Lessons from My Father

Even though my father passed away several years ago I’m surprised how often I think about him.  Something happens during the normal course of my day, and it triggers a flashback of him.  It wasn’t a conscious decision to think about him, but rather some random thing happens and instantaneously I’m transported back in time forty years hearing my dad say or do something.  It happens all the time.  Does that happen to you?

My father in many ways was a good role model.  He also had his faults but as time passes the good memories of him are winning out and the not so pleasant memories are fading.  I hope that’s what happens with my two adult children when I’m dead and gone. 

As I said my dad was a good role model, but he was a lousy teacher.  I don’t ever recall him ever trying to teach me an important life lesson.  He just lived what he believed.  At the time, I didn’t understand the importance or appreciate what I was witnessing.  It was just my dad saying or doing what he always said or did.  It was nothing special, or so it seemed.  It was just vintage Dad.  But the older I get the more I appreciate the values that he lived.   

So what life lessons did I learn from my father?

LIVE WELL WITHIN YOUR MEANS

Growing up my family lived in a very middle class neighborhood.  The neighbor on our left was a grocer and the neighbor on our right owned a gas station.  Although my mom drove new cars, I can’t ever recall Dad driving anything but used pickups.  A vacation to us was visiting our relatives, certainly not going to a destination resort.  We lived quite modestly.  It wasn’t until I was in college that it dawned on me that my parents were financially well off.  Over the years there had been hints of my parent’s wealth but I hadn’t been able to put the pieces together.  That changed when Dad, who owned his own CPA practice, sold his business and retired at the age of 50.  He lived quite comfortably for the next 30+ years off the income generated from his investments.

TREAT EVERYONE EQUALLY

After retiring, my dad spent most of his days working on his tree farms.  Having grown up in the rolling farmland of Iowa he was in awe of the beauty of the forests in the Pacific Northwest.  About ten years before he retired he bought a parcel of logged over timberland and spent his weekends nursing the land back to health.  He was very comfortable working alongside loggers, foresters, and other blue collar workers associated with the forest products industry.  And they were equally accepting of him as one of their own.   

I’m not sure why (it’s a question I wish I had asked him) but he was politically well connected in Oregon state politics.  I remember back in the sixties he was a pallbearer at a funeral where a fellow pallbearer was Mark Hatfield, the then governor of Oregon.  Dad never showed preferential treatment to his wealthy friends.  Those in a lower socio economic class were treated no differently than the rich and powerful. He treated everyone with the same friendly Jimmy Stewart like manner. 

PUT TOGETHER WIN/WIN AGREEMENTS

Dad didn’t believe in win at all costs.  He proposed agreements that were fair for both parties, not just for him.  He had no problem leaving a little bit on the table if it meant getting the deal done sooner rather than later and with both parties satisfied. Sometimes the person he was negotiating with would attempt to take advantage of his desire to strike a fair deal and would respond back with some unrealistic and unjustified counter offer.  You see, not everyone plays by the same set of rules.  But for the most part, people intuitively understood that he was proposing an agreement that was fair to both sides and they respected him for doing so. 

Sometimes life’s most important lessons are better absorbed not through formal instruction but by the consistent actions of a role model over a lifetime. 

May God richly bless you and your family during the holiday season.  Merry Christmas!

Four Common Mistakes That Make Financing Your CRE Difficult, If Not Impossible

I’m surprised how often I am asked to find financing for a property that for one reason or another is obviously not financeable.  It’s as if the borrower wants the lender to forgo the use of common sense.  I’m going to let you in on a little secret: IT ISN’T GOING TO HAPPEN!!!  Anyone who is at all knowledgeable about commercial real estate lending realizes that lenders are risk averse.  They are not in business to take on any more risk than is absolutely necessary. 

So if you want to either refinance your property or to sell your property there things you must do a year or two before financing is needed to get the property to the point where I call it, “lender friendly.”  Not doing so will likely make it much more difficult, if not impossible, in getting a lender interested.  Here are four common mistakes:

1.   The property is in poor physical condition.  It’s a big turn off to lenders to see a property poorly maintained.  Why would a lender refinance a property for a borrower that is not willing to maintain his property?  If you want to refinance a property that has a lot of deferred maintenance you better have an excellent explanation as to why it’s in poor condition.  Better yet would be to get the big ticket items fixed prior to refinancing your property. 

2.   The occupancy rate for the property is below market calling into question the seller’s property management company’s ability to professionally manage the property.  If the property is self-managed you’re in deep trouble.  If the property is for sale some sellers or listing brokers think that providing a rent guarantee on the unoccupied space will satisfy a lender’s concern.  WRONG!!  It does just the opposite.  It’s a great big red flag that something is wrong with the property.  A better solution is to offer as much free rent as needed to get the vacant space occupied.  Offer the free rent at the beginning of the lease.  Once the free rent has burned off, then refinance or put the property up for sale.  You still need to disclose the free rent to the lender but it is much better to have your property at stabilized occupancy with free rent than to have a property with a high vacancy rate. 

3.   Operating expenses are well above normal for a property of that age and condition.  You need to investigate if there is a reason for this.  Is it an anomaly?  Are some ongoing maintenance expenses actually capital expenditures?  Can you explain why?  If you can determine that the additional expenses are costly one-time expenses then capitalize what you can identify and operate the property for a year to show what your operating expenses should be for a normal year.  If you rush to refinance the property with higher than normal operating expenses it will likely lower the loan amount because of the lender’s minimum debt coverage requirement.  And if you’re trying to sell the property, the value of the property will be adversely impacted because the NOI for the property will be lower than it should be.  Worst case scenario, the lower NOI could reduce the loan amount and thereby increase the equity required by the buyer beyond what he is willing to invest in the property killing your sale.      

4.   Most tenants are on a month-to-month basis (not a concern for apartment renters) or have only 1 or 2 years remaining on the term of their lease.  Most lenders will not accept rollover risk.  Again, proposing a rent guarantee on those tenants whose leases have expired or will expire shortly is a big turn off to lenders.  One way to mitigate risk is to identify when each tenant originally moved in.  If they have been a tenant at the property for 10 or more years then it is much less likely they plan to move once the lease expires.  But the best thing to do before you sell or refinance your property is to get as many tenants re-leased for as long as possible.  Once you’ve minimized the rollover risk then seek financing. 

Remember, it’s all about getting the lender as comfortable as possible with financing the property.  You’re asking the lender to lend you or your buyer lots of money.  Make sure to take some common sense steps prior to requesting a loan that makes it easy for the lender to say yes.