The Nevada building market is still hot; positive economic and political environments attract both entrepreneurs and big corporations to our state, making this an era of unprecedented growth and prosperity.
But where do businesses turn for the financial backing needed to build or to expand their present location? Loan sources vary, but generally fall into either private or institutional categories, including banks, insurance companies and Wall Street firms.
Small Business Administration loans may be best for long-term projects, such as a 10- to 25-year loan for the purchase of a new facility. The current market trend is to build or purchase a facility rather than lease, said experts Tony Stelluto and Paul Reader, both vice presidents and business development officers for Zions Small Business Finance, the lending arm of California Bank and Trust. “Our typical borrower is a well managed, solid business that has been established for four years or more, and has experienced success,” Stelluto said. “Now the business has long-term needs, such as a new facility, in order to keep growing.”
Both banks and private lenders handle loan applications to the Small Business Administration for clients wanting to acquire commercial real estate, buy businesses or borrow capital. The SBA can finance up to 90 percent of the purchase price on real estate acquisitions.
Brokers Act as Guides and Facilitators
Brokers can guide your business to hard-money lenders or venture capital investors. “You must prove yourself to them,” said Oliver Stewart, owner of Aussie Investments in Las Vegas, who suggests businesses perform appropriate market research before seeking a loan. While their primary role is to provide investment advice to individuals and companies, Aussie also focuses on educating clients. “Financial literacy is our mission,” Stewart said.
John Utter, president of Utter Mortgage Company in Reno, is a mortgage broker for long-term financing of income-producing properties, like medical buildings, shopping centers, warehouses, office buildings and industrial buildings. Utter works one-on-one with clients all along the process. “It’s best to sit down with the CFO and discuss the goals of the company to determine what’s best,” he said. For example, for a growing family-owned business, a number of financial options could be considered to raise funds, such as a trust, loan transfer or company re-structuring.
Typical borrowers working with brokers include physicians, developers and investors interested in real estate transactions. Personal and professional credibility is important, as many developers establish continuing business relationships with a broker. Factors a broker will review with clients include credit-worthiness and the cash flow to be generated by the property. In addition, the experience and history of the borrower and how he or she plans to use the property weighs in on the decision to lend money. “The lender looks at the ability to cover the debt, loan-to-value ratio, cash flow, length of leases and more,” Utter said.
Private capital commercial real estate investment firms are another source of funds. “People come to private companies like ours to speed up the closing process,” said Ian Harrison, a real estate finance analyst for Royce Capital in Reno. His company specializes in private capital investment for large developments, including the Palladio high-rise project in downtown Reno.
Even borrowers with less than perfect credit but good experience can find help with private lenders. “It’s the nature of the business for developers to run into credit issues, so we are in a position to assist them with financing when the bank may overlook the project,” explained Harrison.
Steve Brockman, president of Builders Capital, Inc., heads a company making private investor-funded loans and real estate loans, basically connecting a borrower with the appropriate lender. “We work primarily with developers,” Brockman said. “Credit is very important with institutional lenders, and next is the amount of cash invested, generally a 15 percent to 20 percent minimum.” If financing is for a non-owner-occupied commercial building, lenders require the develoer to show that tenants have pre-leased between 30 percent and 50 percent of the building before issuing a construction loan.
If a project is to be owner-occupied, Brockman suggested, “Make sure you do your homework on costs and understand the financial obligations. Don’t go into the deal blind. Be sure to have contingency dollars in your budget for unforeseen construction costs.”
Know your lender. CapSource Inc., for example, provides private and institutional financing specializing in short-term acquisition and bridge loans for real estate and gaming developers. CapSource does land loans only, although it may include some preliminary costs to prepare the property for future development, such as grading, subdividing, engineering, soil tests, mapping, zoning and density studies. Steve Byrne, president and founder of CapSource, said creating strong relationships and establishing trust are very important. “On the investor side, the borrower wants to make sure there is equity; from the borrower side, the investor needs to perform, meet deadlines and deliver the capital.”
Banks Provide Traditional Funding Sources
Small business owners typically turn to banks for lower interest rates. First National Bank of Nevada is an independently owned bank with a high legal lending limit of $50 million. “We are generally cheaper than private money,” said Bill Oakley, regional president. “But it depends on risk and timing. If a borrower needs to close quickly on a deal, private lenders are often faster.”
Most banks offer a wide array of loan products. Colonial Bank, a subsidiary of The Colonial BancGroup, Inc., focuses high-growth markets such as Nevada. It provides a diverse range of services, including: lines of credit to fund cash flow; equipment financing; physical plant financing; equipment lines of credit; commercial construction loans for income-producing and owner-occupied real estate properties; and residential construction and land development loans for experienced developers.
What You Need to Get Started
First National Bank of Nevada suggests borrowers come prepared with documents, including a three-year financial statement, tax returns, business plan and projections for the company. “Disclose everything and be honest,” Oakley said. “If you tell me about a problem up front, it is much easier than if we discover it later.”
For a start-up business, bring personal tax returns and a comprehensive business plan. The lender will probably require 20 percent to 30 percent down.
Most importantly, be prepared with a complete financial package on both the borrower and the project itself. In the case of construction projects, select a general contractor and complete budgets, entitlement or zoning changes before approaching the lender.
It doesn’t take a crystal ball to know interest rates are inching back up. Generally, interest rates are determined by the purpose of the loan. The lowest rates are used to buy a building, with the most aggressive rates for commercial real estate purchases and business acquisitions with no real estate in the transaction.
All the experts agree, though, it’s still a great market for real estate throughout Nevada. “I don’t believe in the ‘bubble’ people talk about,” Harrison said. “It’s not really a bubble bursting, just a slowing of sales absorption at current market pricing levels, which will cause a leveling off and possibly a slight decline in pricing. This still should not cause a problem for real estate in Nevada, because demand will continue to be driven by the influx of baby-boomers and Californians moving into the market.”
The Bottom Line
How do you put it all together? A successful model for combining business know-how with investment opportunities is Centra Properties. This young company has massive developments in the works, including Town Square, a 1.8 million square-foot mixed-use project under construction at the intersection of I-215 and I-15, and Las Ramblas, a $4.5 billion hotel, condominium and casino complex totaling 8 million square feet. In each of these ventures, Centra has found a partner with experience in developing that type of project in other markets. Greg Johnson, chief operating officer for Centra Properties, emphasizes understanding your company’s strengths and weaknesses. “We know what we’re good at, we bring in the correct partners and help them understand how real estate is done in Las Vegas,” he said.
“Real estate is a tricky business,” warned Johnson. He recommends asking two questions before taking on a partner: First, do the cultures fit? And second, is it a fair deal? “You need to be brutally honest, and find the right people to do business with,” he said.
It takes effort to determine and identify financing methods that will work for you. For an existing small business owner, the bottom line is that getting a loan is not necessarily a scary or lengthy process. “Go with someone who knows what they are doing,” Reader said. “It can even be an enjoyable experience.”