for the smaller real estate player to obtain financing for their projects. Remember, good deals get done!!

So here are some tips to remember when looking at properties as it relates to financing:

1. Bring a lender a property that cash flows today! If the property has good cash flow and can be verified, the better your chances your deal can get approved.
2. Be selective of your property type. Lenders are looking to protect their capital (i.e. reduce risk) so don't go walking into your lender's office with a gas station sitting on top of a super-fund site!!! Low vacancy apartment buildings, mixed use properites, and retail properties are better bets these days.
3. Leases, Leases, Leases. Look for properites with favorable lease terms. Those include, but not limited to, annual rent increases, triple net leases, and long term structures.

These three tips should increase your ability to get your property financed.

Oh, by the way. If you're wondering what the next big mess will be: Watch the Credit Swap Market and the Leverage Loan Market.