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Financing Your Next Metal Building

For most companies who want to build and/or own a metal building, obtaining financing for it is the first big challenge. Loans are never easily given out, and unstable economy dynamics and financial underpinnings contribute to this challenge. The financial crisis of the past four years has resulted in many lending institutions either going bankrupt or having to be bailed out.

Obviously, this has had a negative impact on financing commercial construction loans. For metal buildings, there are some unique aspects of this difficulty as well. Even the government is taking notice. In 2010, a United States Congressional Oversight Panel warned that deteriorating construction loans are affecting banks with bigger losses than any other type of real estate loan. Nearly 17 percent of all construction loans in the U.S. banking system were classified as noncurrent as of March 2010 because they were at least 90 days late or in trouble for some other reason, according to the Federal Deposit Insurance Corp. That compares with fewer than 5.5 percent of all loans. According to The Federal Reserve's January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices, 20 percent of banks have reduced lending for commercial construction like metal buildings, despite an increase in demand for such lending.

"The overall banking climate across the entire nation is so tight in regard to new construction, especially for non-owner occupied real estate, which accounts for 99 percent of our portfolio," says Evan Beck, owner and president of Woodward Development & Construction Inc., Newburgh, Ind. "You may hear banks say they want to make loans but it's not true. The lending criteria have become so ridiculous it causes one's entrepreneurial spirit to die. Thankfully we've had a couple of smaller banks wanting to provide us service on what are traditionally excellent development projects that some banks just don't want to touch."

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Availability of capital

Lenders are still lending money to metal building buyers, but the conditions have changed. "Our company is still utilizing traditional commercial bank financing, albeit there are far more hurdles and dramatically fewer banks truly active," Beck says.

Lehman Brothers Holdings Inc. was a global financial services firm that declared bankruptcy in 2008. They were the fourth largest investment bank in the United States. Bear Stearns was a global investment bank and securities trading and brokerage firm that was sold to JPMorgan Chase in

2008 during the global financial crisis and recession. The shrinking number of investment bankers makes it harder for metal building purchasers because they help raise some capital for investments. Because so many collateralized mortgagebacked securities have been eliminated, smaller banks have become the prime source for metal building loans. "Thank goodness for the smaller, community based banks to step in for us during this time when our primary banks are not active and look to remain inactive," Beck says.

But banks are tightening the rules. This results in both decreased loan-to-value and term length for financing metal buildings. "For example, 18 months ago, you could get a non-recourse commercial loan on a metal building for 80 percent loan-to-value with a 10-year fixed term and a 30-year amortization," says Charles Connely, president, C.C. Connely & Associates, Kansas City, Mo. "That same building today may be 70 percent loan-to-value with a 5-year fixed term, a 15-year amortization and now with recourse. This means equity investors, whether company or individual, have to put a lot more equity in. That's a big issue."

"Terms in general are a lot shorter," Connely continues. "Loans for metal buildings used to be five years or more, now banks are only doing three years. It sounds like a permanent loan but it is really a step-traded loan. That's where a lot of real estate firms ran into trouble in 2007 or 2008. Let's say in 2008 you did an 85 percent loan-to-value and you have a long-term 25-year amortization. You didn't pay off a lot of the principal just like you don't with a home mortgage. When the market changed and companies had to refinance those mini-permanent loans because they were due in 2010 and 2011, a lot of companies had a hard time refinancing because they had to come up with more equity. They had the same building, but instead of having a 15 percent equity request, the banks came back and said we expect you to put another 5 to 10 percent more into it. We won't underwrite a 15 percent equity requirement. We expect you to put 20 to 25 percent equity into it. This makes it a more difficult environment to operate in."

What lenders want

If you are planning on borrowing money from a bank for a metal building today, anticipate giving the lender some business like an operating account or deposits. "Three years ago you could go to a bank and request a nonsecure loan, even though you didn't have to give them any business," says Connely. "Today if you are going to get a loan from a bank, they're going to want to move your business to their bank. They want more ownership of the relationship." In addition to ownership, lenders will look at their own portfolio when evaluating loans. "The lender's current portfolio and mission will drive what types of loans the lender is seeking to make, and that portfolio changes over time," says Jeff Thomas, president, Omega Church Consultants Inc., Indianapolis. "For instance, if a lender has too many struggling restaurant operations on the books, the chance of getting a loan for a new restaurant building is slim. However, another lender may desire to lend for a new restaurant building at this time." In this economy, cash flow is even more important. "Cash flow has become the primary determinant to qualify for a loan," says Thomas. "Today the cash flow requirements are higher and are scrutinized more than ever before. This is especially true for our church clients because lenders don't want to ever foreclose on a church. Therefore, equity is not the key to the deal for them. Even if the bank could foreclose and make a profit on the church sale, they never want to get into this position. So, proving that you have the cash flow to make the payments is the key to underwriters."

Other sources for borrowing

Banks aren't the only lenders out there. Try applying for financing directly from the building manufacturer. Many companies that supply and build steel buildings also provide capital financing, generally without a great deal of paperwork. You could get a better price on your building. Also, explore private financing. Several diverse companies finance steel buildings. These loans are written as business loans, not mortgages. Separate capital financing can provide possible tax advantages when you're negotiating the price of the building. "Other sources of funds are investment banks or credit unions, and these may be specific to denomination or geographic area," Thomas says. "Bond programs are another source of funding; however, none of our clients has ever primarily funded their project by selling bonds either internally or on the public market. Some of our clients have used professional capital stewardship campaigns and some have not. Most lenders today require that a church have a professional fundraising campaign underway prior to receiving a commitment for construction funds."

