Ballon Payment BS

[CWMan]

This summer I will be required to re-finance the balance of my loan as the ballon payment comes due. This is the second time I will have to do this... 3 year intervals.

I've owned this wash for 6 years, and have never had a late payment and usually pay extra on the principal each month. I'm the ideal banking customer.

I had an "appraisal" done last summer to try to get a better interest rate. The appraiser didn't know crap and unfortunately the only comps he could find were not similar and sold for nothing. Long story short, my appraisal came back low, low, low, and cost me $2000.

If I can't find a more educated appraiser, I will appear upside down to the lender, and they will require a cash infusion or more collateral.

My question is this. How will the bank likely respond if I refuse to jump through their hoops... updated personal financial stmt, 3 years worth of taxes again and pay another $2k for a boggus appraisal? What if I ask them to renew my loan for a decent rate or they can have the wash? I don't really want to walk away, but it seems like I'm holding all of the cards here, and I'm tired of bieng jerked around. Can I bluff?

I know the banking industry is transitioning, but come on. Six years of perfect payment history has to count for something.

Thank you in advance.

 

[pitzerwm]

The problem is that you agreed to that crap 6 years ago. The banker is probably dumb enough that they will take it from you.

Most bankers couldn't run a lemonade stand at Main & Main. Don't expect anything rational.

Here in the 80's when we crashed, the banks took all the properties that were being paid down 25-50% and gave them to the people that owed the bank 100% or more. Make a lot of crooks rich.

 

[JK Xpress]

You are obligated to do whatever is required per the loan agreement you signed. If the agreement says you need to supply this and that, well you have to do it or you are violating a loan covenant and that simply means you are in default on the loan. I say this based on my experience as a former Workout Officer for a large US Commercial Bank. I once had to send out a letter of default because the debtor did not wire to the bank its Excess Quarterly Cashflow per the loan agreement.
Just a statement - at the end of the day, banks do not like being under capitalized.

 

[Earl Weiss]

You seem to be engaged in a process of rational thought, Your mistake is that nbankers are pernmitted to do the same. Notice I say "permitted" which is different than capable.
The hands of decision makers are often tied by regulators and investors. Making logical arguments will only aggravate you. The best you can hope for is a banker who will not BS you. There may also be other ways to approach it.

If you are such a good risk, perhaps you can find another lender or an addittional lender for the infusion. How about yourself? Can you get an equity line on your home and lend the money to the business? You would probably get a better rate this way.

 

[CWMan]

You all make valid points.

Mathematically, the less personal funds I put into the business, the higher my cash on cash return will be. So I guess, I would rather pledge some assets for collateral (rental property) as opposed to paying down the principal.

What I'm most frustrated with is the 3 year term which makes me vulnerable to the fluctuations of real estate values. Yes, I did agree to this 6 years ago, but it was a last minute switch-a-roo on the banks part. I didn't know this until closing. Should have walked away right there, but my youth and eagerness prevented me. Never again!

Thanks for the feedback. I know I have to lower my expectations of banker behavior.

 

[Waxman]

I think that besides the obvious advantage of a good payment history, another important factor is developing a good relationship with a banker personally.

That way, if things come up that need sussing out, re-negotiation, or wiggle room, you have a personal relationship to work within and not just your payment history printout.

Sure, banks are heavily regulated and there's only so far a personal banking relationship with anyone will get you, but it does help. Banks provide a service and you are the customer. It shouldn't be adversarial but rather it should be cooperative, honest and as fair as possible.

I like my banker and if I were in your shoes, me and my banker would be having lunch very soon.

 

[CWMan]

I couldn't agree more. However, not a single loan officer / banker that I have used for my primary home, rental property, car wash or other business loans is still in the business.

 

[pitzerwm]

Most bankers answer to a computer at home office, don't waste your time and money "courting" them.

 

[soapy]

I just had an updated appraisal done on one of my washes. There were no comps availible for several years back so the appraiser had to go a different way. He ended up basing most of his appraisal based on the cost to build less depreciation for the years the wash had been open. One scource he used was the Marshalls Swift Valuation cost guide. It basically says $100 per foot for the carwash building with roughed in plumbing and electrical. Add in each SS bay equipment at $39,500. Add in $122,000 per auto bay for equipment and add in comparable land value which is something he could find. Depreciation was deducted for building (40 year life) and equipment (20 year life).
The second part used was the income approach. With the last 3 years sales records for this wash he developed a value that was about 4.6 times the gross sales. Hope this helps you

 

[robert roman]

Based on the information you provided, I’m not sure anyone could say for certain that you are being jerked around by the bank or not.

