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Honesty, Understanding Keys to Negotiating With Lenders

While lending lifelines have been dramatically reduced or cut off as banks and lenders adjust to new market realities, restrictions and regulator scrutiny, experts participating in an NAHB webinar on lender negotiations last week said that lenders will negotiate with builders and developers to reduce their losses and reach viable solutions.

During the session, “Negotiating With Your Lender,” a panel of home builders, developers and a banking legal expert discussed how lenders are open to renegotiating and what best practices builders and developers should follow to succeed in that process.

The presentation, sponsored by Builders CoPilot and NAHB’s Business Management and Information Technology Committee, was held on April 29.

One of the keys to negotiating with lenders is to “know where they’re coming from” and what they are facing now, said Steve Camp, of Gardere Wynne Sewell LLP, an attorney who specializes in financial services and lending transactions. “Banks are beginning to deal with a bottoming economy, loan portfolios going south and stress tests requiring them to raise more money.”

“A lot of bankers have never seen a financial crisis like this. They are scratching their heads wondering how to work their way out of this and what tools to bring to the table,” Camp said.

Under these circumstances, banks are actually looking to builders and developers for solutions, the panelists said, and builders should be proactive.

“Lenders are looking to us to come up with solutions to the problem. We’re the experts,” said builder and developer Curt Blomstrand, of Focus Realty Services and Lenox Homes in Lafayette, Calif.

Builders and developers have to come to the lender with a plan, but the deal will not be approved if it was one-sided, Blomstrand said. Builders must be willing to “put cash in the deal and have a vested interest.”

Another key to making the negotiations work is to be absolutely honest with your lender, all the panelists agreed.

“This is not about winning, it’s about finding common solutions,” said Camp. “Know what your strengths are as a debtor, understand your own situation and be able to explain it to your bank so they can understand it.”

Joe Lemel, of Lemel Homes in Glendale Wis., said builders not only have to know their strengths, they have to be able to clearly articulate how safe they are. “Honesty with bankers really goes back to prior relationships,” he said.

Negotiating in today’s environment requires patience, said Greg Isenhour, of Guts, Inc. a residential and commercial builder based in Chapel Hill, N.C. who also served as moderator of the webinar.

During the negotiating process, builders must continue to keep their lender informed of any changes in the company, good or bad, in order to maintain trust, Camp said. Lenders need to be convinced that the builder is not going to run away.

“Your best asset is your reputation, that you’re a person of your word and that you keep your word,” said Camp. Keep your lender informed of any changes and why those changes occurred, he said.

Give and take is also an important element in negotiations now, said Lemel. Builders must be “willing to give something up that the bank hasn’t asked for. That goes a long way.”

“The last thing that banks want is the property back,” said Blomstrand, but if a builder or developer is not cooperating, the lender “is very prepared to take the property back.”

And they will confiscate the property if there is no cooperation, Camp said. “When you walk in and say, ‘I’m not interested in working out a deal,’ you put a bulls-eye on that says to your lender, ‘Come after me.’”

When negotiating, Blomstrand stressed that builders should confirm everything in writing to avoid confusion.

Camp added that builders should not shy away from forbearance agreements because they serve as a roadmap for the work-out and because they are negotiable. The forbearance agreement will stipulate what the builder and lender have agreed to do and for how long, he said.

Knowing who to negotiate with is also critical, said Chris Valentine, of Hearthside Homes in Kansas City, Mo. Builders and developers should negotiate with the “people behind the scenes making the decisions” — the bank presidents and loan officers.

He also stressed that builders and developers should negotiate in person. “Shooting off an e-mail doesn’t cut it. Negotiate with them face-to-face and frame the conversation in terms of benefit.”

When negotiating interest rates, the panelists agreed that most lenders are not willing to go below a floor of 5% to 5.5%. Troubled assets are costing the banks more to service, they said.

However, Lemel said the interest rate should not be the be-all, end-all of the negotiations. “The interest rate is critical, but the fee structure also is critical. When negotiating, look at the whole structure.”

He said he recently closed a deal with his new bank moving all his operating capital to it, which helped him work out an attractive negotiation with his lender. “That and the fact that I am very liquid.”

To Access a Recording of the Webinar

Members can download and listen to the panel discussion for free through June 29.

To download the webinar, visit http://webinar.builderscopilot.com/Webinar/Recording/Webinar0429.wmv. To download the slide portion of the webinar only, visit http://webinar.builderscopilot.com/Webinar/Docs/Final-Webinar.pdf.

For more information, e-mail Agustín Cruz at NAHB, or call him at 800-368-5242 x8472.

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