Navigating Commercial Construction Financing

Today, the development and construction of commercial facilities entails a wider range of financial options than anytime in the past quarter century.

Thanks in large part to continued low interest rates and significant liquidity in lending institutions, financing of well-considered speculative projects is available. Having learned the lessons of the tumultuous 1980s, however, such financing is generally considered conservative and follows the precepts of responsible investment. These precepts include significant borrower equity and responsible management available to sponsor the debt.

From a financing perspective, development of commercial facilities falls into two general categories: owner occupied facilities, and investment facilities. The latter can be speculative for lease, include some pre-leasing, or it can be a wholly-occupied build-to-suit project.

Financing of owner occupied facilities typically involves commercial banks and similar short term lenders and entails rather standard pro forma proposals that enumerate the market scope, past performance, revenues, capital costs, and potential for future expansion. Since the owner occupant has business cash flow it is easy to determine his ability to repay. Responsibly generated, those numbers will reveal whether and how much an enterprise can afford to build.
In an effort to nurture small businesses, the U.S. Small Business Administration offers a highly advantageous SBA-504 loan program aimed at small business owners who want to develop or acquire their own facilities.

SBA-504 loans are not as well known as conventional financing, although the benefits they offer to the business owner are enormous and significant. SBA-504s require a skill set most commercial banks offer but usually reserve for portfolio transactions that are of greater benefit to them as a lending institution. Mercantile Commercial Capital, which focuses on SBA-504 loans almost exclusively, rose quickly to prominence based on superior skills, dedication and services only enhanced by the severe dearth of SBA-504 specialized lenders in Florida.

SBA-504s offer business owners below market interest rates with a capital investment of as low as 10 percent of project costs. That advantage, of course, frees valuable capital for business operations and substantially reduces the risk to the business owner. Typical commercial loans require at least 20 percent capitalization — the amount the business owner contributes. In addition, terms range from 20 to 25 years with the SBA rate fixed for the life of the term.

SBA-504s can be used to finance development and construction of new facilities or acquisition of existing facilities in the $500,000 to $6 million range.

Development of for-lease facilities entails a larger set of requirements and developer commitments. Measuring the feasibility of an owner-occupied facility is much more reliable than assessing the market, distributing risk and determining feasibility for a “for-lease” facility.

“Capital”, in this case, is the money that owners or developers contribute toward land acquisition, planning, development, construction and marketing a project. “Financing” is the money that the developers borrow to leverage that capital.

Institutional lenders, such as insurance companies, do not typically finance construction unless they are equity participants. Construction financing is typically the purview of savings and loans, commercial banks or similar financial intermediaries.

Construction loans typically cover costs during the time it takes to build the project and get it leased up. After that, permanent lenders — including insurance companies — should come into play for those projects large enough to get on their radar screen. The name of the game is interest rates. The object is to lock in lowest interest rate. In low rate markets the developer will want to complete construction and establish cash flow as quickly as possible to move to the permanent market. In high interest rate markets, the developer may want the construction lender to provide mini-perm financing, typically one to three years until a lower rate environment presents itself.

In many instances, a strong developer can convince an insurance company to provide a forward commitment. Construction is financed by a typical commercial lender, and the forward commitment will “take out” the bank once construction is completed and leasing occupancy has reached a certain level. Management of this process requires an understanding of the likely movement in interest rates.

Large-scale, phased projects offer the opportunity to secure construction financing from institutional lenders based on the phased project performance. If leasing activities in the first two phases clearly demonstrate demand by the time development of a third phase starts, an insurance company may step in and fund all three phases, putting third phase construction money in escrow. The insurance lender relies on the fact that leasing revenues in the first two phases are adequate to serve the debt. The obvious advantage of this strategy is to lock in today’s interest rates.

Pension funds use generally the same standards, although pension fund managers will occasionally take on a little more risk. However, one must remember insurance companies and pension funds want stable income. Permanent lenders underwrite underlying leases and the strength of the real estate transaction. They have cash flow needs and the stability of their income is paramount to meeting their obligations.

