Should Big Banks Get In The Commercial Property Game?
Traditionally, banks lend funds to anyone who wishes to invest in a commercial property - about 5-70% of the price of that property and this is assuming that certain strict conditions are adhered to.
Evaluators who are hired by the banks need to verify that the price of purchase is market related.
Banks typically don't like working with commercial properties for first time due to good reasons.
Businesses that are recent and aren't established are simply not good risks.
Many of them will fail leaving the bank scrambling for it's funding.
It is also greatly important to the bank that the property has been an income producer and how long the lease that sustains the business has been in place.
Losing a lease can mean that the mega deal of the century the bank just covered has no means to make money and therefore, no method to repay what they've just borrowed.
Ideally the bank will check out every single corner of the business and the loan but frankly, what is ideal isn't always what is done.
Will the return on the investment be enough to cover their repayment on a month-to-month basis? Investments such as these are normally done on a 75% and 25% ratio.
If the investor wants to purchase a $300,000 business, he will be required to find 25% of the price of the business on his own.
Sadly sometimes they aren't.
Often times if a buyer looks like a good investment and his/her business acumen is well known, the bank will lend them funding based on a history with that customer.
The bank should also look into every nook and cranny at the borrowers finances and sometimes will ask additionally for funds that will stand as guarantee for what he or she borrows.
These are sound principles for any bank to follow for any loan, large or small.
Yet, even those don't secure the loan for a commercial property or business of enormous proportions.
Sometimes in unforeseen circumstances, what looked like a great deal for the bank turns out to be a lemon and the investment isn't going to pay off with interest for the bank.
A sad fact of life - Not every business is going to make a profit.
Not every business is going to survive the first year in fact.
Study the business plan all day long, but it doesn't change those facts.
All those things aside even a big bank can make a big mistake.
A case in point is the New Century(TM) collapse, which filed for chapter eleven with a billion dollars of someone else's money in play.
Goldman Sachs, who made loans of about 60 billion to them while Barclays (British Lender) and several other US lending companies who had also made loans to the company held their breaths as New Century collapsed.
A collapse of this type can cause an unhealthy market in the sub-prime and create a real rift in economic health.
In the aftermath of those issues, a top Goldman Sachs executive left with no explanation while a board member there did not stand for re-election.
The bank's primary responsibility is towards its investors and those who house their assets there.
Taking risks with other peoples money isn't always all it is cracked up to be and in the end, someone has to be responsible for what happens when those loans don't pay off.
Let it be said as well that being wealthy does not always mean being able to pay off what you borrow, in terms of your business ventures.
There are many wonderful businesses that began as huge successes and ended because the accountant left with the assets.
It is sad but it is the reality.
One person who isn't all that we hoped he or she might be when we put that person into a position of responsibility can ruin the best-run business.
A bank that lends to a large business based upon the wealth of the owner, which isn't supposed to happen but often does is another thing worth taking into account when considering whether or not the big bank should finance the bigger business.
It is not an easy task to separate whether or not to lend funding to Uncle Joe's millionaire nephew's business when he plays golf with you.
Just now it seems that banks are particularly desperate to get rid of the commercial properties in which they've invested and the reason is relatively simple.
The fallout is simply too huge when and if a problem does occur.
If, as in the case of the Century folks, the commercial property defaults and the loans aren't paid, bankers who have for many years grown accustomed to large salaries and window offices see their jobs very literally sitting on the edge.
If a property such as New Century defaults, what is the fallout? Aside from the health of the economy, if a larger bank corporation undergoes that kind of a loss, that bank's next quarter or next year can be affected to the tune of tens of millions of dollars.
Evaluators who are hired by the banks need to verify that the price of purchase is market related.
Banks typically don't like working with commercial properties for first time due to good reasons.
Businesses that are recent and aren't established are simply not good risks.
Many of them will fail leaving the bank scrambling for it's funding.
It is also greatly important to the bank that the property has been an income producer and how long the lease that sustains the business has been in place.
Losing a lease can mean that the mega deal of the century the bank just covered has no means to make money and therefore, no method to repay what they've just borrowed.
Ideally the bank will check out every single corner of the business and the loan but frankly, what is ideal isn't always what is done.
Will the return on the investment be enough to cover their repayment on a month-to-month basis? Investments such as these are normally done on a 75% and 25% ratio.
If the investor wants to purchase a $300,000 business, he will be required to find 25% of the price of the business on his own.
Sadly sometimes they aren't.
Often times if a buyer looks like a good investment and his/her business acumen is well known, the bank will lend them funding based on a history with that customer.
The bank should also look into every nook and cranny at the borrowers finances and sometimes will ask additionally for funds that will stand as guarantee for what he or she borrows.
These are sound principles for any bank to follow for any loan, large or small.
Yet, even those don't secure the loan for a commercial property or business of enormous proportions.
Sometimes in unforeseen circumstances, what looked like a great deal for the bank turns out to be a lemon and the investment isn't going to pay off with interest for the bank.
A sad fact of life - Not every business is going to make a profit.
Not every business is going to survive the first year in fact.
Study the business plan all day long, but it doesn't change those facts.
All those things aside even a big bank can make a big mistake.
A case in point is the New Century(TM) collapse, which filed for chapter eleven with a billion dollars of someone else's money in play.
Goldman Sachs, who made loans of about 60 billion to them while Barclays (British Lender) and several other US lending companies who had also made loans to the company held their breaths as New Century collapsed.
A collapse of this type can cause an unhealthy market in the sub-prime and create a real rift in economic health.
In the aftermath of those issues, a top Goldman Sachs executive left with no explanation while a board member there did not stand for re-election.
The bank's primary responsibility is towards its investors and those who house their assets there.
Taking risks with other peoples money isn't always all it is cracked up to be and in the end, someone has to be responsible for what happens when those loans don't pay off.
Let it be said as well that being wealthy does not always mean being able to pay off what you borrow, in terms of your business ventures.
There are many wonderful businesses that began as huge successes and ended because the accountant left with the assets.
It is sad but it is the reality.
One person who isn't all that we hoped he or she might be when we put that person into a position of responsibility can ruin the best-run business.
A bank that lends to a large business based upon the wealth of the owner, which isn't supposed to happen but often does is another thing worth taking into account when considering whether or not the big bank should finance the bigger business.
It is not an easy task to separate whether or not to lend funding to Uncle Joe's millionaire nephew's business when he plays golf with you.
Just now it seems that banks are particularly desperate to get rid of the commercial properties in which they've invested and the reason is relatively simple.
The fallout is simply too huge when and if a problem does occur.
If, as in the case of the Century folks, the commercial property defaults and the loans aren't paid, bankers who have for many years grown accustomed to large salaries and window offices see their jobs very literally sitting on the edge.
If a property such as New Century defaults, what is the fallout? Aside from the health of the economy, if a larger bank corporation undergoes that kind of a loss, that bank's next quarter or next year can be affected to the tune of tens of millions of dollars.
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