Financing Your Next Metal Building
Mark Robins, Senior Editor,
Posted
01/09/2012
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."
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."
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.
[sidebar]
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.