The ability to get financing when needed is critical to most businesses. “The important thing to know is how vibrant Nevada is right now,” said Bruce Ford, senior vice president, City National Bank. “Nevada is economically vibrant and we anticipate it will only grow more vibrant. This is a great time to be a business owner in Nevada.”
Approaching mid-year 2024, there’s money to lend. For commercial borrowers, business owners and investors, there’s money for capital expenses and equipment purchases, for commercial real estate and residential.
“But I think the options out there for borrowers have really skinnied up,” said Paul Parrish, president and CEO, One Nevada Credit Union. “A lot of the deals that were being made just five years ago aren’t being made today.”
That’s due to a combination of things, said Parrish. Money is getting a little tighter in terms of liquidity with banks. There’s also considerable concern among lenders regarding commercial real estate and how that market segment is going to perform over the next few years. One Nevada doesn’t do business lending per se, and as a credit union they have a regulatory cap on the amount they can lend on commercial real estate. But they do have a commercial real estate division, and they do, like banks, have money to lend.
“We’ve been able to arrange loans in this environment, and my friends at the banks have money to lend,” said John Blackmon, manager and broker, Nevada Capital Group (a private lender).
Even with money to deploy, lenders are being discouraged from lending on commercial real estate projects, at least those with tenants. Owner-occupied properties are doing well. “If my company, Nevada Capital, owned our own building, lenders would love to lend on that,” said Blackmon. But if Blackmon was planning to be landlord to tenants in the building, those same lenders wouldn’t be interested.
In part, it’s the result of the nationwide shift in workforce patterns. People are still working from home, and office buildings are either abandoned or about to be. “That’s what’s making the banking industry quite nervous about all the commercial real estate loans that had five year reprice on them,” said Blackmon. “That’s a reprice at the end of five years on your loan. It doesn’t stop but they change the rate. While five years ago rates were low, they’re going to go much higher; these tenants are going to experience sticker shock in their monthly rent payment and a lot of them are going to move or not pay. Banks in general are very nervous about that.”
Where previously ultra low rates made cash flow from commercial real estate and other types of real estate investment appealing, as rates went up over the last couple years there hasn’t been the same demand. Lenders are concerned about valuation of products, perhaps office in particular. “Overall looking at the investor to maybe come in with more equity, more down payment, to make us comfortable with that loan,” said Tom Traficanti, president of Reno’s Heritage Bank of Nevada.
Which doesn’t mean that lenders don’t want to lend or borrowers don’t want to borrow. “Our clients are doing extremely well,” said Traficanti. “We have virtually no delinquencies in our portfolio, which is probably a testament to our local economy.”
At the same time, he doesn’t expect interest rates to come down much in the near future. “There might be a slight decrease this summer, but the economy still seems to be strong enough and inflation is still hanging in there and the Federal Reserve isn’t likely to bring rates down an awful lot. Prime is still sitting at eight and a half and I can see that come down maybe a half to three-quarters over the balance of the year, but you’re still going to see rates in the 7 to 8 percent range for a while.”
“There’s some skittishness out there in the marketplace, which is kind of parlayed itself into stricter standards, particularly related to loan to value ratios and debt service coverage ratios on these deals that are being presented. Actually in the last couple years we have ended up with a lot more decent deals being brought to us because competition has kind of fallen off for these deals,” said Parrish.
Some of the concern over market performance in upcoming years is based on the Federal Reserve’s goal of slowing the economy and taming inflation. That scenario alone would have an impact on the commercial real estate market.
Projects and Products
So what types of financing are available and what are borrowers looking for in today’s economy? There’s a lot of short-term working capital and equipment loans being sought and made; those are lines of credit for businesses. On the real estate side, those products are typically loans like mortgages, commercial mortgages, construction loans for businesses stepping into retrofit situations. Medical facilities are expanding, using construction loans to renovate buildings into what they need, or building new.
Consumer services businesses are growing, everything from hair salons to dental offices. For construction, the remodel market is thriving. Tech companies relocating from the Bay Area and manufacturing companies moving to Northern Nevada are looking for financing to create the right facilities. Companies seeking equipment loans are typically looking at five to 10 year terms based on the type and nature of the equipment, and real estate is longer out, typically 25 to 30 years.
Terms depend on product. “If you’re looking for lines of credit, smaller lines of credit, we call those evergreens, there’s no real maturity date, you just pay as agreed. Larger lines of credit usually have an annual renewal,” said Ford. Equipment loans depend on the life of the equipment. “If you have a printing press, and it’s usually 10 years one can last, it can last longer but the technology changes, so maybe that would be a 10-year loan. But if you’re looking at a building loan, that can be a 25 year amortization, but in 10 years we review it. If you’re looking at a mortgage that, can go 30 years. It all depends on product type.”
The Cost of Money
“There’s ample liquidity, ample money to lend; banks seem to have the deposits to lend so availability of capital isn’t the problem,” said Traficanti. “Obviously the rate at which that money costs has been more of a challenge than the availability of the money.”