Making payments on time is not an ideal situation but rather an obligation you agreed to contractually.

Without seeing a copy of the appraisal, it is impossible to know what constraints the analyst faced in developing his/her opinion of value.

For example, in Florida, commercial real estate values have tanked by as much as 30% in some areas. This would have a profound effect on the outcome of an appraisal. In the absence of sales comparables or meaningful ones, the analyst may disqualify the use of the market-based valuation or place much more weight on the asset-based (cost approach) and income-based (capitalization) methods in reconciling their findings into an indicated value.

There is also the question of sales volume and revenue of which you provided no information. Your notion of walking away suggests to me that perhaps your sales revenue is not as robust as it once was. If so, this would lower the debt service coverage ratio which is the key barometer banks use to evaluate the ability of an income producing property to service debt.

A contracted real estate market and weak economy is a poor environment for robust property appraisals regardless of the price one pays for the opinion of value.

 

[CWMan]

You're attempting to read between the lines. You shouldn't. Revenue has increased each year that I've owned this wash. I asked if I should try to bluff. I have no interest in walking away, I merely want the bank to realize they are much better off with me owning and operating this wash than running me out of business by refusing to re-finance the balance based on an appraisal by a guy who used EBITDA incorrectly as his basis. It makes no sense to me that I have to pony up two grand every three years when the only thing thats changed is the banking environment and local real estate values.

I consider this investment a success. With variables such as: fluctuating real estate / property values; incompetent appraisers; "cooking the books" to over or understate income, aren't the bankers really left with one's payment history anyway?

To me this all points out my mistake of agreeing to these terms from the beginning. I accept this mistake, but I can't accept that there is any rational thought to de-valuing a property that now produces more income than it did 6 years ago simply because a couple of washes sold for the price of the land and the appraiser was left with a calculation beyond his abilities.

 

[robert roman]

Hey CWMAN, get a grip. Complaining is great for venting but it doesn’t help solve anything. I never met anyone who was happy about paying for an appraisal that did not meet their expectations.

Get specific if you don’t want people to have to read between the lines. Be happy you are trending upward.

Moreover, you are not the only owner who is watching their revenue go up as their property value falls. Some people are experiencing the double-wammy. Unfortunately, this is the nature of the market we are currently in.

A lot of banks have too much toxicity to deal with. If the bank is willing to lend money, it now comes with a higher price tag so to speak; shorter balloons, shorter overall term, larger equity injection, etc. Interest rates are still attractive.

You appear to be a victim of not only your enthusiasm for the business but getting stuck in the cycle.

However, if your sales are that strong and you are creditworthy, you should be able to shop around and find a note with a longer term (8 to 10 years) now that you have six years under your belt.

Get a copy of Scotsman Guide. It is loaded with advertisements from lenders that are providing funding for small balance commercial properties.

Consider contacting a specialist like Alan Bussey who has a good understanding of the carwash industry and carwash financing to help you determine what would be the most appropriate course of action.

Of course, you could choose to change nothing and wait for interest rates to rise. I’m sure your banker will be more willing to work conditions and terms once that happens.

 

[CWMan]

You're right. Thank you for the advice, but it does feel good to vent. I know you can all relate in some way.

 

[Alan Bussey]

CWMAN -

It seems that many car wash owners want to refinance, even those with a balloon a year or more into the future.

Balloon loans are frequently a source of continuing expense and continuing work. The bank can refuse to renew a ballooning loan for any reason or for no reason and then things really get expensive.

I suppose that yours is some configuration of of self-serve. Many lenders are giving these a very cold shoulder these days. Much of this is just the pervasive extreme caution in the banking industry. Real estate values have been trending down, so the banks really have no way out if they have to foreclose on a car wash, and special properties can be a hard sell even in a strong economy.

The only place to get a reasonable fully-amortizing loan with no balloon and no 'payable upon demand' clause is through a bank that 1. is active in the SBA program and 2. likes car washes.

A 20-year SBA-guaranteed loan is entirely possible, even today.

Alan Bussey

 

[mmurra]

I would encourage you to go to the lender with accurate financials and a willingness to work with the lender in an honest and blunt manner. Know what you are willing and able to do and be willing to be firm in your commitment. Anything can happen in your circumstance.

 

[Waxman]

The SBA is a great way to go if you can.


I started the process 5 years ago. The timing couldn't have worked out better. I built the carwash next to my leased detail shop location.. Lost my lease and needed more $$$ to build a detail shop. Got the extensions (both bank and sba portions) and upon closing rates were at an all-time low. Wound up a 4.xx% fixed for 20 on SBA portion.

