HOT TOPICS IN COMMERCIAL LENDING
Julie Novak, Senior VP at BankCherokee, and John Young, VP Paramount Real Estate, recently talked about many of the hot topics in commercial lending. See below to read more about how banks are working with clients during Covid, the future of interest rates, underwriting standards and more.
John: “Tell us about yourself and BankCherokee.”
Julie: “I’m Julie Novak and I am a Senior Vice President with BankCherokee. I’ve been here going on eight years and I’ve always worked in community banking by choice. I just really feel strongly about community banks and being able to develop relationships and work closely in those communities where we live and work. Bank Cherokee is a 100-year-old family-owned, woman-led banking institution and is the oldest family-owned bank in the metro area. Our President and CEO, Heidi Gesell, has led the bank since 1996. Our goal is to help small and mid-range businesses with all their banking needs. We’re a preferred SBA lender, and we do a lot of commercial and industrial lending as well as real estate lending”
John “How many locations do you have?”
Julie: “We have currently four locations around the metro area.”
John: “How has the last year affected your clients?”
Julie: “I have been in banking for a long time, and in 2020 with the pandemic and PPP loans, it has never been a more challenging or rewarding time to be a banker. If you’re a liquor store, then it has been like Christmas every day, but a lot of other businesses have not been nearly as fortunate. Despite all of the challenges of the last year, we see a lot of opportunity ahead and I think business owners, who are entrepreneurs by nature, they’re always going to be optimistic and very resourceful. Technology is playing a huge role in business success and we see our clients investing in technology to make them more efficient. Certain aspects of business operations will not go back to the way they were and that’s okay. I really think businesses have learned to pivot and some changes they’ve had to make will probably end up being a permanent change going forward.
John: “There is a lot of talk about interest rates increasing, what do you think?”
Julie: “We’re of the opinion based on what we see that rates will continue ticking up bit by bit, and I think that that’s going to be the trend. They have been so low for so long that I think there will be incremental increases over time. But there is still wide-open opportunity to take advantage of low interest rates to purchase that building, buy that equipment, hire employees – there really is a long runway for more investment in businesses. We are very bullish on the future for business”
John: “Do you see a return to double digit interest rates?”
Julie: “Not anytime soon, that’s for sure. With all the indicators that we are seeing, no.”
John: “Given the changes over the last year, have your underwriting standards changed for approving loans?”
Julie: “Yes and no. We really want to look at what a company’s Covid business plan is, and I don’t mean having hand sanitizers in the lobby. We want to know ‘how have you weathered 2020 and how are you planning to weather 2021 and beyond?’ Big questions we want to explore are: are there changes in your staffing, are there changes in your clients as you may not have the same ones as in 2019/2020, how has your supply chain been affected, and any other changes to the operation over the last year. At the same time, we know that the last year has affected every business in a different way. So, we want to understand what you have already done, what you are planning to do, and then we work with each customer and support them through this.”
John: “So, if a business is thinking about buying a building, what specific steps should they take to prepare for that process? Do you have some recommendations on specific things they should do start to do?”
Julie: “Yes, absolutely, they have options because you don’t have to come up necessarily these days with a 25% down payment. An SBA 504 loan may be an excellent option which requires only 10% down. My advice is to have them call their professional contacts. Get a good broker who can help you with the transaction, get a good accountant, you want to get somebody that’s really going to help you get your numbers pulled together. We will want both historical numbers and projections. You certainly need an attorney at some point too so knowing those key people can really help any business put it together.”
John: “What changes have you seen in appraisals in the last year through Covid?
Julie: “An appraiser once told me, it’s an art not a science, which leaves the door open as to interpretation of the property value. We have seen appraisers getting more comfortable with where things are currently at, turnaround times have been good, and I think appraised values of commercial property are coming back to levels it had been pre-pandemic.
John: “With the rise of the internet there has been a rise of online banking. You can get a loan on the internet very quickly, why has that become so attractive?”
Julie: “It’s perceived as an easy way to get money, and it is, until you want to unwind it and that is where the challenges begin. Sure, you may get the money you need, but it is a higher interest rate, shorter loan term, online lenders won’t usually work with you if there is an unexpected challenge, and you don’t have the support and service that you will receive at a bank.
John: “What’s the timeline typically for getting a loan approved to buy a building?”
Julie: “If the borrower has everything in place and if we have the documentation ready to go, we can approve and close a loan in three to four weeks. We will need to wait for the appraisal and environmental to be completed also. So, our process internally can be relatively quick, but some of these other variables take more time. Appraisals have been taking three to four weeks and environmental testing can sometimes take even longer. We are doing our work at the bank behind the scenes while all of the other external work is happening so we are ready to close as soon as possible.
John: “What are you seeing with environmental issues these days?”
Julie: “Vapor intrusion has been the hot button the last couple of years, and I think it will continue to be. The good news is that sellers have been providing an escrow from sales proceeds to help buyers pay for vapor mitigation systems. We have become accustomed to working with environmental issues because it is quite prevalent in commercial and industrial properties.
John: “Is there anything else you would like to add?”
Julie: “BankCherokee is a local community bank and we have all the tools that large banks have. That’s a beautiful thing to be smaller, more nimble, AND have all of the right tools for businesses. We are able to think outside the box and are not beholden to somebody in another state, but instead have all of our decisions made right here in St. Paul.