“What our economist thinks is that we are still expecting three rate cuts by the Fed this year, most likely beginning in June,” said Ford. The forecast is for short- and long-term rates to drift down over the remainder of the year. The fact that this is an election year may add uncertainty to what’s happening with interest rates. Inflation still stands above 3 percent, which caused the Fed to lower expectations for rate cuts, at least until maybe midsummer or later. “So come July, even if the economy hasn’t slowed down or inflation hasn’t reasonably abated, rate cuts may still come just to juice the economy prior to the election,” said Parrish. Chairman Powell has indicated he has no interest in the Federal Reserve being part of the election dynamic. But expectation is for rates to drop by end of year.
In the current market uncertainty, an owner-occupied commercial real estate building loan might be in the low 6 percent range, or 6.25 percent, with a five year adjustment. But a building that’s not owner-occupied, a project with tenants, is going to see terms in the 7 percent or 7 percent plus range.
Source of Money
Banks and private lenders don’t necessarily work with angel investors and venture capital groups, but there’s likely money to lend in those areas too. “I don’t have experience in that world, or friends who do, but I do know one thing—there’s a lot of cash in the system right now and I suspect those areas have money to lend,” said Blackmon.
“If you have a significantly strong balance sheet and a good income statement, you can go to anybody you want to go to [for financing]. You can go to an insurance company, you can go to a bank, even the local credit unions are pretty active in that business,” said Blackmon.
But for a regular business that’s on a trajectory of every year things are getting better but they’re still not “investment grade,” Blackmon suggests accessing Small Business Administration (SBA) loan programs through a local bank or credit union. SBA programs are active and funded, and the local bank connection is because smaller regional banks are more likely than large national banks to give loans to local businesses.
City National Bank carries all the products an international bank would, but they’re also one of the top SBA lenders in the country. “We’ve sharpened our focus on Small Business Administration lending,” said Ford. The bank does a lot of 7A, helping small businesses short-term and long-term with things like working capital, equipment loans, and building loans. Depending on the SBA product, like with 504’s, it’s usually a 50 percent loan to value on owner-occupied real estate or equipment with a good collateral value that helps the bank,” said Ford. “With the 7A depending on the size of the loan, there’s a range of guaranteed percentages on the loan that the government actually guarantees. So when you have those things, it allows you to be more flexible in your underwriting as you’re lending to small business.”
SBA isn’t a direct lender. Instead, they facilitate loans with the lenders who provide the money. SBA offers a guarantee to the lender which mitigates risks.
“The SBA 504 program is intended more for fixed assets and/or real estate, so the beauty of it is it has longer terms for the SBA,” said Saul Ramos, director, Nevada SBA. “So for example the lender goes in with 50 percent and then we have what’s called a certified development corporation, they go in with about 40 percent, and then the owner goes in with possibly 10 to 15 percent down.” That’s important because when a business owner is looking for capital, having a lower down payment puts money in their pockets. The terms are also longer, running 20 to 25 year terms on a fixed rate. “That’s a huge win for the business owner.”
SBA’s 7A is the flagship program, which can be used for working capital, purchasing inventory, business acquisitions or purchasing real estate. “The terms are a bit different. They tend to have a bit more of a variable rate, but again we go back to the benefit of using the programs in the sense of the guarantee. Oftentimes you’ll find folks who may not be quite ready for traditional lending, so SBA becomes a very good alternative to be able to get capital,” said Ramos.
For business owners whose financials aren’t quite ready for traditional lending, SBA has a network of professional relationships and programs to help out.
A Bit of Advice
For business owners and investors looking for financing, going forward there’s probably going to be a need for a little more cash going into a deal.
“Especially in the market today with all the uncertainty as it relates to what the economy is going to look like here in the next two to three years, I hate to say it but cash is king. Having some sort of decent pile of reserves going into these deals is always a good idea; if they’re going to run into bumps in the road that’s always going to come in handy. If their cash flow starts to suffer, if their tenants run into problems, they’re going to have to figure out a way to float these deals through the trying times,” said Parrish.
Variables to take into account when deciding when to get a loan include cash flow, said Ford. “The most important thing is cash flow and their credit history. Those things are key. If their cash flow is strong and they’re generating income and cash flow, that’s very helpful from a banker’s perspective. Obviously their credit history is probably the best barometer of how they’ll pay in the future, so businesses should try to make sure their credit history stays strong and they pay their bills on time.”
“I always emphasize the importance of the banking relationship,” said Traficanti. “Because you can’t predict the future. Having gone through the Great Recession, knowing that things don’t always go exactly as planned, it’s not only good to go get your best interest rates if you have your deposit account and relationship with your bank that you also will be able to work through changes if you need to.”
Ford agrees. “Get to know your banker and make sure your banker gets to know you. The more familiar they are with you and your business, the better they can advise you.”