The effect on metal buildings

An important financing factor for metal buildings is your lender is going to want to know where your building is going to be built and what it will be used for. Certain metal building code requirements in counties, zones and towns prohibit or specify construction in certain areas. Make sure that you can legally put up your building where you want it, how you want it. Some builders might tell you that these codes are standard but they are not, they can vary depending on different building requirements. Make sure that all building codes are noted and cleared before you start.

Financing is easier for metal buildings in industrial parks that have various building design solutions. "A partial wall on a metal building looks good in a tilt-up wall industrial park," says Connely. "There are some areas-because of an architect or a city-that don't want metal buildings. One concern is the life expectancy of the building, or how the building will look in 15 years versus a conventional building. "From a lending and a practical standpoint, many financial people don't have a lot of expert knowledge of metal buildings. Another reason many building owners are building their metal buildings with a 6- to 8-foot partial wall around them is the psychological benefit to the lenders. With the wall, lenders are more likely to believe that forklift drivers won't run their forklift through the side of the building and out the other side. A partial hardwall prevents that and it's an aesthetic look."

Lenders are understandably concerned about owners going bankrupt and not having alternative uses for the metal building. They want to know if they can be reconfigured, especially for owneroccupied buildings so they can recoup their investment if they have to. Bankers want to know if the ceiling is high enough to reuse the building for a warehouse. Can a large metal building be "broken up" into smaller partitions? Many rectangular buildings can be split up in two parts with a wall down the middle. A steel building can be extended years after it has been built. The difference in a standard building and an expandable building is often just an extra rigid frame column in the end-wall.

In the event of a foreclosure, "lenders have expressed that they prefer a church design that could be converted for use to an office building, retail space, community center, recreational facility, school, warehouse or day care," Thomas says. "This obviously impacts the exterior appearance, but also the interior design. To the lender, this means that a flat floor is preferable to a sloping floor in the sanctuary. Large open spaces are preferable to solid interior walls. And the more prominent the location, the easier the facility will be to market for commercial use."

Also, lenders sometimes worry that because they are easy to assemble and disassemble, buyers can potentially remove and relocate metal buildings without the lender's permission. But Thomas argues that the pre-engineered metal buildings Omega designs and builds are normally 20,000 to 100,000 square feet, and the exteriors are finished with stone, stucco and glass in a very aesthetically pleasing way. "They don't look like metal buildings, and it would be nearly impossible to disassemble and relocate any of the buildings that we create," he says.

Ironically, the metal building financing arena is being hindered by other existing empty metal buildings. Even though the economy is improving, there are still a lot of vacancies in the industrial and warehouse building markets. New building construction is going to be hindered for a period of time until the demand fills up some of that space. Connely says right now, the competition is the unoccupied buildings that are just sitting there with low rents that nobody is doing anything with. He believes "there is just too much inventory sitting out there today."

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What can you do?

Buyers can still get loans, but many lenders will have predetermined requirements on what buyers need to have. Bank loans for metal buildings are largely based on the buyer's historical performance. Banks grant loans based on the buyer's assets and the ability to pay the loan back. As it is for many loans, credit worthiness is everything. The financing will only be approved if the project is sound and proven to the lender to be so. Even buyers with good credit can go bankrupt and not honor invoices. To avoid such bad debts, many loaning institutions offer bad debt protection services for commercial construction builders. The finance companies take the risk of non-payment and charge a nominal fee for this service. Moreover, coupled with invoice discounting or factoring services, almost 70 percent of the invoice amount is immediately available for use. This improves the cash flow.

Even though borrowers will have their credit and equity scrutinized very carefully in today's lending climate, certainly, one aspect in the borrower's advantage is very low interest rates. Banks are loaning around 5.5 percent, very reasonable when compared against long-term interest rates that customers have had to pay over the years. With that going for you, despite some hurdles, borrowing money for a metal building still makes sense and cents.

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While there is a diverse lending protocol, some procedural steps are standard for financing metal buildings. Prepare in advance even before starting the process of quoting or accepting an application. You should have a bank statement equal to 30 percent of the building price. You should own, or at least control, the land the metal building will be situated on for at least the length of the loan term. You may need to have two or three guarantors to take responsibility in case you are unable to pay back the loan.

If approved, determine whether the lender's requirements suit you, reviewing their financing agreement for down payment, amount financed, interest rate and loan term. Exercise your purchase contact with the seller and pay a small portion of the money, typically 25 percent of the price. Obviously, putting the least amount of money down for a metal building gives you more working capital. Be prepared to visit several different lenders if your first choice refuses. Call different banks and ask for the construction loan department or a construction loan officer. Also, an experienced construction loan broker can provide direct access to hundreds of banks nationwide. A broker is a representative for hundreds of banks and can solicit funding proposals from numerous conventional and unconventional sources. Although the broker serves as an intermediary, his or her services in most cases won't cost anything extra. Brokers get loans at wholesale rates, then pass them along to their clients at retail prices, just like any other business. Because or their volume, many brokers are able to offer their clients better deals than could be had by talking to the banks themselves.