The scenario is all too familiar to builders that have lived through multiple economic recessions: The moment the housing market dives, banks and lending institutions come calling.
Literally overnight, real estate investments that weeks (or days) before were financially sound deals are now high-risk ventures — at least in the minds of Wall Street bankers and those in the banking community.
As banks begin to sweat over their real estate portfolios, they invariably look to their builder and developer clients to help mitigate some of that increased risk — whether real or perceived. This commonly comes in the form of personal guarantees on outstanding loans and more cash and equity in deals. In some cases, banks limit or completely cut off vital lines of credit and ask for balances to be paid in full on the spot.
It’s an unenviable situation for any builder to be in, especially when dealing with multiple financial partners that all want some sort of concession right away. Unfortunately, many builder firms have met their demise after having been bum-rushed by their lenders.
If you’ve been pressured by your banks in the past 12 months, you’re not alone. This past March we surveyed Professional Builder readers on the most-pressing financial challenges they’re facing today. More than one in five (21 percent) respondents said they’ve had their banks call on their loans even though payments were current.
So what do you do when the banks come calling?
There are a number of philosophies on how to deal with banks in these sticky situations. I recently had a chance to chat with Chicago- and Austin, Texas-area builder Jamie Bigelow about this very subject. The strategy that worked for his company was quite simple: be upfront, equitable and fair, but don’t give them a dime more.
“We told them that we needed all of our cash for working capital,” says Bigelow. “We also told them that, ‘Yes, we could pay you off, but if we did we wouldn’t be able to pay off our other banks, and we’re not going to do that to the other banks, just like we wouldn’t do that to you.’ They eventually went along with that plan.”
The bottom line is it’s possible to stave off heavy pressure from lenders and keep your business operating without jeopardizing those vital relationships, even when taking a hard-nosed stance like Bigelow did.