How To Make Sensible Investments in a Senseless Economy: Six Proven Steps to Prevent Financial Disaster by Kafka Stanley & Klein Michael

Author:Kafka, Stanley & Klein, Michael [Kafka, Stanley]
Language: eng
Format: epub
Published: 2020-07-07T16:00:00+00:00

Assessing the Purpose

When we assess the purpose of a loan, the first step we take is to sit down and find out what the borrower’s business plan is before we even begin talking about loans and investments.

We always make sure a loan is designed to match the business that it is intended to finance. And we take the time to discover what the goals are for the borrower. We want to know all the economic issues, the hot buttons and the risk factors so that we can put together an accurate profile.

Take the following case.

We were the lenders for a deal with a developer who was building an office building for San Bernardino county in California. The cost of the project was approximately $10 million. This was in 2009 when the world was on fire, and the borrower was paying out of pocket to get this building done while he was waiting for his bank of 25 years to come back with an answer to his loan request.

They turned him down, but he had already invested half of the $10 million in the project. He was running out of capital and had a delivery date to meet. So, he came to us and we closed that deal in two weeks. Why were we so quick to approve the deal?

We were able to determine that the people were first rate, had excellent experience, solid credit and the capacity to deal with adversity. The purpose of the loan was to fund the construction of a building already leased to an investment grade tenant and the requested loan matched the purpose of the deal. The source of repayment was the re-financing of the project, and if that didn't work out (secondary source of repayment), the building would be sold. Why didn’t the bank make the loan? Likely because they had shut the spigot for ALL construction loans, irrespective of the facts. Banks are relationship lenders until their credit administrators, management and the regulators decide they aren’t.

Here’s another example where the purpose of the loan was a huge deciding factor.

We had a borrower who had a building that they had leased to the US federal government and they couldn't get a construction loan—this was back in 2011. We did the construction loan for them in about three weeks. But what was interesting about this project was that this building was being built in Sierra Vista, Arizona.

During the course of that construction in nearby Tucson, Gabby Giffords, a member of the United States House of Representatives, was shot. Three days after the shooting, there was a change order from the federal government that required all the exterior glass to be changed to bulletproof glass, and the entire lobby area had to be installed with bulletproof drywall. That was a half-million dollar change order!

So, inside of a day, the developer needed to find half a million dollars to finance these changes, or he would lose his prospective tenant—and his shirt. Because the purpose of this loan increase made sense, this stressful event became a non-event.

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