 

[cebo]

Call the appraiser & question his methodology. For 2k you should get more than a Cost Approach & unreliable direct sales comparison.

As an appraiser it is my opinion that it is very hard to develop an accurate sales comparison due to a lack of verifiable data. Older washes with good mgt & gross has a higher market value than a new one doing less. Because a wash is a special use facility a true real estate appraisal of a wash could really only be done with a cost approach. Because a wash is going to sell based on gross all of the comparables will have a business component in the price that would have to be adjusted for.

I was lucky enough to have helped a commercial appraiser who was sharp & was doing a wash. I referred my bank to him. He did a CA & income approach based upon 3 yrs tax returns & my P&L's. In many cases the income approach will be higher than the cost approach.

If you can't convince the appraiser to reconsider find someone who knows what they are doing to review the appraisal report. If the reviewer can show incompetence get your money back or call the state board. I'm in a small town & some of the appraiser's do commerical work & are not qualified but the bank uses them because they are cheap.

I also lucked up on the loan after fooling with ballons. My bank was promoting a 15 yr fix @ 7.5 for new customers. I whined to them about being a good customer, paying earlier and would get new money to put in an auto. They agreed, but I spent 8 weeks trying to get less money than the orignial mortgage and they offered me 7% for my trouble. Of couse my bank was taken over by the fed. Goes back to what Bill said - most bankers I know, especially holding company bankers, don't know or care about anything but the past 30 days P&L.

Robert is right the dummies look at the DCR. According to a banker partner of mine its because its a simple to understand and makes them feel good. I rarely use it in an income approach anymore.

 

[Alan Bussey]

Ceb -

I am confused by your post. By DCR, are you using that as 'Discounted Cash Residual', or as 'Debt Service Coverage Ratio', or something else?

Every banker that I know is intensely interested first and foremost in the ability of the business to repay the loan, to make the monthly loan payments. Further, if for some reason the business becomes unable to repay the debt we have to be as certain as reasonably possible that the guarantors can make the payments. So, the Debt Service Coverage Ratio (DSCR) is a customary part of the loan analysis. Usually we calculate the DSCR on the individual subject location, on the overall business entity, and on the business AND the guarantors personally together, as a 'global cash flow'. This may be simple to understand in theory, but it is NOT simple or easy to calculate. When locations have been bought or sold, or other major changes like new equipment, or major changes in operation are planned, calculation of the very important DSCR can consume many hours of work.

Alan Bussey

 

[cebo]

I stay confused! Must be too long in the real estate & CW business. I was talking about Debt Coverage Ratio to determine a cap rate. Ro = Mortgage Constant x LTV x DCR (usually 1.25). I assume you are talking about debt ratio stuff in regard to the finance part which is different from what I was talking about.

What is your opininon about it being tough to use a direct sales comparison due to sales prices including the value of the going concern? These appraisal questions have come up repeatedly since the forum started and it usually is a complaint about the appraiser. I've seen some serious weird logic and methodology. A friend of mine just had an appraisal done on an interstate property. 7 ac fruit stand (walmart of fruit stands) with restaurant, rv park, etc. The guy charged 5k and did a CA and income. Income app were dissimilar properties 40 miles away. Went in the low 2m. A reasonably similar property sold less than 36 months ago on the other side of the interchange for 3.2 on 3 ac which would reflect the going concern. Imo he should have capitalized NOI instead of using net leaseable rents of disimilar properties.

As many appraisals you have seen and washes you've financed you should put together a book or class and sell it to appraiser's because alot of the guys doing them don't seem to know what they are doing.

 

[Alan Bussey]

Cebo -

Well, since a car wash is a special purpose property, the business value needs to be in there or the appraisal won't show much value because of the limited use of the structure. (Most washes are run about the same way regardless of who owns them.) The lack of a thorough set of comps has bothered me a number of times. I have seen full-serve comps used in self-serve appraisals, and the other way around! Really, the lenders need to work harder, and many do, to find an appraiser with true respectable experience with car washes. But other lenders just use the cheapest guy, or the guy that appraised a shopping center for them last month. So, yes, I think that wash appraisals could often be better. The key for the applicant is to make sure that the lender is using an appraiser with solid experience with car washes - before writing the check to the lender. The applicant can certainly make suggestions for an appraiser to use, although of course the lender is required by regulation to contract the appraisal. A better effort made by the lender and the applicant can lead to a better appraisal.