Choosing A Financial Planner

Choosing a financial planner is a very important decision. Who will you trust to handle your life savings and plan your financial future? The fact that someone claims to be a financial planner does not qualify him or her to handle your money. They must have the proper certification, experience and knowledge.

The Four Cs of choosing a financial planner

1. Credentials

·What certifications, college /university degrees and experience does he/she have?

·How many clients or how much money does he/she handle?

·Make sure the planner is registered with the Investment Dealers Association in your area or Certified by a Government body

2.Compensation

·How are you compensated? Flat fees, salary or commission? (Beware of those who earn big commissions for placing you in high risk funds)

·Are there any hidden underwriting fees with my investment fund?

·Will you explain all the cost involved with each investment?

·What is the cost of liquidating or canceling my account with your firm? (Good to know, if you decide to switch funds or investment companies)

3.Characteristics

·What is your investment philosophy?

·Do you focus on domestic markets, foreign market or both? (Answer should be both)

·What is your specialty? Your strongest area? (Global portfolio management, no load mutual funds, stocks, bonds etc)

·How do you view risk and how does your philosophy fit my risk tolerance?

4.Customer service

·What services does your firm offer?

·How accessible will you (the agent) be?

·Will you review the funds last 5 to 10year performance in the prospectus?

·What has been your year-to-year investment performance?

·What was you worst year? Best year? And why? (Look for defensiveness or humility after raising this question, it reveals personality type)

·Do you offer financial planning, money management or both?

In conclusion, a financial planner works for you, and should be compatible with your personality, risk tolerance and financial goals. Make sure that your hard earn money is in good hands. Interview potential planners, ask for references and call at least 3 of those references.

Medical Receivables Financing

The Rx for Ailing Cash Flow

The current adverse financial structure of the healthcare industry has placed hospitals, medical groups, private practitioners and other providers in a perilous position. Cumbersome and bureaucratic third party billing systems with long time-to-collection waiting periods have resulted in inconsistent cash flows and limited capital for growth. Nationwide, two-thirds of physicians work in practices that are set up as small business. Payment cuts 18% over four years, together with soaring malpractice premiums and other overhead costs, have threatened to put such practices out of businesses. More than 50% of doctors have deferred plans to purchase much-needed new equipment, and 30% either have laid off staff or are planning layoffs in the near future.

What Factoring “Is Not:”

o A Loan – Factoring is the sale of your medical claims for services already delivered

o Offered By Banks – Factoring is not an asset-based loan, nor is it a debt facility similar to those offered by banks.

Why not simply pick up the phone and call a bank for a loan to get through the crisis? Many of you already tried that and have been surprised to find that the average practice may not have sufficient credit and assets with which to secure adequate working capital. Additionally, the traditional banking loan application and approval process is long and involved. Debt is created for the practice to repay, and personal guarantees are required. The practice becomes less desirable for resale or acquisition.

Unlike bank lines that can tie up all of your assets, factoring involves only your third party medical claims

o No collateral other than accounts receivables

o No financial guarantees

o Unlimited amount of dollars

Factoring provides working capital without adding debt to your balance sheet. There is no predetermined maximum limit. This working capital arrangement is not limited in amount as many bank products are nor is it subject to banking “regulations.”

Surveys of physicians have identified the following immediate needs:

The creation of solid dependable cash flow

Decrease in the reimbursement interval between the time service is provided and payment is received

Increase in the overall percentage of claims collected

Reduction in administrative costs

Ready availability of cash for new equipment, expansion of office space, the addition of new partners, and practice marketing

This “wish list” would be complete if access to this working capital could be created debt-free. The physician practice would then have the financial freedom to focus on business growth and patient satisfaction, instead of focusing on how to meet the next payroll or malpractice premium payment. Is such a solution possible? Fortunately, the answer is YES!