Entrepreneurs Stuck at the Starting Gate By Kurt Lefteroff and Mark Speno

by 09 Jan 2009
Every year our neighbors gather for a holiday party. We look forward to the evening as our chance to check in with the many commercial real estate developers and executives who live nearby. This year, we expected to hear tales of woe and frustration, and we were not disappointed on that account. In small groups and in one-on-one conversations, we heard about tenants asking for rent reductions, development projects getting delayed, and borrower-lender relationships turning sour. Not all of the conversations were negative. One conversation in particular stood out. A former mortgage broker, I will call him Sam, told us about how he is buying foreclosed single family homes from banks, making repairs and selling to ready and able buyers. He said the key to his strategy was to keep the final price below $100,000 and to deliver a home in fully repaired condition. Sam?s experience told him that while buyers could make the required down payment and could afford the monthly mortgage payments, they could not afford to bring the homes into livable condition. As it turns out, many foreclosed homes need substantial repairs. We think Sam is doing something wonderful. Sam is helping banks dispose of non-earning assets. Sam is giving hard-hit contractors much needed work. Sam is providing affordable housing. Sam is driving the engines of the local economy. Sam is an entrepreneur in the finest sense of the word. Sam has a good plan and a limited window of time to execute and he is frustrated that he lacks the capital to scale up his operation. He can afford to undertake only one or two projects at a time. He knows that if he had access to greater capital he could turn his idea into a more profitable venture. Banks would give him better pricing if he could buy homes in bulk and his subcontractors would share savings with him if he could give them more houses to work on at a time. Sadly, Sam is an entrepreneur that is stuck at the starting block. He is not alone. In the rubble of every burst investment bubble are those courageous entrepreneurs who help break the gridlock between devastated holders and willing and able buyers. The capital that lenders provide to real estate entrepreneurs is scarce these days even though the government has pumped billions of dollars into the banking system to promote lending. We recently met with the president of a regional bank to get his take on why the new funding has not had the desired effect. His bank received a significant influx from the TARP, the Troubled Assets Relief Fund, and we were curious to hear what his bank planned to do with the funds. The answer surprised us. It seems that banks have a relatively free rein with the TARP funds, and in the evaluation of our banker acquaintance, buying other troubled banks was the best possible place for his bank to put the funds to work. The logic has much to do with acquiring depositor accounts on the cheap. When asked why he robbed banks, Willie Sutton is famously credited with saying, ?Because that?s where the money is.? When it comes to commercial real estate, it appears that is where the money is going to stay for a while. So what is an entrepreneur like Sam to think? The government is pouring vast amounts of money into the banking system. The Federal Reserve Bank has just lowered interest rates to historic lows. To the casual observer that pair of factors must look like an ocean of cheap capital ? just out of reach. In the words of the Ancient Mariner, ?Water, water every where, nor any drop to drink.? The problem doesn?t stop with the lack of ready loans. For those few loans that lenders will make, the loan-to-value ratios have tightened as well. That means borrowers need to bring more real cash equity to the table today than in the recent past. That necessary equity is not readily available to entrepreneurs as private investors run shell-shocked to the financial sidelines. It is unfortunate that Sam will have to muddle along for the foreseeable future. Losing the good that he could do for himself, others and the overall economy is a loss we can ill afford as an industry and as a nation. Bottoming out is a process. That process is going to take some time for investment real estate and most seasoned real estate entrepreneurs understand that the substantial profits that can be made in this part of the cycle are worth the wait. We can expect that the entrepreneurs will be willing to move when the starting gun eventually sounds. Until then, we owe all of the courageous entrepreneurs we work with in our respective industry roles and our pledge to continue to champion their cause. Kurt Lefteroff and Mark Speno are Principals of Secured Private Capital, LLC, a private lender for investment real estate based in Scottsdale, Arizona. They can be reached at (480) 315-1515 or mark@securedcap.com.



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