Builders Can Work With Banks to Survive the Credit Crunch
In weathering the current housing downturn and credit crunch, builders can negotiate more effectively with their bank by understanding that they have a different set of priorities from their lender and by pursuing proposals that meet the needs of both parties, according to banking experts participating in a Nov. 18 NAHB audio seminar, “Builder Financing: Working with Your Lender in the Credit Crunch.”
“Lenders are not your partners. They are invested in your success only to the extent that their loan is repaid in full,” advised Bill Rothman, Major Builder Group president for IndyMac Federal Bank in Irvine Calif.
Rothman said that builders have several misperceptions about lenders. For example, it is commonly held that lenders don’t want to own real estate, but that isn’t always true when they have other customers who are able to build out the project. And lenders will sue loan guarantors who they believe have assets.
In crafting a successful survival plan, the builder’s priority is to find a way to continue operating under current market conditions while ensuring that the lender gets repayment on the loan in a way that minimizes losses and holds up to regulatory scrutiny, he said.
As a contractor and project manager for the lender, the builder should present a plan that:
- Performs a current project market analysis — determining sub-market conditions, a price point at which the product will sell and a timeframe for settlements
- Quantifies the dollar shortfall
- Quantifies the financial ability to service debt (interest/principal) and builder overhead until the market improves.
The package of information conveyed to the lender at the meeting should include, at a minimum:
- Current financial statements and project sales/settlement reports with monthly absorption numbers
- Detailed cash flows and valuation analyses with assumptions detailing the timing of settlement revenues, updated costs (hard & soft) in the project budget, expected net cash flow and resulting liquidity
- Analysis of borrower and guarantor contingent liabilities
- A current market study that determines the correlation between supply and demand
- A focus on the future and not past accomplishments
- A realistic assessment of expected performance, providing as much detail as possible, including related assumptions
Once a builder has completed the hard work of developing a plan, there are a number of things that can be done to ensure the best circumstances for negotiating with the lender:
- Minimize the number of participants and include a decision maker
- Maintain a positive environment
- Set an agenda that includes all the existing issues that must be discussed
- Reinforce the benefits of loan repayment as detailed in the plan
- Clearly state and continually reinforce the joint benefits addressed in the plan
- Listen to the lender and carefully weigh options prior to responding or committing to an offer
- Be prepared to make fair concessions in return for time and continued funding
The audio seminar was hosted by The NAHB University of Housing and NAHB’s Housing Finance and Housing Policy Department.
The full audio program with many more tips and insights — including potential legal issues and actions — will be available for purchase on the NAHB Web site soon.
For more information on housing finance issues, e-mail John Dimitri at 800-368-5242 x8529.
For more information on NAHB University of Housing audio seminars, e-mail Mary Knowles, x8057.
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To view or order the “Cost of Doing Business Study” online, click here, or call 800-223-2665.