Tag Archives: property values

Lisa Alberti - Small Business

Paving The Way For Phoenix Small Business Growth

Foreshadowing federal reports of an uptick in demand for commercial real estate and small business lending, CDC Small Business Finance recently funded two loans to help a local company purchase three commercial buildings in Phoenix.

We wanted to take advantage of lower property values and low financing rates to purchase the buildings,” said Todd Franklin, owner of Arizona Sun Supply, a wholesaler/distributor of solar screen products. “The additional square footage we gained will give us the space we need to warehouse all of our raw materials and give us more room to grow.”

Franklin benefited from using the Small Business Administration 504 loan program, designed to help small businesses purchase commercial real estate at below-market fixed rates and minimal down payment. The anticipated result is that small businesses expand and are able to create new jobs.

CDC Small Business Finance teamed up with Bank of America on the Arizona Sun Supply loans. CDC provided the SBA-504 fixed-rate loan to finance 40% of the total purchase, Bank of America provided 50% with a conventional loan and the small business needed only to contribute a 10% down payment. Arizona Sun Supply’s commercial real estate loans totaled just less than $1M.

Typically, small businesses are unable to tap into the long-term capital market, but can do so with a SBA 504 loan. Business owners of growing companies usually come to a crossroads of whether they should buy a facility or lease. An SBA-504 loan makes purchasing attractive because the cash down payment required by the owner is minimal, allowing the small business to preserve its cash for ongoing operations. Plus, long-term tax benefits are often realized.

Arizona Sun Supply, Inc. (AZSUN) operates as a niche supplier with a focus on specialty products that reduce the negative impact of the sun. As the top supplier of Textilene products, a durable mesh fabric made from PVC resin that is specifically designed to block the sun’s harmful rays, the company sells at wholesale prices to the general public across the U.S. In Arizona, they only work directly with sunscreen and shade structure businesses.

“The window shade business can be cyclical based on housing growth rates in the market,” Franklin said. “However, we’ve been growing at a steady rate because we continue to add new products to sell across the country and have not been reliant on sales in one or two markets.”

The primary areas of growth have been in shade fabric installed in parks, schools and other outdoor venues. Arizona Sun Supply’s general product line includes solar, screen fabrics, sliding and swinging doors, aluminum screen frames, sail and structure fabric, insect and pet screen and Textilene outdoor fabric enhanced with fire rated performance.

Over the past six months Small Business Finance has funded 21 SBA-504 loans, partnering with banks to provide $39M in financing to Arizona small businesses.

“Like Arizona Sun Supply, small businesses are taking advantage of lower property values to purchase new facilities for expansion,” said Lisa Alberti, loan officer for CDC Small Business Finance.

Alberti added that other Arizona small businesses are taking advantage of a refinance program revamped by the SBA and available through September. This program is designed to help small business owners facing balloon payments on conventional commercial property mortgages. The current refinance rate through this program is 4.95%. (For more information, http://tiny.cc/SBA504refi).

The 504-loan program was created by the SBA for the specific purpose of financing long-term fixed assets such as commercial real estate and equipment with economic life of 10 years or greater.

CDC Small Business Finance’s office is located at 2575 East Camelback Road, Suite 450. For more information, contact Lisa Alberti (602-635-8413 or lalberti@cdcloans www.cdcloans.com)

retail space avaialble sign in a window of a building

Arizona’s Local And Regional Banks Are Facing More Distressed RE Loans

The recent New West Era of Arizona’s fast-growth economy from 2004 through 2007 is now expansion-cycle history. Having faced the Great Recession and what Alan Greenspan called a “once-in-a-century credit tsunami,” we now plan to resume positive economic growth in 2010.

Since late 2008, Arizona has lost more than 200,000 jobs. Commercial real estate (CRE) loan delinquencies are programmed to accelerate, with some distressed loan exposures exceeding 200 percent of total equity for smaller financial institutions. Given the scale of pending defaults, key decision-maker questions revolve around ideas such as “Who is too big to fail?” and “Who will benefit and who will pay in loan restructuring?”

Since rents and property values rapidly declined last year, banks’ loan delinquencies have been widely reported. Borrower defaults are increasing due to the inability to make timely debt service payments on existing notes. Rent concessions abound, and some recent short-term leases have been negotiated as break-even deals that just cover operating expenses, a preferred choice over the cost of holding vacant space. Many existing tenants are attempting to renegotiate contract rents as record high vacancy rates are underreported, especially in cases where leases are intact but the tenant is in default. The credit freeze has taken a toll on loan refinancing, especially when funding loans of more than $1 million with lower loan-to-value constraints. Costar Analytics recently reported commercial property price declines from 15 percent to 35 percent since 2007 peaks.

Negative commercial space absorption has given back the early gains of a few years ago, as new construction deliveries wind down and building permit activity is off dramatically in Arizona. Commercial space demand is driven by jobs, and employment is expected to be weak through the middle of this year. Positive business growth and a boost in hiring are essential for large-scale investment in the built environment. Considering employment as a lagging economic indicator and consumer spending as a prime driver in economic activity, commercial real estate vacancy rates are problematic.

Since March 2009, Bloomberg reported a five-fold increase in Phoenix-area loan delinquencies backed by office, industrial, retail and apartments. Recently, Deutsche Bank projected price declines from 35 percent to 45 percent as necessary to maintain return-on-investment requirements in a declining rent environment. Over the next 24-plus months, delinquency rates are expected to exceed the results posted in the savings-and-loan bailout days of the early 1990s.

Non-performance is two-fold: initially as term default risk where debt repayment cannot be met, and later as maturity default risk where the loan cannot be repaid or refinanced due to value declines and higher borrower down-payment requirements. Perhaps two-thirds of loans do not qualify to refinance at maturity, mostly recent (2004-2007) originations.

The fall 2009 Greater Phoenix Real Estate Consensus Forecast, a quarterly consensus on general economic indicators and key construction measures from economists, real estate analysts and executives, shows only “marginally better” commercial real estate market results expected through 2011. With office vacancy so high, it is likely there will be no new office building construction for the next five years. Retail sales are tied to rooftops. While housing markets are expected to improve through 2011, improvement in single-family residential activity is expected to be slow by historic standards. Industrial demand will be end-user driven and also likely to be slower than historical trends.

Economist Elliott D. Pollack, CEO of Elliott D. Pollack and Company in Scottsdale and co-editor of the Greater Phoenix Blue Chip Economic Forecast, states, “Now is the time for banks to raise capital in order for them to workout their loans.”

He says many banks believe the best way to handle the loan workout is to deal with the current borrowers. The difference between now and the 1989-1992 real estate crisis is bank regulators are not currently forcing banks to immediately liquidate loans. Given the events of late 2008, regulators are reluctant to force financial institution closures and seem to be more willing to let institutions work out their problem loans. The idea is to rebuild confidence in America’s financial system.

In positive terms, the Mortgage Bankers Association forecast calls for Real Gross Domestic Product growth in 2010, the first GDP gain in two years. Clearly, widespread hope exists for a rebound in local commercial real estate prices. In the near term, investors are closely monitoring federal government bank policies that privatize profits, nationalize losses and buffer the banks against failure.

Fundamentally, real estate market performance will follow the time pattern when Arizona’s primary economic activity rebounds with measurable employment gains. Without recognizable fundamentals focused at the property level, end-user demand is missing, and commercial real estate performance is likely to remain speculative through 2011 and beyond.