Real Estate Cycling: Banking Real Estate in the ’80’s, 90’s and the New Millennium

1. Real Estate Cycling: Banking Real Estate in the ’80’s, 90’s and the New Millennium Laurie Griffith March 31, 2008 For The University of Texas at San Antonio

2. Real Estate Cycling: Banking Real Estate In the 80’s, 90’s and New Millennium • 6 C’s of Credit – Knowing the impact of the Economic Cycle being one of them • Real Estate Lending and Firrea – Coming out of the 80’s Cycle • Real Estate Loan Structuring – The cycle of asking yourself if this is an investment you would make yourself and assessing the risk • Case study – Loan analysis and remembering cycle trends

3. The 6 C’s of Credit • Character.Trustworthiness is the first thing that a bank looks at. In addition, banks will rely heavily on credit history. • Capability to Manage the Business. Banks need to be sure that the person/people making the business decisions know what they are doing. • Capacity.The Bank needs to determine the capability of your business and/or real estate transaction to turn a profit. • Collateral and Guarantees. Collateral is important, especially in real estate transactions because it is all about location, location, location. The bank wants to get paid back either through profitability of the business/real estate proposal, a secondary source of repayment and/or the liquidation of the collateral. • Context of the Business.Banks look at a number of factors that may potentially impact your business/real estate project. They will pay particular attention to potential economic (real estate cycles), legal, employee, supplier/contractor, tenant, or environmental problems/impacts. • Conditions or Terms of Loans.The nature of the loan request is an important factor. Banks will want to know three important things: "How much money are you requesting? What will it be used for? and For how long will it be needed?“

4. Real Estate Lending and Firrea The Financial Institutions Reform Recovery and Enforcement Act of 1989(FIRREA)is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s. • Appraisals - The major impact for real estate lending was that the law established new regulations for real estate appraisals. Title XI of FIRREA empowered federal regulators to adopt standards for real estate appraisal and promulgate licensing requirements to the states. • LTV Ratios - Additionally, FIRREA specifies maximum advance rates that banks can lend on against different classes of real estate as shown below (For acquisitions, advance rates refer to the higher of “loan-to-cost” or “loan-to-value”. For construction loans, re-financings, and other transactions except acquisition loans, advance rates refer to “loan-to-appraised value”. ) Property TypeLoan To Value Raw Land 65% Land Development 75% Construction Commercial, Multifamily[1] & Other Non-residential 80% 1- 4 Family Residential (Builders) 85% Improved property 85% Owner Occupied 1-4 Family Construction 90% Mortgages 90% [1] Multi-family construction includes condominiums and cooperatives.

5. Real Estate Loan Structuring Desirable Types of Real Estate Loans • Interim construction or mini-perm financing for owner-occupied commercial real estate, • Interim construction financing for well-located multi-purpose commercial buildings or multi-family residential buildings with take-out commitments and/or substantial borrower equity and/or substantial pre-sales or pre-leasing. • Owner-occupied residential mortgages and interim construction loans • Interim construction financing for single-family home builders. • Land development loans for either single-family or commercial usage. • Land and property acquisition loans for specific use.

6. Real Estate Loan Structuring Undesirable Real Estate Loans • Non-recourse Financing and Loans Secured by Inferior Liens in Real Estate • Speculative Land Loans • High Risk Income Properties • Mini warehouses • Mobile home parks • Resort properties • Nursing homes • Hotels/motels • Small retail strip shopping centers without anchor leases • Specialty retail properties such as discount malls or auto malls • Two-story retail centers • Marinas • Restaurants • Condominiums and townhouses • Churches • Schools

7. Real Estate Loan Structuring All loans are created differently and structure will depend on the following: • Financial (especially liquidity) and Cash Flow Analysis of Borrower and Guarantor • Experience and Track Record – both the Borrower and Contractor • Collateral Property and Project Feasibility – Location, Location, Location • Other Banking Relationships -aggregate financial situation • Assessing and Mitigating Risk – Construction Risk, Lease-up Risk, Economic Risk

8. Case Study Examples of Loan Requests and their Analysis

9. Real Estate Cycling: Banking Real Estate In the 80’s, 90’s and New Millennium • It is easy to Lend in the “Up Cycles” and many bankers get careless in these cycles. What sets bankers apart is sticking to “Basic Principles” and not deviating from good sound lending practices. Questions Thank You The University of Texas at San Antonio