As the country begins to pull out of one of the darkest recessions in nearly 100 years, both entertainment developers and existing operators are beginning to take the project plunge once again. There probably couldn’t be a better time to do so, as the three metrics, real estate, interest rates and construction costs, are all aligned in the developer’s favor. Add to this a continuing upward trend in consumer spending growth and it becomes clear that present-day economics are paving the way for the country’s next wave of progress. There’s only one catch – capital. While the private equity markets are bursting at the seams with idle capital that has been redirected from traditional bank and stock market investments, the lending landscape is still lukewarm. Most of the problem stems from a decade of overzealous lending and lack of regulation, the byproduct of which was a rash of non-performing loans and, ultimately, failed banking institutions.
Most banks took the only action they knew at the time – stop lending. The moratorium gave most institutions an opportunity to work through their troubled loan portfolios and begin the process of internal stabilization. As we sit in 2012, it would appear that the worst is behind us, with virtually all of the money center banks back on their feet, albeit leaner and perhaps wiser. The new lending landscape differs from the old in that new applications are more carefully analyzed for sustainability – a word very few credit analysts used during the earlier part of the decade. Loan volume is now secondary to loan quality, and as such, it is imperative that applications submitted to lenders be fully detailed and stress-tested to a greater extent than ever before. Below are some tips to consider if you intend to seek bank financing for a new project or renovation:
Obtain an independent feasibility study. An independent feasibility study by a competent provider offers an impartial examination of the merits – and risks – of the proposed project. Many developers are under the assumption that such due diligence can be done by members of their own team, however, lenders are often suspect of findings reports that are authored by the same entity that also serves as the borrower. “Conflict of interest” is often the term heard in credit committees today. A properly constructed feasibility study should examine market capability, competitive threats, acceptable project scope, market sustainability and reasonableness of budget. Conclusions should be based upon industry performance trends that have been compared against market specific data points.
Understand the importance of collateral. Many borrowers fail to realize that banks are in the business of lending money at relatively low interest rates, largely with the intent of recovering the original loan principal plus a reasonable reward (interest). When a loan enters default, banking regulations require that the affected bank set up a capital loan loss reserve to protect against non-collection of the defaulted note. This results in the bank having less available capital, and in extreme cases, can cause liquidity problems for the institution. To counter against this, banks look to obtain collateral – be it real estate, marketable securities or business assets – to help offset loss of principal. When seeking a loan, be prepared to offer both business and personal assets as collateral. While providing personal assets might not appeal to you, consider that a lender’s only goal is to insure that its principal is not lost. Sometimes a borrower can negotiate a limit or “cap” on the level of personal collateral provided, which can offset some of the borrower’s risk in a downside scenario.
Utilize the Small Business Administration. In 2009, the SBA’s guarantee limits were raised from $2 million to $5 million for a commercial transaction. Under the entity’s 7(a) program, the SBA will guarantee loans administered by a primary institution at a rate of 75 percent of the total outstanding loan amount. In essence then, a bank that provides you with a $1 million loan can receive a guarantee of up to $750,000 from the Federal Government. As many are aware, the SBA serves as the U.S. Government business stimulus vehicle, approving billions in loans each year to small business owners. SBA support is by far the greatest tool available to the entertainment developer, as the guarantee program can go a long way in closing the gap for both perceived collateral shortfalls and low equity contributions.
Increase equity contributions. One of the easiest ways to improve your chances of obtaining bank financing is to bolster the stability of your upcoming project through greater equity infusion. The greater the equity contributed by the project principals, the lower the loan-to-value ratio. Lower LTV ratios translate into greater cushion against loss and also protect the project principals from the ill effects of over-leverage. If you don’t have access to additional equity, consider raising private equity from friends, family or a local business proprietor. In recent years, private capital such as this has become the key catalyst in launching most projects within the entertainment industry and can be an efficient way to position the project for success.
Plan Your Funding Strategy. Practice sometimes makes perfect. With this in mind, it’s important to hone your skills as you navigate the financing process. Be prepared to meet with 10 or more banks to discuss your project. Carefully study the nuances of each banking institution, noting whether they are a true commercial bank, thrift or credit union. Understand their product offerings, and if possible, research prior loan transactions that they’ve completed in your area. Armed with information, consider approaching the least likely candidate first. This will give you the opportunity to identify weaknesses in your presentation and correct such deficiencies for the next potential lender. It may also be helpful to practice role playing with a trusted friend or business associate to uncover shortcomings in your personal skills, as lenders will be seeking a qualified candidate that truly understands both the economics and operating essentials of the business model that’s being proposed.
While there’s no guaranteed formula for success, patience, practice and preparedness are the key elements in securing funds from bank lenders. Interestingly enough, rejection is a necessary part of the process, as some banks may not have an appetite for your particular undertaking or may feel that your entrepreneurial skills may not match their expectations. Treat these rejections as an opportunity to bolster your presentation, and in some cases, reformulate your plan to reduce perceived risk to both parties. Above all, keep your cool, knowing that success is often conditioned upon balancing your goals with a lender’s goals.
The time couldn’t be better for undertaking that new entertainment project. With quality documents and a strong business case, 2012 can prove to be a very good year.
(Reach Industry Owls Contributor Jerry Merola at 732-616-4492.)
Bay Tek Entertainment, an industry leader in games and entertainment, is pleased to announce the...