Local banks are still in the real estate business, with a little help from their friends.
“We’re still doing land deals, but we’re very selective in the ones we’re doing,” says John D’Angelo, the president of Investar Bank. “This market has given us the opportunity to pick developments that we like.”
Investar, a $155 million bank founded in 2006, prefers not to lend more than $3.5 million to any one borrower. Like any bank, Investar is restrained by federal regulations. But bigger deals aren’t out of the question, thanks to a network of banks Investar works with that might be interested enough in a given project to chip in a few million.
“Participation” among banks is nothing new, but in today’s market, it might be the only way to get a deal of any size done.
“I don’t think we’re fulfilling our mission and our responsibility as a community bank if we’re not [loaning money],” D’Angelo says, although Investar lately has been less aggressive and has tightened its lending guidelines like everyone else. His bank’s real estate exposure peaked in June 2008.
“We’re happy to let it maintain or decrease a bit, but if there are good projects, we’re going to look at good projects,” he says.
Large banks that were active in real estate two years ago, like Capital One, Chase and Regions, largely have stopped making such loans, developers say. Some banks are telling developers, even longtime customers, to bring their real estate loans to another lender. And many banks are pushing developers to get moving on a project so the bank can get that loan off its books.
A borrower often is asked for a cash infusion or additional collateral to renew an existing loan. Lending for speculative deals is scarce, although owner-occupant or build-to-suit projects still are doable.
“In the days of easy money, the lenders would just plain find a way to make the loan,” commercial mortgage broker Brian Andrews says. “It was so competitive out there that the way you differentiated yourself from the next lender down the road was to lend more money.”
That party’s over now, and the retrenchment is well under way.
“If you’re just looking to buy raw land, you can forget it right at the moment,” Andrews says. Bankers have discretion to bend their own lending rules when circumstances warrant, but these days, “your deal really has to fit into the box,” he says.
Community banks still are willing to listen to a good story, but generally don’t have more than a couple million to lend out, which is where participation comes in. There was a time when banks were hesitant to participate with other banks in the same market for competitive reasons. But now some of those out-of-town banks are having trouble in their own markets, leaving local banks with fewer options.
“The [local] banks are still hesitant to use local community bank participants, but I think they’re grudgingly finding they have to do it or lose the business,” Andrews says.
“The banks aren’t doing anything speculative, which we understand,” developer Donnie Jarreau says. “I’m not seeing hardly any of the larger banks doing much. The community banks are still lending.” With participation loans, the lead bank sets the terms and conditions, and Jarreau says the developer might not know other banks are involved.
“It’s allowed us to compete head-to-head with bigger banks,” says Jim Purgerson, a senior lending officer at Plaquemine-based Citizens Bank and Trust. “It’s not out of the question for me to pick up the phone and call a banker in town or right across the river and say, ‘Hey, I’m looking at this deal. Would you like to look at it with me?’” Community banks also have the option of going to First National Bankers Bank, which can farm out requests to multiple lenders.
Citizens was the lead bank on a $6.7 million loan for The Village at Magnolia Square, a traditional neighborhood development in Central in which three other local banks participated. Purgerson says local bankers consider Central an up-and-coming area with a good school system, making the loan an easier sell than it might have been to an out-of-town bank.
“I just deal with Jim [Purgerson], which is wonderful,” Magnolia Square developer Jimmy Nunnally says.
Community banks that are making loans are looking for borrowers with significant cash on hand. Banks have stepped up their verification of assets, and down-payment requirements are tougher. If the borrower has deposits with another bank, the potential lender might ask him to move those deposits to the lender’s bank. Purgerson says while banks are taking a harder look, developers also seem to be taking it upon themselves to be more cautious.
Whitney National Bank, one of the region’s bigger players, never has focused on real estate development as much as other sizable banks, although they have done projects with some of their core customers and might do more with the right people, says Barry Kilpatrick, Whitney’s Baton Rouge city president. Still, it’s doing less than a few years ago.
“The lack of home sales and the weakness in the retail sector have put a lot of projects on hold. Since there’s not demand, we have not seen the activity we have seen in the past,” he says. “A lot of it has to do with demand, not so much the ability to finance it.”
“All the lenders are doing the same thing. They’re being cautious, and rightfully so,” developer Kevin Nguyen says, adding that when a few banks start pulling back, others tend to follow. But he thinks the reverse also might be true.
“It might take one or two banks to begin to do deals,” he says, “before the other banks start to say, ‘Well, let me go make some loans.’”
Anatomy of a participation loan
Step 1: A developer dreams up a project he thinks will cost about $7 million. He brings it to Banker A, with whom he’s worked in the past.
Step 2: Banker A loves the project, but he can only put up $2.5 million of his bank’s own assets. His bank isn’t large enough to cover the full $7 million. So Banker A brings the deal to bankers X, Y and Z.
Step 3: Banker X puts up $2 million, Banker Y contributes $1.5 million and Banker Z chips in $1 million. Banker A takes the lead on the deal and works directly with the developer, but all four banks share in the risk and potential profit.
